IntelDigest

InnOvation Capital & Management, LLC

IntelDigest

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

FEBRUARY 28, 2018

 

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 have written about the “Melt Up” in investment markets on several occasions over the last 18 months, and we continue to believe that high-quality equities (particularly banks and multinational corporations) are still buoyed by:

* improving economic conditions around the world

* strong earnings in many U.S. corporations

Corporate earnings are expected to sail for companies … both big and small … because of a new tailwind from the Tax Cuts and Jobs Act of 2017 (TCJA).

 

 

Interest Rates

However, we try to stay ahead of the trends, and the trend with respect to  Interest Rates  is changing as we go forward. As we have written on several occasions … most recently in our final 2017 post on December 20:

“…. we believe that the single most important factor in the current market climate is Interest Rates.  While ultra-low rates have done immense damage to fixed-income investors over the last several years, investors in equities have done very well.  There have simply been no easy options for investors, so they have invested heavily in stocks and stock funds, driving Price-to-Earnings Ratios to unusually high levels.”

The Federal Reserve (The Fed) has clearly signaled that it intends to alter this landscape, perhaps beginning as soon as next month.  The Fed expects to raise short-term interest rates by 1.5%-2% (incrementally) over the next 24 months.  And, it will seek to reduce its balance sheet by selling into the market Billions of Dollars of bonds which it has accumulated since the Financial Crisis of 2008-2009.

Even though short-term rates would still be well below the historic norm, these combined actions will eventually create drag on economies and deflate equities markets.

 

 

Why Do Interest Rates Matter?

In addition to the actions of The Federal Reserve, the United States Treasury must increase its borrowing dramatically, for this year and for several years into the future.  Cheap credit has underpinned the equities markets over the last eight years, and allowed both corporations and governments to borrow huge amounts of money.   The Debt Service on all that borrowed cash is about to become lots more expensive.

 

 

The Debt Explosion

We wrote about the coming  Debt Explosion  in the December 20 issue:

* Government debt (both federal and state) has been growing exponentially in the last 17 years.  Because the Federal Reserve cut interest rates to almost nothing, government borrowing costs have not exploded (yet!)

PLUS

* Consumer debt has returned to an all-time high (less than 10 years after a Financial Crisis which reverberated across the globe)

As we expect borrowing rates to continue rising over the next two years, much of this Debt will prove to be unsustainable and unserviceable.

 

 

Tax Breaks for All!

The aforementioned tax legislation … the Tax Cuts and Jobs Act of 2017 (TCJA) … is already contributing to the  Debt Explosion.  The new law lowers individual income tax rates, so new tax withholding tables went into effect this month.

The Congressional Budget Office (CBO) has estimated that withheld income taxes remitted to the U.S. Treasury will be $10-15 Billion less each month than in recent years.  This was anticipated by Congress … the tax bill was passed under reconciliation rules which allowed reduction of revenue by $1.5 Trillion over 10 years, which works out to approximately $12.5 Billion per month.

 

 

The End of Low-Interest Treasury Borrowing

Because The Fed has pursued an ultra-low interest rate environment in the wake of the Financial Crisis, the federal government has been allowed to borrow tons of cash with minimal financing costs.  The average interest paid on the U.S. Debt has been reduced to less than 2% in recent years.

Simply put:  as interest rates increase, borrowing costs of the Treasury will rise.  With total Treasury Debt of over $20 Trillion, even a 0.5% interest rate increase will impact the overall budget deficit.

As we wrote last week, Congress and the Trump Administration have committed to rising budget deficits. That’s what happens when you cut taxes and increase spending.  The Federal government is expected to issue a mind-boggling $1.3 Trillion in new debt this year.

Add to that the doubling of Interest Rates over the next two years;  and, the new supply of government paper which will hit the market at the same time as The Federal Reserve works to unwind its massive bond portfolio.

The result is a need for at least Two Trillion Dollars of additional funding for 2018 alone!

 

 

How Did We Get Here?

Most Americans have paid little attention to the massive increase in federal Debt over the last 17 years, primarily because ultra-low interest rates kept borrowing costs down. Even though total federal Debt outstanding has increased by 126% since 2008, borrowing costs have fallen over that period of time.   The American public is paying about the same amount in annual interest as it did back in the early 1990s, when the national Debt was 80% less than it is today.

However, net interest payments started moving higher when The Fed began raising short-term rates two years ago.  Today, federal interest payments exceed $260 Billion per year for the first time in history!

The Treasury Borrowing Advisory Committee (TBAC) is a group of private banks which advises the Treasury Department.  TBAC has estimated that the Treasury would need to borrow approximately $955 Billion in the fiscal year that ends September 30, up substantially from $519 Billion in the previous fiscal year.  The TBAC estimate for fiscal 2019 is $1.083 Trillion;  for fiscal 2020, $1.128 Trillion.

The Treasury has also announced that it will shift from predominantly longer-term bonds (average duration of 70 months) to more short-term Debt.  Ostensibly, this shift will help offset the reduction in demand for longer-term debt by The Federal Reserve, as it unwinds its bond portfolio. However, there could be serious consequences to this policy.

First, the additional supply of short-term debt will push short-term rates even higher, and hasten the yield curve “inversion” that historically triggers a recession.  And, the problem of government borrowing costs could be made exponentially worse.

Instead of being able to lock in long-term interest costs on longer-term bonds (even though the Treasury would be committed to paying higher rates on those bonds), the Treasury will have to constantly reissue short-term Debt at rates which begin low, but grow higher and higher over the years.

 

Next week, we will discuss re-positioning some portfolios in light of these developments.

 

 

InnOvation Capital & Management, LLC

IntelDigest

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

FEBRUARY 21 , 2018

 

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.

 

Last week, we discussed derivatives trading in Volatility, and the role of that trading in the market turmoil of early February.  In this issue of  IntelDigest, we review other factors which will likely have great effect on the Economy and Markets going forward.  Specifically, we address the current outlook on Inflation, Federal Borrowing, and Interest Rates.

We will certainly discuss each of these elements in much greater detail during 2018.  For this briefing, let’s see where each stands today.

 

Inflation

The core annual rate of Inflation in the U.S. is just under 2%, which is right on target for the purposes of The Federal Reserve.  There have not yet been signs of any appreciable increases in inflation in major sectors of the American Economy, such as housing or commodities or the equity markets (when low interest rates are factored in).

Since the 2008-2009 Financial Crisis, which threatened to sink world economies in a dangerous  Deflationary  spiral, central banks have pursued a policy of Extremely Low Interest Rates, coupled with unprecedented waves of money printing.  This provided a flood of cheap money, with the goal of increasing Inflation  by boosting corporate borrowing, increasing consumer spending, and elevating asset prices.

