foxex: Tax Free

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. U.S. markets add to record highs with fourth straight day of gains

2. Boeing may delay or freeze 737 MAX production over safety concerns

3. Why the U.S. may lag the rest of the world in 2020

4. Billions in profits, nothing in taxes

Markets Closed

Dow
28,235.89 +0.36%

S&P
3,191.45 +0.71%

Nasdaq
8,814.23 +0.91%

VIX
12.14 -3.88%

Bitcoin
$6,919.77 -3.30%

US 10-Yr Yield
1.892 +4.01%

Credits: Julian Finney / Getty Images

Markets Today

U.S. markets added to their record highs and are on a four-day winning streak as concerns about the U.S.- China trade war have abated for now. U.S. Treasury Secretary Mnuchin told reporters over the weekend that the Phase One Agreement will be formally signed in January as the two sides work on the next phase over the coming months. That is removing uncertainty for some investors and headwinds for companies planning their budgets for 2020 and beyond. European markets also reached new highs as the Stoxx 600 posted a new record close. This is the last full trading week of 2019, which is shaping up to be a banner year for all major U.S. equity indexes.

Headlines

Novartis AG (NVS) said it was abandoning a potential blockbuster drug for treating asthma after it failed two late-stage trials, dealing a blow to the company's hopes of pioneering a novel way to treat the respiratory disease. The company said the experimental treatment, called fevipiprant, performed no better than a placebo in reducing exacerbations—episodes where symptoms suddenly worsen—in two large trials on patients with moderate-to-severe asthma.
Boeing (BA) is suspending production of its 737 MAX jet over continued safety concerns. The halt is expected to occur in January. At the moment all 737 Max's are grounded until the Federal Aviation Administration gives its go-ahead. The FAA has said that the safety issues won't likely be fully addressed until February.
Amazon (AMZN) is no longer allowing third-party sellers to use FedEx's (FDX) ground-delivery shipping, the latest escalation in the ongoing rivalry between the companies. FedEx in August announced it would end its ground-delivery contract with Amazon, after ending its express U.S. shipping contract with Amazon in June.
International Flavors & Fragrances (IFF) said it will merge with DuPont's nutrition and biosciences unit in a deal that will create a new firm valued at more than $45 billion. The merger will use a tax-efficient structure called a Reverse Morris Trust, IFF said. Such transactions let a company avoid a big tax bill by spinning off a unit that it wants to divest and simultaneously merging it with another company.
Goldman Sachs (GS) says it is overhauling its environmental policies and is pledging to spend $750 billion on sustainable finance projects over the next decade, as well as implementing stricter lending policies for fossil fuel companies. The $750 billion will focus on financing, investing, and advisory activity related to nine key themes within climate transition and inclusive-growth finance. Examples include sustainable transport, accessible-and-affordable education, and food production.
United Nations member countries could not come to terms on an even non-binding measure that would have encouraged countries to adopt more ambitious targets for reducing greenhouse-gas emissions next year. (NYT)

The Shift in Global Market Performance

The Phase One Agreement between the U.S. and China could not have come soon enough, especially for markets outside of the U.S. As we know, the DJIA, S&P 500, and the Nasdaq have all topped new highs multiple times this year, and again today. But global markets have been stuck in neutral, trapped in the uncertainty between the U.S. and China, Brexit, and a broader slowdown that has Germany and Japan in its clutches.

That may be changing, and quickly.

While most market strategists see U.S. markets climbing 6-8% in 2020, which is about average, many see broader outperformance in Europe and emerging markets in Asia outside of China. Here are the reasons:

U.S. markets have become crowded with global investors seeking yield as the Federal Reserve cut interest rates three times in 2019.
Global economies are slowing, but are expected to bottom out in the first half of 2020 and grow from there.
British PM Johnson's parliamentary victory will unleash heavy government spending in the next two years, which will help the U.K. and its neighbors.
The U.S.-China trade war wasn't just choking companies in those countries. Their global trading partners have been on hold as the two biggest economies in the sand pit fight it out.

chart courtesy Capital Group

Billion in Profits - Nothing in Taxes

Multi-billion dollar companies paying nothing or close to nothing in taxes is nothing new. It's the battle cry for many U.S. Democratic candidates seeking the White House in 2020, as well as hundreds of left-leaning policy and advocacy groups who decry the tax loopholes that enable these practices.

It does seem rather peculiar that Amazon.com pays next to nothing in taxes while Walmart paid nearly $64 billion to Uncle Sam last year. But it's not just an Amazon phenomenon.

The Institute of Taxation and Economic Policy (one of those aforementioned left-leaning policy groups) is out with its list of the 91 largest companies that paid no taxes in 2018. Per the Institute, 2018 was the first year that companies were subject to the Tax Cuts and Jobs Act (TCJA), the tax law signed by President Donald Trump at the end of 2017. The law lowered the statutory federal corporate income tax rate to 21 percent (a 40 percent decrease from the previous 35 percent rate) and made other changes affecting what companies pay. When drafting the tax law, lawmakers could have eliminated special breaks and loopholes in the corporate tax to offset the cost of reducing the statutory rate. Instead, the new law introduced many new breaks and loopholes, though it eliminated some old ones. The unsurprising result: Profitable American corporations in 2018 collectively paid an average effective federal income tax rate of 11.3 percent on their 2018 income, barely more than half the 21 percent statutory tax rate.

Some paid nothing at all. Here are the top ten profitable companies that paid zero or less-than-zero in taxes in 2018.

See the full list and the report here.

More News:

Starbucks Stock Breaks Out After Analyst Upgrade

Skyworks Shares Popped 25% After This Signal

ETF Chart Says Markets Are Due to Pull Back

chart courtesy YCHARTS

Gainers: Fertilizer makers Mosaic and CF Industries, as well as agriculture-chemical maker Corteva rose 4.6%, 3.9%, and 4.0% respectively in the wake of China's commitment to increase purchases of U.S. farm goods. Data storage firm Western Digital rose 4.2% after a Susquehanna analyst upgraded it from "neutral" to "positive."

Chemical company International Flavors & Fragrances dropped 10.4% today after it announced it was merging with DuPont's nutrition and biosciences business. Boeing dropped 4.1% after it said it may need to slow or freeze production of its 737 MAX jet (announcement of the freeze came after markets closed). Fashion firm Capri Holdings fell 1.9% after it announced it was purchasing Italian shoe maker Alberto Gozzi.

Word of the Day

Reverse Morris Trust

A reverse Morris trust (RMT) is a tax-optimization strategy in which a company wishing to spin-off and subsequently sell assets to an interested party can do so while avoiding taxes on any gains from such asset disposal.

Today in History

December 16, 1947

Today in 1947 physicists Walter Brattain and John Bardeen invented the first transistor at Bell Labs in New Jersey. The transistor amplifies and directs electric signals, a job previously done by fragile, power-intensive vacuum tubes. The name "transistor" (a combination of "trans-resistance" and the suffix 'istor' from devices like "resistor") wasn't coined until the next year. That next year their team leader Bill Shockley created the more durable junction transistor. The three went on to win the 1956 Nobel Prize for physics for their achievement.

Source: http://www.pbs.org/transistor/album1/