Month: April 2017

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

APRIL 26 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

 

Tonight and next week, in  IntelDigest, we review the economic landscape and map out a thesis for investing in the months ahead.  It is necessary to periodically step back and take a look at one’s investment program, to determine if your suppositions about the markets are holding up, to review the performance of the companies in which you have entrusted your funds.

The bulk of these two issues will be devoted to our ideas on the best areas to invest for the remainder of 2017.  Before that, we take a broader view of the markets and political events which pull at the markets on a daily basis.

The Trump Agenda

Today was mostly an UP day (until 3:00 p.m.) in the markets because the Trump Administration finally announced its proposals for Tax Reform.  What will tomorrow bring?

As you have read in our weekly missives, we believe that Tax Reform is extremely important to the U.S. Economy, and we have bemoaned the Administration’s putting it on the back burner for the First 100 Days in order to address less-important issues.

The reaction of the markets to Donald Trump’s election was a surge upward, on the theory that having a Capitalist in the White House would be Good-for-Business.  From November through February, we had the Trump Bull Market.

However, the new Administration has failed to build on that confidence. Uncertainty now permeates the marketplace as the reality of a Trump Presidency has sunk in.  Markets have settled into a reactive pattern, ultra-sensitive to the political news out of Washington.  Will Congress be able to agree on important legislation?  Are the President’s Men up to the task?  What has the President tweeted today?

Meanwhile, it is doubtful that meaningful legislation will be enacted before the Fall … legislation which would spur growth in the Economy.  So, the upward trajectory of the markets has stalled.

As a result, we believe that many of the stocks in the U.S. markets have hit their top for the year already.  We will begin to review positions and set tighter Stop Losses in our portfolios, with the expectation that … absent some consistent progress by the Administration and Congress over the next few months … our buying opportunities are waning.

In the meantime, we have narrowed our focus for investment.  We look away from the Dow30 and S&P500, and concentrate on a few market segments, which we set out below.  We are trying to take advantage of the last-gasp market surge of the 2009-2017 economic expansion

As we expect 2018-19 to feature both a Credit Default Crisis and a cyclical Recession, we think that these last few months of the expansion bring us the best opportunity for significant investment gains for quite a while.

So, we set out our thesis on each of the sectors where we continue to invest in 2017.

Thesis:  Mobile Payments

There are two rapidly-growing trends in the world which are converging and creating a massive opportunity for investors:  digital payments and mobile phones.

Governments (including our own) have been encouraging citizens to decrease the use of Cash in the marketplace, and move to digital means for making transactions.  Some governments have banned the use of Cash in certain large denominations.  The result has been a meteoric rise in Digital Payments.

At the same time, more and more people are becoming accustomed to using their mobile smartphones for more than phone conversations and texting.  In just the last two years, paper money has been almost completely replaced by mobile phones in the major cities of China.  China has a population of 1.3 billion, and most of them use mobile phones.

You can pay for most anything in China using your smartphone, and the Chinese company which makes it possible could be the largest company in the world in a few years.

The United States has been slower to adopt these habits because we have a better financial infrastructure than most countries.  However, the growth of Mobile Payments in the U.S. has been increasing … it is definitely the wave of the future.

 

 

 

Thesis:  Machine Learning and Artificial Intelligence

It used to be that computers worked by following rules written by humans.  Today, computers are given huge data sets to examine, and use their findings to write their own rules.  This is machine learning.

Machine learning is changing the way tech companies develop products and do business, faster than anyone imagined.  Stephen Hawking, the legendary theoretical physicist, thinks that this could be the biggest event in the history of civilization.

Jeff Bezos, the founder of Amazon, stated in his recent letter to shareholders, “We’re in the middle of an obvious … big trend … machine learning and artificial intelligence … Machine learning drives our algorithms for demand forecasting, product search ranking, product and deals recommendations, merchandising placements, fraud detection, translations, and much more.”

Using what Bezos calls the company’s “deep learning” computers, he says “customers are already developing powerful systems ranging everywhere from early disease detection to increasing crop yields.”

Amazon is one of the Big Five … also including Apple, Google, Microsoft, and Facebook … which are the biggest tech companies and the five largest stocks in the S&P 500 Index.  All have market values in excess of $400 billion.

All use Machine Learning and Artificial Intelligence, although each in its own way.  Each company has its own philosophy on how to use technology and change the world. All have become world leaders in processing data and turning data into useful information, because they have created massive databases on user behavior.

They have become some of the biggest companies in America in a very short time.  And, there’s no way that a new business can compete with them, because their Machine Learning capabilities allow them to maximize their databases.

Our thesis is:  these companies will continue to grow.