Although world economies have slowly recovered over the last nine years,  Inflation  (both general prices and wage inflation) has remained stubbornly low.

Low Inflation and Low Interest Rates have kept bond yields down, encouraging investors to move their money into the equities markets, where one could earn a comfortable dividend yield versus bond yields.

The result has been an unprecedented Bull Market in stocks. When the markets were roiled in early February, some analysts opined that the initial sell-off on February 2 was spurred by release of the monthly unemployment numbers, which showed evidence of wage inflation.  One narrative was: Inflation is rising, so The Fed will raise interest rates and tighten monetary policy in order to “nip it in the bud.”  That would choke off economic growth and tank the market.

They drew a direct line from Higher Inflation to Higher Interest Rates to investors abandoning equities for bonds and other commercial instruments which will start earning decent interest … like the Good Old Days.

However, the signs of some wage inflation are unlikely to upset the equity markets.  The higher wages are primarily a result of stronger business metrics.  The U.S. economy is expanding, and business owners have recently received the gift of lower income tax rates going forward.  Businesses can afford to pay higher wages to attract quality employees. Higher wages will be more than offset by tax breaks and stronger business activity.

Although  Inflation  is expected to play a significant role in The Economy next year, we’re just not there yet.

 

Federal Government Borrowing

The Department of the Treasury recently announced that its 2018 borrowing requirements will be dramatically higher than last year.  This is the first time in nearly a decade that Federal “debt issuance” has risen significantly.

This week, on the first day that the “floodgates” were opened, the government issued nearly $151 Billion of short-term Treasury bills, the largest single auction in history.  The plan is to issue a total of $258 Billion of short-term and long-term debt this week.

This is just the beginning …

Congress and the Trump Administration have committed to rising budget deficits.  The Federal government is expected to issue a mind-boggling $1.3 Trillion in new debt this year.  This is a record amount … even more than the Obama Administration when it was working to pull the country back from the financial brink.

Debt issuance is expected to rise even further over the next few years.

To make matters worse, this new supply of government paper will hit the market at the same time that The Federal Reserve works to unwind its massive bond portfolio.

Economics 101:  rising supply and falling demand results in lower bond prices.  As bond prices and bond yields (interest rates) trade inversely, this suggests that interest rates will go a good deal higher over the next several years.

 

Interest Rates

As noted, the two greatest influences on Interest Rates are:

1. The United States Treasury must increase its borrowing dramatically, for this year and for several years into the future.

2. The Federal Reserve has signaled that it expects to raise short-term interest rates by 1.5%-2% (incrementally) over the next 24 months.  And, it will seek to reduce its balance sheet by selling into the market Billions of Dollars of bonds which it has accumulated over the last nine years.

We have already experienced a significant increase in the 10-year Treasury note, which has doubled since the summer of 2016.  It now stands at its highest rate in four years.

This is important, because the 10-year Treasury is a “benchmark” rate which affects a wide range of financial instruments, from mortgages to corporate bonds. Consequences of a higher 10-year Treasury include higher borrowing costs for … just about everybody!

Cheap credit has underpinned the equities markets, and allowed both corporations and governments to borrow huge amounts of money.  The Debt Service on all that borrowed cash is about to become lots more expensive.

Interest Rates were expected to go higher this year.  These recent developments indicate that rates could go much higher, sooner than expected.

 

Begin to Reduce the Risk in Your Portfolio

In these circumstances, we do not expect that The Fed will allow short-term rates to run up precipitously.  However, The Fed does not control long-term rates … those are determined by markets.  And, rising rates of any duration will eventually tip the Bull Market over.

Higher rates will cause businesses and consumers to decrease consumption, and some investors will begin to sell stocks and transition into safer government debt.  That will suck the air right out of the U.S. stock market, and lead to the next recession.

So, investors who hold bonds must be cognizant of bond durations, and focus on bonds with shorter maturities.

And, begin to trim interest-rate sensitive stocks … primarily higher yielding stocks such as real estate investment trusts (REITs), utilities and energy stocks … which are often the first to lose value as Interest Rates rise.

 

 

InnOvation Capital & Management, LLC

IntelDigest

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

FEBRUARY 14 , 2018

 

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 this issue of  IntelDigest, we address the recent action in the investment markets.  As a matter of course, we provide periodic updates on markets and The Economy, with emphasis on prospects going forward.  And, we will return to such analysis in the coming weeks.

Today, we look at the recent market turmoil.  What does it mean?  Does it signal the end of the long Bull Market?

 

Fundamentally Sound Markets

To start, we believe that the equity markets are fundamentally sound, and the “Melt Up” in the markets still has several months to run.

Conditions haven’t changed much since we wrote (on November 8 and December 6) that certain factors support the continued “Melt Up” of equities, both domestically and internationally, for another few months:

* low Interest rates

* improving economic conditions around the world

* strong earnings in the largest U.S. corporations

* positive technical indicators signifying continued strength … the Advance/Decline Line and market breadth moving up

And now, the potential for massive gains in Corporate America from provisions of the Tax Cuts and Jobs Act of 2017 (TCJA).

 

So, What Happened?

Since the calendar turned to February, we have experienced three days where equities markets dropped precipitously (2-4% per day), causing unease among investors.  However, we see this as normal corrective behavior within the Bull Market.

After all, the S&P 500 had rallied more than 40% over the prior 24 months, without so much as a 5% decline.  This has been an unprecedented winning streak.  Markets go Up and Down in the ordinary course of events … a normal market correction has been long overdue.

The overall direction of the equities markets is still Up, for the reasons set forth at the beginning of this article.

 

The Real Cause of the Disquiet

Besides, recent events have had little to do with market fundamentals, and can be attributed to “Financial Gambles Gone Bad.”  Many assumed that news on higher inflation spurred the initial sell-off on February 2.  We’ll talk about Inflation next week;  but, we believe that a form of Gambling set the markets on edge.

You have all heard about derivatives.  They were at the center of the 2008 Financial Crisis.  And, we believe that a form of derivatives caused the recent market unrest.

A derivative is a financial contract which derives its value from an underlying asset … essentially, “side bets” which traders and investors may make on market movements.  Sounds innocent, doesn’t it?

Derivatives are written on stocks, bonds, currencies, commodities, Treasury notes, interest rates, et al.  The most notorious were Collateralized Debt Obligations, primarily packaging real estate mortgages, which turned the world upside-down in 2008.

As long ago as 2002, Warren Buffet stated that, “… In our view … derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”  In other words, derivatives can be dangerous if they become over-extended, or if misused.  These strategies used to be restricted to professional futures traders.  Now, millions of traders … many of whom lack sufficient understanding of the dangers … have the ability to “place bets” with derivatives.

