Day 325: Tax Reform?

Mother's Little Helper portfolio was UP today +$13,464.69 (+1.62%).

Overall GAIN YTD: +$259,320.26 (+44.41%).

Our benchmark index, the S&P 500 is up +15.49% Year To Date.

http://money.cnn.com/data/markets/sandp/

The only difference between death and taxes is that

death doesn't get worse every time Congress meets. - Will Rogers

Tax Reform

The DOW closed up +187.08 points today, and Mother's Little Helper enjoyed a nice bump up +1.62%.

Since the beginning of the year I've been listening to commentators, politicians, pundits, economists, friends, neighbors, even my friend at the local deli all say that tax reform is NOT priced into the market. But the instant that tax reform looked in question (yesterday), the market tanked on any bad news it could find or dream up. Today investors couldn't contain themselves because the House passed their tax bill. Earnings reports from Cisco Systems and WalMart contributed the most but the tax gift rang the bell louder. I was more impressed that 227 politicians agreed on anything.

It's exhausting to watch so much capital run around in circles, pretending that it knows what its doing. I seem to get along just fine sitting in one place.

The income tax has made more liars out of the American people than golf has.

- Will Rogers

What's Next

The Senate needs to debate and pass their version of the tax bill, which I suspect they will do because....well they don't have any choice. The simple fact is we've come to that place where our politicians simply have to do something, right or wrong, they will do something.

The impact of lowering taxes on corporations seems to also be the subject of some debate. My two cents is that lowering taxes will cause an immediate recalculation of all the analysts models, which will make stocks look less expensive on a Price/Earnings (P/E) basis, and that will cause a whole lot of money to flow into stocks. When the tax rate goes down all those savings will flow right to the denominator in the P/E multiple, namely the Earnings. We might see S&P 500 stocks in general go up as much as 10%. Sounds great if you own stocks, but wait there's more.

The sudden jump in stock prices will be temporary and might just get tamped down a bit by the Federal Reserve. The Federal Reserve has been holding off on raising interest rates but has been telling us they are going to unwind their balance sheet, which means they aren't going to keep buying up treasuries to artificially support the economy. As they let bonds mature and don't buy up bonds to put cash into the economy the result is basic, interest rates go up without the Fed having to raise rates at all.

But wait, there's more...

Included in the tax bill is a provision to allow corporations to bring overseas cash back home at a reduced tax rate. Right now those corporations are either investing that money overseas or simply holding the cash because they can't find anyplace to invest it. Also included in the bill is a provision that allows for the immediate expensing of new capital equipment. That's the clincher. If I'm a CFO at XYZ Corp and I get an opportunity to access my own cash at lower rates I'm going to invest big before all that goes away. I'll make that acquisition, I'll build a plant, I'll upgrade machinery and computers, I'll buy back shares in my own company, I'll return more capital to my owners (share holders primarily in pension plans) and more. Now if we could just get a 1-2% reduction in the employee payroll taxes the US would be so strapped to fill jobs that a complete reboot of our immigration policies would be required to fill all the new jobs.

I don't think that lowering taxes spurs business growth. Businesses will find ways to be profitable regardless of the tax structure they operate under. However I do think that the sentiment being created of a more business friendly environment does spur growth. Regardless of where you're personally at with the president and his administration, the business community, is generally more optimistic, and that's fueling growth. The one thing that would have a very real impact on growth is an improvement in productivity and the low hanging fruit is simply to simplify tax reporting. I wrote about the cost of people filling out forms in a previous post. If you want to put the nation back to work, stop making them do stuff that takes them away from work and provides no value to anyone accept the accountants (sorry to my accountant friends). No forms, no post cards, no refunds, no withholding, no more expensive reporting to multiple agencies by every employer on indecipherable forms. Just do it all digitally at the source. But alas, this would require a government that can create and adhere to a budget.

We owe more money than any Nation in the World, and we are LOWERING TAXES.

When is the time to pay off a debt if it is not when you are doing well?

You let a Politician return home from Washington and announce, 'Boys we lowered your taxes.

We had to borrow the money to do it, but we did it.' Say, they would elect him for life.

- Will Rogers 1926

Conclusion

I'm not a 100% fan of the current tax bill but I can see some positive aspects in it; namely it's not the tax policy we have now. The purpose of lowering taxes is said to be to spur growth and that growth will pay for the cost of government. Maybe. Just maybe this is like the space program of the 50's, 60's and 70's; we invested in ourselves and are still reaping the rewards. It's up to us what becomes of this new tax policy and what benefits we will ultimately receive.

Stay Invested

Clay Baker

Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, TBT, THO, TWX, VEEV, VZ, XLNX, XOM

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.