(Washington)

Advisors need to pay very close attention to what states are doing on taxes. As might have been expected, states with high taxes are working hard to come up with solutions that protect their residents from the higher payouts trying to be imposed by the federal government. The new tax package limits state and local deductions (“SALT”) to just $10,000, which means much higher tax bills for residents of higher tax states. While New York is preparing to sue the federal government over the changes, California has already come up with what looks like a good solution. Residents of the state can simply donate to the “California Excellence Fund” instead pf paying taxes, as such a charitable gift is deductible in the new federal package.

FINSUM: New York may also use the same plan as California is using. All the states seem likely to do this. What a big waste of time and energy because of a silly rule.

(New York)

Barron’s has been getting increasingly bearish of late (with the Dow at 25,000 now, we can understand why!), and they have published a bearish article laying out the case for why a correction is looming. The argument has a lot to do with price action, and what the market is showing is that despite reaching a new high, it is coasting rather than gaining momentum. The last trading day of the year—a 118-point loss—was a worrying sign of slowing momentum, and many technical indicators now point to falling prices soon.

FINSUM: One key takeaway from this piece is that despite January being considered a good month for stocks, that is not the case in midterm election years.

(New York)

The stock market just finished a sensational year, capping what seems a one-in-a-lifetime nine-year run. However, there is something very surprising about this rally that is different than those in the past—more and more Americans are sitting it out because of fear. Since the start of 2012, nearly a trillion Dollars has been pulled from retail equity mutual funds (some went back in as ETFs). The market rose 116% over the same period. In the last three years, US stock funds (ETFs included) have seen net outflows each year.

FINSUM: The Financial Crisis left deep scars for investors all across the country, and the traumatic effects of it can be seen in the data.

(New York)

It is that time of the year again, and investors need to watch out. January is historically the top month for retail bankruptcies, and it seems likely there is going to be another cull this year. Last year saw a furious pace of retail bankruptcies, with more companies going bust than during the Great Recession. January is traditionally when most companies file, according to data going back to 1981.

FINSUM: Christmas sales were a little better than feared this year, so a couple of zombies might linger on longer than January, but this is certainly going to be another year of retail bankruptcies.

(Washington)

The last couple of years have seen a huge surge in the legal pot industry. More and more major states have made marijuana legal, which in turn has sparked a flurry of business to create a legal pot industry. However, doom and gloom may be about to settle into the young area as Jeff Sessions, Trump’s Attorney General, has now rescinded the Obama era policy that limited legal enforcement of federal marijuana laws in states where it was legal. The news hit the sector hard, with one of the main pot stock indexes down as much as 24% yesterday.

FINSUM: It is going to be hard for the federal government to enforce any national law when there is primarily only local law enforcement, but this could still cause some major disruptions to the young industry.

(New York)

Well-known hedge fund manager Jeremy Grantham has published an article in Barron’s considering the state of the US equity market. His piece is well-thought out and communicated and comes to a clear conclusion—the bull market has more room to run. Basing his argument on a mix of historical market data, economic info, and psychological analysis, Grantham reluctantly comes to the conclusion that the bull market may be entering its final “melt up” phase. He says that while this is one of the priciest markets in history, “strangely, I find the less statistical data more compelling in this bubble context than the simple fact of overpricing”.

FINSUM: We know Grantham personally and respect his views. He was a pioneer in the statistical study of markets, but here says he leans away from that view, which is very noteworthy.

(New York)

Consider this a warning shot across the bow on a piece of information that no one seems to see coming. The Wall Street Journal has put out a piece saying that fourth quarter earnings season, set to start soon, is going to be miserable. The reason why is that many companies are going to intentionally incur some huge expenses as occurring in the fourth quarter as a way to take best advantage of the new tax regime being brought in during 2018. This will heavily cut into fourth quarter profits, leaving some very ugly numbers.

FINSUM: The piece says this is going to be the weirdest earnings season in years, and that seems right as these losses are somewhat artificial. However, it is never good to have some very poor numbers come out, which could lead to some short-term misunderstandings and volatility.

(New York)

Merrill Lynch took a big step yesterday. Seemingly espousing the same view as Jamie Dimon, the firm officially blocked clients and all advisors who act on their behalf from trading Bitcoin. The firm does not believe in the asset class’ investment suitability. The ban extends beyond direct purchases of the cryptocurrency and extends to all futures and funds that trade in bitcoin. Advisors reportedly have mixed feelings on the move, with some saying it is a missed opportunity.

FINSUM: In our opinion, Bitcoin is a solid idea and is here to stay, but it just has so much regulatory risk right now that we think only accredited investors should be allowed to have it in their portfolios.

(Washington)

Okay we have a major call to make today, and it could go well, or it could get ugly for us. Our contention is that despite fears of jumping inflation and growth, we believe rates and yields are going to rise only slowly. New Fed commentary shows that the central bank does not expect the new tax policy to significantly affect growth, which makes us feel they will lean towards dovishness. Additionally, with inflation remaining subdued, we think they won’t be under a great deal of pressure to hike. Finally, on the yields front, we expect that retiree demand for fixed income will keep a lid on yields. As proof, just look at how stock funds have seen three years of outflows, while bond funds have risen for over a year straight.

(London)

While it has largely faded from the American consciousness, the fallout over 2016’s Brexit vote has been nothing short of an absolute mess. The negotiations for departure have finally made a little progress, but are plagued by internecine warfare at every level. Now, a push for a second referendum, which could refute the first, is gaining traction. Former PM Tony Blair is urging his liberal party to back a second vote. Blair and Liberals believe that leaving the EU is not the solution that will fix the worries of Leave voters.

FINSUM: We think this situation only has upside for investors. If the UK reversed its positon, it would lead to a rally in the Euro and Pound and be bullish for most asset classes.