We believe that the tsunami of selling which hit the markets earlier this month was caused by derivatives action related to the CBOE Volatility Index (VIX), commonly referred to as the “VIX.”  Since 1993, the VIX index has been considered a premier barometer of investor sentiment and market volatility.  VIX futures contracts and options were introduced in 2004 and 2006, respectively, ushering in an age when virtually anyone with a computer can place bets on market volatility.

 

Volatility Derivatives Trigger Chain Reaction

The long bull market has been uncharacteristically stable for the last 24 months, resulting in record-low volatility.  So, the use of “short volatility” strategies has been unusually high. Essentially, these involve futures contracts, option contracts, and even exchange traded funds (ETF) which trade as easily as stocks and allow traders to make long-term, highly-leveraged bets on sustained market quiet.

As long as volatility stayed dormant, traders would make money, sometimes lots of money.  However, at the beginning of February, volatility started to move up on news of a minor uptick in inflation data (again, we’ll discuss the prospects for inflation next week).  It seems that a Chain Reaction of panic selling was started among volatility traders.  As traders sold shares to offset their volatility risk, the market naturally fell lower.  This caused more volatility, leading to more market selling.

Eventually, buyers stepped in to take advantage of the discounted stock prices, but not before steep declines had occurred in the markets, triggering panic on Wall Street.

The irony is that there was no political or geopolitical news, or financial news on the underlying stocks, causing the downturn.  Many investors engaged in panic selling simply because the overall markets were trading lower.  Market action was driven by math, rather than objective analysis;  by futures contracts and algorithms, rather than by rational investment decision-making.

There is always the danger that a market panic could result when forced selling leads to more volatility, leading to more forced selling as futures dealers try to balance trades which have gone bad.  However, the rational investor should understand:

* low Interest rates continue to undergird the health of the equities markets

* world economies are stable

* large corporations, especially in the U.S., are enjoying growing profitability

Under these conditions … which we expect to perpetuate through most of 2018 … we do not fear corrections in the markets.

Lower stock prices represent lower risks and better opportunities.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

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

FEBRUARY 7 , 2018

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 did not publish  IntelDigest  last week because of travel.  In this issue, we review analyses of major provisions of the Tax Cuts and Jobs Act of 2017 (TCJA).  Will the legislation attain the advertised benefits for American taxpayers and the economy?  Or, have the benefits been reserved for the special few?

Initial Impressions of The New Tax Law

We discussed Tax Reform proposals in  IntelDigest  on several occasions last year, including the December 20 issue:

“… we supported changes which would facilitate American business putting more private money into growing the American economy.  We still believe that lowering tax rates on businesses … large and small … has the potential to increase the competitiveness of U.S. corporations in world markets, and allow smaller businesses to employ more Americans …

“… IF these tax cuts prove to be stimulative to the economy, and IF business owners truly plow their new-found tax savings into business expansion and hiring thousands of workers, then we will have taken a large step toward attaining 3-4% growth in the American economy in the coming years.

“… However, we also believe that massive changes in individual taxation are not warranted at this time, most especially because of the likelihood that this wholesale Tax Cut package will add another Two Trillion Dollars to the national debt in the next few years …

“The fear is that these tax changes will:

* amount to nothing less than a redistribution of resources from the Middle Class to multinational corporations, millionaires and billionaires, and the same banks which were responsible for the 2008 Financial Crisis;  and

* drive up the cost of premiums in the health insurance exchanges.”

In our last issue, on January 24, we reviewed technical aspects of the Tax Cuts and Jobs Act of 2017 (TCJA).  Herein, we’ll look at the probable outcome of some provisions of the TCJA, which applies for the 2018 tax year and later years.

All That Debt

Unfortunately, Congressional Republicans have created new problems by passing massive tax cuts without coming up with new revenue to offset the cost.

In the news today, the U.S. Senate is touting a two-year spending deal which will increase federal spending and the National Debt.  The TCJA will add an additional Two Trillion Dollars to the Debt.

What happens when the next serious recession hits this economy?  There will be pressure to expand unemployment benefits, lower interest rates again, and enact other traditional types of fiscal stimulus.  Such measures become more difficult and less effective as the Debt grows ever larger.

Just a few years ago, Congressional Republicans portrayed themselves as “budget-conscious.”  The GOP fought hard to pass sequestration, a measure to cut federal government spending.  In 2011, some members even threatened to default on the federal Debt rather than to add to it.

Today, they say that the tax cuts will boost the economy so much that the additional revenues would offset the tax cuts.  Basic Arithmetic differs.  The Debt will continue to grow;  and, a future Congress will likely extend the tax cuts past 2025.

Worsening Income Inequality

Income inequality drives American workers, providing motivation for working hard and getting ahead.  However, wealth is increasingly loaded at the top of the income chain today, while the middle is hollowing out.  Income inequality is winning the battle versus the American worker.

Intelligent tax policy would be designed to push income inequality back toward historical norms.  Unfortunately, the new tax law will make the rich richer still, and the rest more resentful.

The current Republican-led government has turned back to “supply-side economics,” which had a modicum of success during the Reagan Administration when the highest tax rate was 70 percent.  Tax cuts were effective at such high levels; they could boost growth enough to offset federal losses of revenues.

However, “trickle-down economics” does not work as well today, when tax rates are half what they were in the 1980s.

Tax cuts for the wealthy are much larger than tax cuts for lower-income workers, in both dollar and percentage terms.  It is true that upper-income taxpayers pay more taxes, so they should save more when tax rates decline.  However, their tax payments will also drop more in percentage terms than lower- or middle-income taxpayers.

Wealthy taxpayers tend to use tax cuts for savings/investment.  This will help buoy the stock markets, but will not drive demand or create jobs.  Upper-income taxpayers will also benefit most from cuts in the corporate tax, which will inflate stock prices and returns for those who can afford to own stocks.

A greater tax cut for the Middle Class could drive demand and create more jobs.

Taxes on Businesses

The maximum corporate tax rate is cut to 21% (previously 35%), which brings the U.S. tax rate more in line with other developed nations.

Also, a major feature of TCJA is allowing multinational companies to repatriate large cash stockpiles which had been kept outside the U.S.  The total amount held by American companies overseas has been estimated at $2.6 Trillion! Under the repatriation provision, companies will have a limited time to bring those assets home and pay a tax rate of 15.50% on cash (8% on equipment).

Many large corporations have already stated that they will NOT use the tax cuts to create jobs.  The chief executives of Cisco, Pfizer, and Coca-Cola would instead use the extra cash to pay dividends to shareholders.  The CEO of Amgen will use the proceeds to buy back shares of stock.

The corporate tax cuts will boost stock prices, but only a small number of companies (e.g., Amazon, Apple) propose to create new jobs.

Business Tax Games

Many private business owners get a new tax break which allows them to deduct 20% of their income, effectively lowering their tax bill well below what they’d pay if their income were taxed as regular wages.  So, more people are likely to change their reporting status, stretching the definition of a “business.”