 
Thesis:  Investing in China

Chinese stocks have been volatile, and have gone through a few boom-and-bust cycles over the last 20 years.  Today, as the country tries to work its way through a difficult transition from a primarily-export economy to a consumer economy, Chinese stocks are in an uptrend … in fact, they are the best-performing stocks in the world in 2017.

This uptrend is likely to accelerate this Summer when the MSCI decides to include Chinese stocks in many of its investment funds, a move which would shift Billions of Dollars into Chinese stocks over the next few years.

 

 

 

MSCI is a leading provider of stock market indexes, exchange traded funds (ETFs), and analytics.  In June, the index committee of MSCI will meet to determine when to add Chinese stocks to their indexes.

Despite the fact that China is the second-largest economy in the world, Chinese companies are not yet in MSCI index funds (although Hong Kong-based companies are included).

It is expected that MSCI will announce that Chinese companies will be included, beginning in 2018, and that the weighting of Chinese companies in the funds will increase gradually over several years.

Nonetheless, the announcement would launch a long-term trend of investment in Chinese stocks.

 
The latter half of this market analysis will appear next week in  IntelDigest.

 

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

APRIL 19 , 2017

 

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

 

IntelDigest  will be very short this evening, as we take time to contemplate the economic landscape for the remainder of the year.  Markets seem to be making a turn, and this is a crucial moment for American investors.

It is important that we deliberate on the way ahead, so that we can offer as clear a roadmap as possible for our clients and colleagues. So, after a brief account this evening of the troubles in our path, we will produce an expansive study for next week on the best course ahead for protecting our assets.

 

The Bull Market

It is clear that the “Trump Bump” or “Trump Bull Market” has petered out.  Prospects for decisive action in the areas of Tax Reform, Regulatory Reform, and Infrastructure Renewal have waned.  The President and his men seem to be oblivious to the likelihood of coming battles over the Debt Ceiling and government shutdowns.

Little progress has been made in the First 100 Days.  Will it be possible … even by the end of the year … to make good on promises for economic growth?

Investors are no longer buoyed by President Trump’s audacious pledges, and are dialing back their expectations. It is likely that the stock markets have attained their apogee for the near-term.

So, what do you do, as an investor?

For our next issue, we will construct a thesis for the markets going forward, and posit a timetable for government action on the economy through the end of 2017.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

APRIL 12 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

In recent issues of IntelDigest, we have discussed the prospects for Tax Reform in America this year.  We have touched on the initial proposals by Congressional Republicans, and the reasons that Tax Reform is so important at this point in American history.

Today, we will conclude this series with a discussion of the roadblocks and political obstacles which could inhibit comprehensive Tax Reform.  To take the pessimistic view, the following factors are headwinds against real Tax Reform:

Shakiness of the New Administration

Contrariness of the Electorate

Dysfunction of Congress

Trump Administration

After the initial shock of the election, the stock markets began a surprising ascent, which has lasted through the first two months of the Trump Administration.  Why?  Primarily because many investors see Trump as a successful businessman, a “can-do” guy.  They reason that having a Capitalist in charge, rather than a politician, would quickly bring about much lower business taxes and a leaner federal bureaucracy.  It has been the Trump Bull Market.

Now, almost three months into his presidency, that confidence is ebbing.  It looks less likely that the Administration will succeed in the single most important program on the agenda:  Tax Reform.

We have expressed our viewpoint on two occasions in IntelDigest … the Trump White House has been inept and naive in its waste of political capital … issuing provocative executive orders and rushing into the hornet’s nest of healthcare … rather than beginning with the most important programs which can increase jobs and grow the economy.

How can people who ran a successful American presidential campaign be so maladroit in the area of governance?  How can a candidate who seemingly “heard” the common man so well during the campaign, now be so tone-deaf to the legislators with whom he must craft vital legislation?

As a result, Trump’s First 100 Days will pass without any forward progress on the most important issues of the day. Investors’ initial enthusiasm is being tempered, and markets will settle back into a “wait-and-see” mode while the Administration tries to form a rational agenda.

The markets are hoping for a miracle-of-sorts from this Administration.  If the year ends without significant tax and regulatory reforms … and a job-creating Infrastructure package … markets will have a sharp fall.  The 2016 Trump Bull Market will morph into the 2017-18 Trump Bear Market.

The Contrary Voter

Whatever tax proposals will come down the pike … from either Congress or the Administration … Public Opinion is sure to be ardent and loud.  How will that influence the legislative process?  Will the public support tax increases or benefit cuts?

The Average American Voter wants two things from the government:  less taxes, and more benefits!  All too often the attitude is:  Taxes are too high!  I want to pay less.  But, don’t touch my benefits!  Or my family’s benefits!