This comes as funding and staffing at the I.R.S. are both down, because of hostility toward the agency from Congressional Republicans.  The inevitable outcome will be a surge in tax cheating, resulting in a growing sense among honest taxpayers that the system is “rigged.”

True ‘tax reform’ would have made the system more fair;  our shiny new tax laws are arguably less fair.

Taxes on Individuals

TCJA generally helps businesses more than individuals.  Business tax cuts are permanent, while the individual cuts expire in 2025.  This creates a Fiscal Cliff to come in 2025, which Congress could have avoided if it had had a smidgen of fiscal discipline in 2017.

On the positive side, the tax rates have been lowered in most tax brackets, and exemption amounts have been increased for the Alternative Minimum Tax (AMT) on individuals.

The Tax Policy Center breaks down the individual tax benefits as follows:

Those in the lowest-earning one-fifth of the population would see their income increase by 0.4 percent;  the next highest one-fifth would receive a 1.2 percent boost;  the next two quintiles would see their income increase 1.6 percent and 1.9 percent, respectively.  The biggest increase, 2.9 percent, would go to those in the top-earning one-fifth of taxpayers.

TCJA makes the progressive income tax system more regressive.  Tax rates are lowered for everyone, but they are lowered more for the highest-income taxpayers.

The primary structural changes on individual tax returns come “below the line,” meaning that they appear AFTER Adjusted Gross Income (AGI) is calculated.   Significant changes have been made to the Standard Deduction, Itemized Deductions, and Personal Exemptions, effective through 2025.

TCJA doubles the Standard Deduction to $12,000 for a single filer and $24,000 for Married Filing Joint returns.  At the same time, all Personal Exemptions are eliminated!  The increase in the Standard Deduction would benefit approximatley six million tax filers, according to Evercore ISI.  But, for many income brackets, that won’t offset lost deductions.

For smaller families, these changes … along with lower tax rates … will generally result in a tax savings.  However, families with several children will generally pay more because of the loss of the Exemptions.

Open Warfare Among Governments

TCJA also puts a $10,000 cap on State and Local Taxes (SALT), which will force some taxpayers to adopt the Standard Deduction, and others to pay higher taxes.  Many taxpayers have Itemized Deductions which far exceed even the new higher Standard Deduction.  They pay a combination of State and Local income taxes, real property taxes, personal property taxes, and sales taxes which can amount to $15,000-30,000.  Add in mortgage interest and charitable contributions and deductible medical expenses, and these taxpayers MUST itemize.  So, the $10,000 cap on SALT is a burden on many taxpayers.

High-tax states will suffer from the $10,000 cap on SALT, a provision which Republicans knew would disproportionately affect Democratic-leaning states.  Some states are creating novel approaches to dealing with these provisions, such as allowing state and local tax payments to count as deductible contributions to charity.

Expect clashes between the Congress and state legislatures on a multitude of issues in the coming months.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

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

JANUARY 24 , 2018

 

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 closed out the 2017 publication of  IntelDigest  by discussing the new tax legislation.  We start the New Year by expanding on the same subject … the Tax Cuts and Jobs Act of 2017 (TCJA).  this issue, we will review the technical aspects of the tax law changes, which begin with the 2018 tax year.  Next week, we’ll concentrate on the consequences of these changes.

Here is a general listing of new tax provisions which would affect many of our clients and colleagues:

 

Estate and Gift Taxes

TCJA doubles the estate tax exclusion amount.  For estates of decedents who die in 2018 and later, the basic exclusion amount is $11,200,000, indexed for inflation (compared to $5,490,000 in 2017).  The combined exclusion for married couples rises to $22,400,000.

The top tax rate remains at 40%, and the annual exclusion for gifts increases to $15,000.  The estate tax exclusion reverts to pre-TCJA levels in 2026.

 

Taxes on Businesses

The maximum corporate tax rate is cut to 21% (previously 35%)

Businesses can now deduct the cost of depreciable assets in one year instead of amortizing over several years, through changes in Bonus Depreciation and Section 179 Expense deductions (effective through 2023).

Many businesses are organized as pass-through entities, including proprietorships, partnerships, limited liability companies, and Subchapter S corporations.  These may include real estate companies, hedge funds, and private equity funds.  For such pass-through businesses, the standard deduction is raised to 20% (effective through 2025).

TCJA eliminates the corporate Alternative Minimum Tax (AMT), which had forced many companies to pay at a 20% tax rate when tax strategies and credits had lowered the regular tax below that level.  The new law allows greater spending on research and development by some companies.

A major feature of TCJA is allowing multinational companies to repatriate large cash stockpiles which had been kept outside the U.S.  The total amount held by American companies overseas has been estimated at $2.6 Trillion! Under the repatriation provision, companies will have a limited time to bring those assets home and pay a tax rate of 15.50% on cash (8% on equipment).

TCJA also provides for a shift in corporate income taxation from a  worldwide  system (where multinationals are taxed on all foreign income earned) to a modified  territorial  system, where U.S. corporations will not pay U.S. taxes on certain foreign income.

TCJA does place limits on interest deductions.  A corporate deduction for interest expense is now capped at 30% of income.

And, there are new limits on  carried interest  profits which are often claimed by hedge funds and other private equity funds.  Such investments are taxed at the top individual rate for short-term holdings.  In order to qualify for a rate of 23.80%, investments must be held for three years.

Other business provisions have been modified slightly by TCJA:

Standard Mileage Rates for business miles driven increases to 54.50 cents per mile.

The Work Opportunity Tax Credit (WOTC) is extended through 2019, encouraging employers to hire long-term unemployed individuals (unemployed for 27 weeks or more). The credit is approximately 40% of the first $6,000 of wages paid to a new hire.

The Research & Development Tax Credit is available to businesses with less than $50 million in gross receipts, and can be used to offset alternative minimum tax. Certain start-up businesses which may not have any income tax liability will be able to offset payroll taxes with this credit.

Other provisions remain which encourage small employer Health Insurance Plans and employer-provided transportation, mass transit, and parking benefits.

 

Taxes on Individuals

The primary structural changes on individual tax returns come “below the line,” meaning that they appear AFTER Adjusted Gross Income (AGI) is calculated.  Significant changes have been made to the Standard Deduction, Itemized Deductions, and Personal Exemptions, effective through 2025.

TCJA doubles the Standard Deduction to $12,000 for a single filer and $24,000 for Married Filing Joint returns.  At the same time, all Personal Exemptions are eliminated!

For smaller families, these changes … along with lower tax rates … will generally result in a tax savings.  However, families with several children will generally pay more because of the loss of the Exemptions.

TCJA also puts a $10,000 cap on State and Local Taxes (SALT), which will force some taxpayers to adopt the Standard Deduction, and others to pay higher taxes.  Many taxpayers have Itemized Deductions which far exceed even the new higher Standard Deduction.  They pay a combination of State and Local income taxes, real property taxes, personal property taxes, and sales taxes which can amount to $15,000-30,000.  Add in mortgage interest and charitable contributions and deductible medical expenses, and these taxpayers MUST itemize.  So, the $10,000 cap on SALT is a burden on many taxpayers.

On the positive side, the tax rates have been lowered in most tax brackets, and exemption amounts have been increased for the Alternative Minimum Tax (AMT) on individuals.

The Child Tax Credit and the credit for Child and Elder Care have been improved.  The Child Tax Credit increases from $1,000 to $2,000 per qualifying child, and eligibility has been expanded to include families with income up to $400,000 (Married Filing Joint).  Taxpayers can also use a credit (up to $500) for non-child dependents, such as elderly parents.

Section 529 college savings plans can now be used for tuition in private and religious K-12 schools, and even for home-schooling.

 

Retirement Accounts

Participants in employer-sponsored retirement plans may now make Elective Deferrals up to $18,500 per year.

Other retirement provisions have been expanded to allow more taxpayers to participate in qualified plans, IRAs, and the retirement saver’s credit for moderate-income workers.

 

 

Next week, in  IntelDigest, we will discuss the practical impact of the Tax Cuts and Jobs Act on the American economy.

 

 

InnOvation Capital & Management, LLC

IntelDigest

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

DECEMBER 20 , 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.

This is the final publication of  IntelDigest in 2017.  We will take a break over the Holidays, and resume publication for 2018 in the second week of January.

This issue has been delayed by one week pending final votes in Congress on the new Tax Bill.  Now, the votes are in and the Tax Bill has passed.  We don’t yet know all the provisions of the new tax law, but we will learn that over the next few weeks and months … at the same time that the Senators and Representatives who voted for it will learn what they voted for!

We did highlight one provision of the (then-proposed) tax reform in the November 29 issue of  IntelDigest  when we discussed year-end tax and investment planning.  That provision will severely limit itemized deductions for taxes levied by states or local governments, e.g., income taxes and real property taxes.  So, we recommended:

Pay your 4th Quarter Estimated Taxes in December, to preserve your deduction for State and Local Taxes.  Similarly, pay property taxes in December, and make Charitable Contributions before December 31.

We would add:  inquire about the possibility of pre-paying some of your 2018 real property taxes this month … otherwise, you could find that you lose some of your deductions next year.

Initial Impressions of The New Tax Law

We discussed Tax Reform proposals in  IntelDigest  earlier this year … from mid-March through mid-April … where we supported changes which would facilitate American business putting more private money into growing the American economy.  We still believe that lowering tax rates on businesses … large and small … has the potential to increase the competitiveness of U.S. corporations in world markets, and allow smaller businesses to employ more Americans.

By the way, among the many beneficiaries of lower tax rates on small businesses:  Donald Trump and his family, and other real estate developers.

IF these tax cuts prove to be stimulative to the economy, and IF business owners truly plow their new-found tax savings into business expansion and hiring thousands of workers, then we will have taken a large step toward attaining 3-4% growth in the American economy in the coming years.

However, we also believe that massive changes in individual taxation are not warranted at this time, most especially because of the likelihood that this wholesale Tax Cut package will add another Two Trillion Dollars to the national debt in the next few years.  It is also worrying that the Republicans chose to discriminate against the middle class, i.e., making the small tax cuts for some families expire after a few years while tax cuts for corporations are permanent.

The fear is that these tax changes will:

* amount to nothing less than a redistribution of resources from the middle class to multinational corporations, millionaires and billionaires, and the same banks which were responsible for the 2008 Financial Crisis

* drive up the cost of premiums in the health insurance exchanges

* pave the way for large cuts to social programs such as Medicare, Medicaid, and Social Security

We will certainly devote much digital ink to Tax Analysis and Tax Planning in the New Year.

Challenges Ahead

In our last issue, we pointed to a number of financial challenges which we all will face in 2018 or 2019.  The most serious is the Debt Explosion:

* Government debt (both federal and state) has been growing exponentially in the last 17 years.  Because the Federal Reserve cut interest rates to almost nothing, government borrowing costs have not exploded (yet!)

PLUS

* Consumer debt has returned to an all-time high (less than 10 years after a Financial Crisis which reverberated across the globe)

The Problem:  Interest rates will eventually rise to more “normal” levels, and all this Debt will prove to be unsustainable and unserviceable.

But, for now …..

The Importance of Interest Rates

Low Interest Rates are still supporting a growing economy. Despite a hike in short-term rates last week by the Federal Reserve, investors realize that there is still no better choice than stocks in the current environment.

We have expressed our view … repeatedly, like a mantra … over the last several months:

“…. expect the stock market to stay strong through the end of this year, attributable in part to a ‘melt-up in earnings’ … interest rates remain at historically low levels …

“…. we believe that the single most important factor in the current market climate is Interest Rates. While ultra-low rates have done immense damage to fixed-income investors over the last several years, investors in equities have done very well. There have simply been no easy options for investors, so they have invested heavily in stocks and stock funds, driving Price-to-Earnings Ratios to unusually high levels.”

Looking further into 2018, there is the probability of future hikes in March and September.  If they occur, short-term rates will still be no higher than 2%, less than half the 4.5% normalized interest rate.

So, there’s still plenty of fuel for the “Melt Up” in stocks deep into 2018.

Warning Sign for The Turning Point

There is one indicator which we will watch carefully in the coming year, because it has been a reliable warning of a major market peak and impending recession.  That indicator is an  Inverted Yield Curve.  As the Federal Reserve continues to raise short-term rates, the yield curve could “invert” … the spread between short-term and (usually higher) long-term rates falls below zero.

This indicator is straightforward … it compares short-term interest rates (which the Federal Reserve “controls” and artificially adjusts) to most other interest rates, which are set by market prices.

Historically, when the Federal Reserve has artificially pushed short-term interest rates ABOVE long-term rates, the stock market has peaked, sending the economy into recession.  The last three times that short-term rates moved above the 10-year Treasury were in 1989, 2000, and 2007 … leading to the most recent recessions in the U.S. economy.

Therefore, we will keep an eye on this and other indicators so we can keep you informed in the pages of  IntelDigest.

Happy Holidays to all!  Best wishes for happiness and prosperity in the New Year.

 

 

InnOvation Capital & Management, LLC

IntelDigest

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

DECEMBER 6 , 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.

As we wind down our 2017 publication of  IntelDigest … before taking a break over the Holidays … we continue to discuss the Equities Markets and The Economy.  We have returned several times to this topic over the last four months, and we find that the data continues to support the “Melt Up” thesis for the U.S. and global economies.