In order to reduce the Debt, a Tax Reform package will have to include incentives to grow the economy, and reductions in government costs.  The annual budget deficit has been running around $500 Billion.  Where do you cut?

Consider the current costs of government in the United States.  Healthcare costs over $1.1 Trillion.  Social Security is another $1 Trillion.  Entitlement programs for seniors and low-income families (food stamps, disability, affordable housing, earned-income tax credits, childcare tax credits, et al) add another $550 Billion.  Defense spending is at $620 Billion.

 
Congress

Where to cut, indeed?  The one constant trait of U.S. Members of Congress over the last few decades has been the universal abdication of duty … by both Republicans and Democrats … to control federal spending.  The National Bank Account was briefly in surplus during the Clinton Administration;  however, over the last 17 years, Congress has allowed the National Debt to run wild.

Who thinks that Congress will make the hard choices to balance the budget now?

 

 

Needs To Be Addressed

The country’s needs are many, and comprehensive Tax Reform is needed to address these needs:

The National Debt creates a drag on growth, so the Debt has be brought under control.

Medicare and Social Security expenses are going to rise inexorably over the next 20 years as the Baby Boomer generation grows older and requires more services. Unfunded liabilities in the $ Trillions will come due.  Only an American economy running at high speed … enabled by a favorable tax system … will make it possible to meet those obligations.

Entitlement programs will need to be re-structured in order to extend their useful lives.  Yes, that means reductions in benefits, raising eligibility ages, means-testing, et al.

Our Healthcare system has been distorted for at least three generations, and healthcare costs have been skyrocketing … at double-digit annual rates … for at least 35 years.

Americans need jobs.

The ratio of the tax-paying private sector vs. tax-consuming government sector must rise again to at least a 3-to-1 rate.

The purpose of Tax Reform is NOT JUST to collect enough taxes to pay for government services.  The Tax System should provide motivation and incentive to American businesses to hire more workers and grow our economy.

Comprehensive Tax Reform … which could take several years to enact … could eventually address each of the needs listed above.  Start with bringing the federal budget into balance through budget cuts and business-growth incentives enabled by changes in the tax code.

Change the corporate tax structure to put our businesses on an equal footing with international competitors;  better yet, the U.S. tax code could make American businesses dominant, and encourage foreign businesses to headquarter here.

Tax Reform can play a role in extending the useful life of Social Security and Medicare.
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Tax Reform can encourage efficiencies in the delivery of healthcare so that costs can come down.

Tax Reform can enable greater Job Creation by allowing small businesses and entrepreneurs to keep more of what they make and to increase their savings.

And, it is incumbent on Congress to seriously and maturely address the balance between the cost of government and the extension of needed benefits.  Congress has been “kicking the can down the road” for far too long … we are at the end of the road.

 

 

Later in the year, when the debates on Tax Reform begin in earnest, we’ll address these issues in more detail.  And, we’ll look at some radical tax revisions which could be on the table by then.

As an example, consider the possibility of replacing income taxes with consumption taxes.  Consumption taxes, such as the Value-Added Tax and the recently discussed Border Adjustment Tax, would be profoundly foreign to the American Taxpayer, but they may deserve a look.

The country is in need of investments which will create new jobs.  One solution would be to STOP taxing savings and income, and begin to tax consumption.  We have plenty of consumption;  taxing it would produce more income, which would lead to increased consumption and more jobs.

 

 

In any event, we will come back to Tax Reform when the government starts to get serious about it.  In the next few weeks, we’ll look back at the markets, and begin a discourse on the nature of Work in our American Economy.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

APRIL 5 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

We continue our discourse on Tax Reform in this issue of IntelDigest.  Please feel free to look back at the March 22 and March 29 issues, where we set out important proposals which have been put forth by the Speaker of the House, and began the discussion of the importance of Tax Reform at this point in our history.

There are a number of concerns in our economy and our system of taxation which require serious action by our leaders.  Most of these concerns should have been addressed in the past by many of those same leaders and their predecessors.

Debt

As we have pointed out in several issues of  IntelDigest, our National Debt is now approaching 20 Trillion Dollars, and unceasing Deficit Spending adds to the Debt every year. Growing the economy out of this predicament would require sustained growth of at least 3% per year going forward, and the best way to do that is through real, serious Tax Reform.

Debt can actually be beneficial, if it is used to purchase productive assets which contribute to growth. Unfortunately, governments incur Debt much too often for use in current consumption, not for productive assets such as infrastructure.

We are deep into the third-longest “recovery” since World War II, and we are averaging over a full point of GDP growth less than in previous recoveries  …  primarily because of the size of the Debt.  If the economy should fall into recession, it would truly blow out the budget, deficits, and debt, and suck us into a downward spiral that would leave us with no good choices.