Writing one month ago, in our November 8 issue, we set out a number of factors and indicators which support the extension of this market run well into 2018.  These include:

* continuation of low Interest rates (even if the Federal Reserve bumps up the rate by 1/4 percent next week)

* continuation of improving economic conditions around the world

* strong earnings in the largest U.S. corporations

* Holiday Season, typically the strongest time of year for many companies in the Dow 30 and S&P 500 … this year, featuring blockbuster holiday sales

* positive technical indicators signifying continued strength … the Advance/Decline Line and market breadth moving up, major stock indices (Dow, S&P 500, Russell 2000) rebounding from any decline to achieve new highs

 

Add to that the potential for massive gains in Corporate America if any version of the proposed Tax Reform legislation comes to pass.

All of the above support the “Melt Up” of equities, both domestically and internationally, for another few months.

 

 

So, let’s start looking further down the road, so we can begin planning for the downside to come.  Here are some warning signs:

Bubbles

There are indications of financial bubbles  (irrational exuberance?)  forming in different sectors:

* Stocks have had a long, strong run to previously-unheard-of levels, buoyed by never-before-seen machinations by central banks

* Prices of Cryptocurrencies have been soaring

* Corporate bonds are paying record-low yields

* Investors bidding up non-financial assets, such as Art, to prices in the Hundreds of Millions of Dollars

* Consumer debt has returned to an all-time high (less than 10 years after a Financial Crisis which reverberated across the globe)

 

Sovereign Debt

The cornerstone for all of the above is Sovereign Debt. Governments around the world have taken on loads of debt and flooded marketplaces with liquidity, which has flowed primarily into asset values rather than productivity.  This will inevitably lead to the bursting of several of these bubbles … perhaps as soon as mid-2018, or perhaps not until 2019.

In other words, when the market “Melt Up” comes to its end, the resulting recession will not be mild … expect some serious unpleasantness when the Bust arrives.

 

 

The current market is analogous to the market boom leading up to 1998.  Stocks were flying then, and Internet stocks were flying fastest and highest.  Debt was growing at unprecedented rates.

At the beginning of a massive credit boom, everything seems great.  When credit growth far exceeds savings, it allows an economy to consume far more than it is producing.  This “pulls forward” consumption, magnifies economic growth, and increases spending and wages.

But, by 1998, so much consumption had been pulled forward that it exceeded global aggregate demand.  Bust!  Commodities and emerging markets were hit hard.  Russia defaulted.  Eventually, bubbles burst in Technology and Telecoms, and a bear market ensued.  Many Tech stocks fell 80% from their peak.

There is a high probability that we suffer a similar bust next year.

Government debt (both here and abroad) is at unprecedented levels.   On a per-capita basis, U.S. federal debt has more than tripled since 2000.  (Some things which have NOT tripled in that time:  American wages and the American economy).

In just the last eight years, U.S. government debt has more than doubled on a rolling 10-year basis.  By the end of this year, total federal debt per person in America will reach $62,000.  That’s nearly $250,000 for a family of four.

This is bad enough to cause street protests, as well as “rending of garments and gnashing of teeth” (to get all Biblical).  But no … there hasn’t been much protest at all. Because these massive increases in government debt have not (yet) caused the nation’s borrowing costs to rise.

By reducing Interest Rates to practically nothing, the Federal Reserve has anaesthetized the public to the growing debt.  The Federal government is paying about the same amount in interest on the debt as it did back in the early 1990s, when our national debt was only 22% of the size of today’s burden.

The thing that matters to policymakers is how much the debt costs to maintain, not how much it costs to repay.

But, the Reckoning is coming.  The debt explosion is finally reaching its peak.  More and more consumer loans are starting to go bad.  Default rates are rising on subprime auto loans.  Now, credit card default rates are moving higher, too. Student loans will be next.

The Federal Reserve intends to slowly bring short-term Interest Rates back up to “normal” levels (around 4%), from the current level of 1.25%.

What will happen to the Federal government borrowing costs as Interest Rates rise?  The Congressional Budget Office estimates that Interest Payments will nearly double, going from 6% to 11% of the federal budget.

 

Next week, we will discuss the warning signs to look for in advance of difficult times to come next year.

 

 

InnOvation Capital & Management, LLC

IntelDigest

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

NOVEMBER 29 , 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 our last three issues of  IntelDigest  for 2017 … before taking a break from publication during the Holiday Season … we will concentrate on Year-End matters and planning, with relation to both investments and taxes.

As promised, we will continue to discuss the Equities Markets and The Economy.  Since August, we have returned several times to this topic;  in prior November issues, we have provided an UPDATE on investment prospects and the “Melt Up” thesis for the U.S. and global economies.

In our two December issues, we will go into more detail on this thesis, illuminating matters and sectors for which caution is recommended going forward, or companies which are not expected to advance further in the next year or two.

At this time, a full 30 days before the year comes to a close, it is important to address certain matters which require decisions or action before time runs out on 2017.  Therefore, we devote this issue to steps which you can take in Year-End investment planning and Year-End tax planning.

 

Required Minimum Distribution (RMD)

Once you reach age 70½, tax law requires you to start taking distributions from your qualified retirement plans, including Traditional, Rollover, SEP, or SIMPLE IRAs.  This is the Required Minimum Distribution (RMD), and your first one (for the tax year in which you have turned 70 ½) must be completed by the following April tax deadline.

Your second, and all subsequent RMDs, must be taken by December 31 of the applicable tax year.  Distributions are fully includible in your gross income for income tax purposes.  If you fail to take the required minimum amount in any year, you could face a hefty 50% excise tax on the missed amount, plus more complications in your tax return preparation.

 

Retirement Contributions

For those of you who have not yet retired, plan to make tax-deductible contributions to IRAs, 401(k) plans, and other qualified plans before the regular tax-filing deadline.  You have until Tuesday, April 17, 2018, to make these contributions.  However, it is in your best interests to invest these amounts sooner and capture potential gains while the markets continue to sizzle.  Be sure that your investment company understands the correct tax year to which your contributions pertain, and reflects the appropriate year in your statements.

Your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500 per taxpayer ($6,500 if you’re age 50 or older);  double those figures if you file a joint income tax return.

For 401(k), 403(b) and certain government plans, the employee contribution limit is $18,000.  If you’re over 50 years old and still contributing to employee and government plans, you can add an extra “Catch Up Contribution” in the amount of $6,000 for 2017.

If you have a SIMPLE IRA for self-employed individuals, you may deduct up to $12,500 ($15,500 if you are age 50 or older). The deduction for contributions to a Simplified Employee Pension (SEP) account maxes at $54,000, or approximately 20% of your adjusted net earnings.   You have until your 2017 tax filing deadline, including extensions, to both open and fund a SEP.

 

Delaying Social Security Benefits

If you are of an age to qualify for Social Security retirement benefits, keep in mind that you have a high probability of increasing the amounts which you will receive over your lifetime … by simply delaying commencement of benefits.

There are several strategies for maximizing your benefits, and they can be quite complex.  However, the simplest strategy is to delay starting Social Security benefits until you turn 70 years old.  Your benefit could be as much as 32% higher at age 70.  If you live to normal life expectancy, you will receive much more in benefits.  If you live a good deal longer … into your 90s or 100s … you would receive a great deal more.

 

Get Ahead of Tax Changes

No one is sure what form the Final Tax Reform Bill will take. But, to be safe, you should get out ahead of Congress and the Internal Revenue Service.  Plan to take the usual Itemized Deductions this year, before the deductions are reduced or taken away by new tax laws.

Pay your 4th Quarter Estimated Taxes in December, to preserve your deduction for State and Local Taxes.   Similarly, pay property taxes in December, and make Charitable Contributions before December 31.

 

Rebalance Your Portfolio

Act soon (certainly before Christmas) to turn investment losses into tax savings for 2017.  If you have losing assets in the portfolio, they can offset capital gains or produce capital losses, which will reduce your income taxes.  Sell in the next three weeks so that the transactions will clear before the end of 2017.

This form of Tax-Loss Harvesting should be part of your normal year-end routine, but could be more important this year simply because of the uncertainty of the imminent tax legislation.  Many investors will make a serious review of their portfolios only once per year, if that often.

All investors should use the year-end to reassess their portfolios and investment objectives.

 

Funding Education

The American Opportunity Tax Credit is still available through the end of 2017 for you, your spouse, or a dependent enrolled in a degree program.  You can take the credit for up to $2,500 of tuition, fees, and course materials.  The Lifelong Learning Credit is a 20% credit on the first $10,000 of qualified education expenses.  Each credit is subject to restrictions.

Student loan interest up to $2,500 is deductible if your modified adjusted gross income does not exceed $80,000 ($160,000 if married and filing a joint return).

If you have children or grandchildren, consider starting college savings programs for them.  Start now while the investment market is hot;  open a tax-advantaged plan while they’re still toddlers.

You can create a 529 account (see the White Papers section at www.powerlaw.us for details), Coverdell education savings account, or a simple custodial account.  Remember that each state has specific rules pertaining to such plans.

 

Donations to Charity

Make donations to charitable organizations well in advance of December 31 in order to ensure a tax deduction for 2017.

Volunteer Work on behalf of charitable organizations can also generate tax deductions.  If you have spent a significant number of hours volunteering at a shelter or church or food pantry, or have participated in relief efforts, you can deduct actual expenses incurred plus 14 cents/mile for use of your vehicle.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

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

NOVEMBER 8 , 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 the August 30 issue of  IntelDigest, we stated our expectations for the equity markets:

“…. expect the stock market to stay strong through the end of this year, attributable in part to a ‘melt-up in earnings’ … interest rates remain at historically low levels …

“…. we believe that the single most important factor in the current market climate is Interest Rates.  While ultra-low rates have done immense damage to fixed-income investors over the last several years, investors in equities have done very well.  There have simply been no easy options for investors, so they have invested heavily in stocks and stock funds, driving Price-to-Earnings Ratios to unusually high levels.”

 

Last week, we reiterated our position that this “Melt Up” would continue into the new year, and republished our September 6 issue, which listed a number of sectors which should continue to do well.

So, why do the stock markets continue to push higher, when they are already at “frothy” levels? And, why do we think that the “Melt Up” in U.S. and global economies will extend further into 2018?

There are a number of factors and indicators, which add up to a positive environment for the markets.  These include low Interest Rates, improving economic growth around the world, and strong earnings.

 

Strength of Earnings

The Third Quarter earnings announcements have shown strength in many industries;  results have been better-than-expected.  Among the S&P 500 companies which reported actual results for the most-recent quarter, earnings growth … on an annualized basis … is coming in at approximately 4.7%, and sales growth at 5.7%.  Various estimates for 3Q had forecast 2.1% earnings growth and 5% sales growth.

According to FactSet, 55% of S&P 500 companies have thus far released results from the most-recent quarter … 76% of those companies have announced positive earnings surprises.  In addition, 67% of the companies posted positive sales surprises.  These results have placed a nice foundation under the stock market.

 

Strength of Technology

Technology continues to lead the markets higher, especially among the Tech Titans referred to as the FAANG stocks … Facebook, Amazon, Apple, Netflix, and Google (Alphabet is now the holding company which is the parent of Google).   Better-than-expected results from Amazon and Google, as well as sold-out orders for the new Apple iPhone X, have boosted technology stocks overall.

Tech is reasserting its leadership, which should continue to support the overall stock market as we head into the time of Holiday Gift-Giving, a seasonally strong time of year for businesses.

 

Strength of the U.S. Economy

However, the strength of the U.S. Economy is more broad-based than just the Techs … U.S. GDP growth remains strong.  Last week, the Commerce Department published its preliminary estimate for third-quarter GDP growth.  It came in at an annual pace of 3%, higher than economists’ consensus estimate of 2.7%.  Second-quarter GDP growth was also revised higher to a 3.1% annual pace.

Despite continued political turmoil and three major hurricanes, the U.S. Economy has continued to grow at a faster pace than in recent years.  In the third quarter, consumer spending grew at a 2.4% annual pace, and business spending increased at a 3.9% annual pace.  Exports moved up by 2.3%.  Rising exports would work to reduce the U.S. trade deficit, which would further boost overall GDP growth.

U.S. GDP growth has lingered around 2% per year in recent years. These recent results point to a persistent 3% annual growth rate moving forward.

 

Strength of the Holiday Season

According to Bespoke, November is one of the strongest months of the year for the Dow and S&P 500.  In the last 20 years, the Dow has rallied an average 1.93% in November.  Since 1983, the S&P 500 index has posted an average 1.19% gain in November … during the bull market of the last eight years, the index has performed even better, averaging a 1.75% gain in November.

Further, investment guru Louis Navallier points out that small- and mid-cap stocks tend to outperform large-cap stocks in November, and well into the New Year.  Navallier says that:

“Typically, an early “January effect” commences in mid-November right before the Thanksgiving holiday.  During this time, small-cap stocks benefit from year-end pension funding and other seasonal buying pressure, including gifts to grandkids.”

Finally, the U.S. dollar has reasserted itself in recent weeks.  A stronger U.S. dollar favors domestic companies and small- to mid-cap stocks.  As long as U.S. GDP growth remains strong, the U.S. dollar should continue to dominate and support higher prices in U.S. equities.