Government Spending

Spending by governments in the United States … federal, state, local … now amounts to 35% of the Economy.  At the current rate of growth of budgets at all levels, the figure will be over 40% in the near future.

Cutting government spending … something which has not been done in generations … would be a start.  But, cutting spending alone would do little to reduce the National Debt.

Taxation of Productive Business

Every private Dollar which goes to paying taxes and supporting the government is a Dollar that cannot be invested in new businesses or creating new jobs.  On the other hand, greater tax-saving by Americans who are capable of re-injecting those savings into U.S. businesses is a boost to the U.S. Economy.

Empirical research has shown that as capital increases in a country, so does entrepreneurial capacity.  As that capital is taxed more heavily, entrepreneurial activity fades. Successful economies allow entrepreneurs to keep more of their earnings, so they can put them back to work in growing business.

Corporation Taxation

The United States has the highest corporate income tax rate in the world.  That heavy corporate tax burden puts us at a serious disadvantage;  as a result, more American corporations move operations or headquarters overseas every year.

The irony is that the corporate tax is only 11% of the total revenue of the United States.  If all loopholes were eliminated and the rate was reduced to 15-20%, the federal government wouldn’t lose all that much revenue.   Corporate pre-tax profits are roughly 1.5 Trillion Dollars. Lowering the current tax rate, or adopting a 15-20% flat tax, would replace most of the tax revenue currently collected. More importantly, the United States would become very tax-competitive internationally, attracting more multinational companies to headquarter here.

 

In other ways, the U.S. tax system is Short-Sighted.  Key provisions of our tax code focus taxpayers on short-term goals.  We need more long-term thinking in order to grow our economy out of the current predicament.

Tax System Encourages Debt

The current tax regime favors debt over equity.  Companies are allowed to expense the total amount they spend on Interest.  This is a significant incentive to use the Wall Street investment banks to borrow as much money as possible.  It reduces the cost of capital.

Most Americans have no idea how big or dangerous the corporate-debt bubble has become.  As of the second quarter of 2016, investment-grade corporations were spending $119 billion annually on Interest expenses, the most since 2000, just before the Tech Bust of 2001. However, interest rates are much, much lower today.  So, the debt balances are vastly higher.

U.S. corporate debt has soared from less than $3 trillion to almost $7 trillion in just the last decade.  And, a higher percentage of this debt is rated as “junk.”

Thus, American companies are now more exposed to either rising default rates or rising interest rates than they’ve ever been before.

This situation has been great for Wall Street … not so good for America.

Tax System Requires Depreciation of Assets

The U.S. tax system requires that most capital investments be depreciated over years, rather than expensed in the year of purchase.

Some items … such as computers and software … are eligible to be fully expensed in the year of purchase. However, longer-term corporate investments can only be depreciated over many years.  Inflation decreases the real value of these deductions, providing companies with an incentive to avoid making big, long-term investments.

Allowing companies to reflect their actual expenses (including all investments) in the year they are incurred would provide American corporations with a major business incentive, which would be vital to economic growth over the long term.

This would be the best chance to increase productivity in the U.S.  It is important that American companies make far more and far larger long-term investments in American productive capacity.  Our tax policy should make this easier to achieve.

Tax System Encourages Offshoring

The current trade and tax regime makes it logical for American companies to store as much value as possible overseas, and only import what they plan to sell in the U.S.

Why does every important American software maker (including Apple and Microsoft) have its international headquarters in Ireland?  By keeping their core intellectual property in Ireland, these companies can pay far, far less in taxes.  Meanwhile, they can import that intellectual property back into the U.S. (after manufacturing in China) for free.  This allows them to pay a tiny fraction of the taxes they would otherwise have to pay.  So, a great deal of their employment and capital is kept outside the U.S.  (Microsoft, for example, just spent $250 million building a new campus in Ireland.)

Change the Tax System!

Lower wages don’t drive U.S. companies to manufacture overseas.  The difference in wage rates is almost irrelevant when the costs of setting up infrastructure, supply chains, and transportation costs are factored in.

The reason that most U.S. companies set up manufacturing and research and development overseas is to avoid high U.S. taxes and regulation.

Changing just these last three components of the U.S. tax code could be done on a revenue-neutral, zero-cost basis. These three changes alone would drive U.S. gross domestic product growth from around 1% to well over 3.5% … a level which we have not achieved in more than eight years.

This is why Tax Reform is so important at this point in American history.  We need accelerated entrepreneurial activity to expand the economy and create more jobs.

We can achieve significant Tax Reform and move into a new era of growth (with attendant Inflation) … or … we slide back into a depression caused by a mountain of corporate and government debt.