 

Technical Indicators Signal Continued Strength

Another sign of market strength comes from technical indicators. There are hundreds of technical statistics and charts which stock analysts use to try to predict the future price levels or the general price direction of various securities, often by analyzing past patterns. Each, alone, does not carry much weight, and should be taken with a large helping of salt!

However, when indicators act together, and move in parallel directions, they tend to support each other.  Here are a few indicators which have been moving in tandem … therefore, we see them as lending support to continuation of the “Melt Up” thesis in the markets.

Advance/Decline Line  is still moving up … this is a Market Breadth indicator representing the difference between the number of advancing stocks versus the number of declining stocks.  This index is considered one of the best indicators of market momentum.

S&P 500 Equal Weight Index  rising … this indicator gives equal weight to all the companies in the S&P 500, showing that even the smaller-cap companies continue to move up, not just the giant companies.

Russell 2000  index of smaller-cap companies continues to rise in tandem with the larger S&P 500.

We will continue to monitor these and other indicators as we move through the end of the year, and alert you of any change in direction.

InnOvation Capital & Management, LLC

IntelDigest

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

OCTOBER 25 , 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.

 

This week in  IntelDigest, we present the last installment of our 4-issue essay on Cryptocurrencies;  we use the shorthand designation, Cryptos, to refer to these digital currencies.

In earlier issues this month, we covered the underlying technology for most digital currencies, known as  Blockchain. We have outlined the workings of the Blockchain technology … a decentralized “distributed ledger” system … and some of its game-changing potential.  The development of Cryptocurrencies is the first and most obvious use of the technology;  and, Bitcoin is its first “killer app.”

Bitcoin is the “proof of concept” that Blockchain technology works as intended.  The success of Bitcoin has proven that it is possible for independent and fragmented entities (referred to as “miners” or “nodes”) to process/enable the exchange of value between strangers, with no need for an intermediary. And, do so in a transparent, verifiable, and open manner.

In this issue, we discuss the process of speculating in digital currencies, and the safest Cryptos on which to risk your money.  Cryptos now number over 1,000, but 99% are pure speculations.

The most “reputable” are Bitcoin and Ethereum.

Ascension of Bitcoin

The advantage of Bitcoin is that it was the “first adopter” of the Blockchain technology.  It is an amalgam of decades of innovation in applied cryptography, which began with the military in the 1970s and was continued by independent computer programmers in the 1990s.  It is the template for most of the Cryptos which followed.

Bitcoin marked the birth of  Cryptocurrencies in 2009, soon after the bottom dropped out of the global economy.  Is it any wonder that people were seeking an alternative financial system to the one which had left so many broke and dispirited?

Bitcoin is the first of the Cryptocurrencies, and, arguably, the most stable.  It has established a market value, which is volatile;  over the course of this calendar year, Bitcoin has climbed from just under $1,000 per bitcoin to almost $6,000 per bitcoin.  Bitcoin can be purchased in fractions of bitcoins.

Ethereum

While Bitcoin was focused on creating a store of value and a currency, Ethereum takes the Blockchain further.  Sure, Ethereum is another form of currency.  However, the avowed purpose of Ethereum is the creation of “smart contracts” and the construction of decentralized applications on the Blockchain.

Property and contract law are the fundamental building blocks of commercial society.  Smart contracts would enable enforcement in a decentralized manner, which would be faster, easier, and less costly than the traditional legal system.

Once set into a blockchain, smart contracts would become immutable and unstoppable.  Anything “signed” onto the blockchain becomes global and permanent.  Data and programs can be auditable by anyone.

In this way, it would become impossible to renege on a “contract” or a decision once it’s coded and set into motion on the blockchain.  And, anyone can audit the blockchain and prove the existence and terms of a transaction.

One of the co-creators of Ethereum is Vitalik Buterin, a Canadian programmer of Russian extraction.  His vision of smart contracts:

“Ethereum can be used to codify, decentralize, secure and trade just about anything:  voting, domain names, financial exchanges, crowdfunding, company governance, contracts and agreements of most kind, intellectual property, and even smart property thanks to hardware integration.”

So, Ethereum, which trades for just under $300 per coin, would appear to have a high ceiling and a much more utilitarian future than other Cryptos.

 

If you have an interest in speculating in these, or other, Cryptos, please seek out more information before committing your money.  Do NOT forget that Cryptos … at this time … are more speculation than they are investment.  And, there is no simple vehicle, like a mutual fund, which trades digital currencies.

 

The Process

The first step in speculating in Cryptocurrencies is to set up an account with an Exchange.  We will mention a few here. An Exchange may be just a secure platform for buying and selling Cryptos, or it could be a regulated financial institution … similar to banks and stock brokerages … which can set up your account in Dollars, link to your bank account, then purchase Cryptos for your account.

The largest digital currency exchange is Coinbase, which is a secure platform for buying and selling Cryptos.  It is easy to set up, but has the highest fees.  It is also limited to Bitcoin, Ethereum, and Litecoin.

Gemini has lower fees than Coinbase;  it, too, currently handles only the most recognized currencies.  Gemini is regulated as a trust company in New York State.

Two other exchanges are Kraken and Bittrex, which can handle more cryptocurrencies, but are more difficult to use. Example: you may be able to find a Crypto which you prefer on Bittrex.  But, you can only buy on Bittrex using Cryptocurrencies.  So, you would have to have an account on Gemini or Coinbase, which can convert your Dollars into Bitcoin or Ethereum.  Then, transfer your bitcoin or ether to Bittrex in order to buy another Crypto.

 

Your Wallet

Having purchased an amount of Crypto, you then have to store your “coins” in a Wallet.  You can keep your currencies stored on the Exchange, which is easy but not very secure. The more secure method … one where you keep control over your asset … is to transfer your Wallet to one or more encrypted hard drives (or thumb drives) which you can secure.

Keys

Think of your Wallet as your bank account.  Now you need the Keys to transfer assets into and out of your wallet.  Each wallet has a unique address associated with it.  Here’s what a public wallet address looks like:

1PUA99Fyco1hQRpwwmstfDP2xmvZMyAiK8

This is a public address;  you don’t have to keep it secret. Anyone can send coins to that address if you provide it to them.

To open the wallet, however, you need a private key, or password.  A private key is, preferably, a very long password which determines your ownership of the cryptocurrencies in the wallet.

You would need to keep your private key (password) secure. And, you should back up your wallet onto two other encrypted drives.

Alternative Crypto Investment Vehicles

At this time, the only investment funds which invest in Cryptocurrencies have high fees and are limited to high-income “accredited” investors:  Metastable, Crypto20, The Token Fund, and HOLD 10 Private Index Fund from Bitwise.

We will update you on developments in this industry as Cryptos gain greater credibility and acceptance in the marketplace and among regulators.