Stocks opened down across the board yesterday until reports came out that Biden’s private meeting with Senator Capito offered major changes to his American Jobs plan. Every report out of the political world comes with a grain of salt, but they are pulling out all the stops in an attempt to get a bipartisan infrastructure bill signed this summer. Originally, this bill was to be partially paid for via an increase in corporate taxes from 21% to 28%. That would reverse half of the Trump Tax cuts which brought down the corporate rate from 35%.
Republicans drew a red line in the sand on erasing their signature accomplishment. With this being a non-starter, Biden is moving to a new idea. His proposal now includes a cut in spending from an original $2.2 trillion goal to $1.0 trillion. More importantly, a major concession points to not touching the corporate tax rate, rather requiring a new minimum tax rate of 15%. This follows another election item where he wants to close tax “loopholes” and make companies pay “their fair share”. In the past he singled out Amazon as a repeat offender.
There is no data on private companies, but at least 55 public ones paid no taxes over the last three years on billions in profit. One might think it was mostly new technology companies, but the list is very diverse and includes FedEx#, Nike#, Kinder Morgan and Duke Energy. Many of these can be explained via renewable energy tax credits, deferred balances to be paid in the future, or past Government plans including the Cares Act.
Tax experts and Government officials will argue that deductions and credits encourage research & development, promote growth in jobs and are critical to a successful country. Senator Warren, among many others, is certainly on the other side of this argument.
New questions arise from this change of events. Why switch from an original goal of simply raising taxes on corporations? Did the Administration lose support from their own side as well? Would this plan be acceptable to both parties? What are any side effects in raising the corporate minimum tax on private enterprises? Is Biden’s previous stance on “green” tax credits going to be excluded? At the end of the day we’re no more certain on what, when and how the American Jobs Plan will be constructed.
What can be inferred is that nothing is going according to plan. Reconciliation can only be used one more time this year, which allows Democrats to pass certain legislation with a simple majority in the Senate, as opposed to the normal 60 votes. Since they have 50 seats, they need every Democrat to be on board. Senator Manchin has been a focal point in negotiations, but realistically there are many moderate Democrats who worry about ballooning deficits. It is fair to question if any of them are rumbling behind the scenes on excessive money printing efforts with an upcoming election cycle in fifteen months. Finding a bipartisan path to infrastructure would also allow the Democrats to use reconciliation on their green agenda later in the year as well. Either way, the market wants answers and Biden wants this resolved soon. It is not going to be easy.
For now, investors are a bit enthused by the prospect of no corporate tax increases in 2021. Once word got out, stocks staged a decent rebound yesterday morning, especially in the Financial and Utility sectors. They would be the ones most harmed by raising corporate taxes due to their predominantly U.S. revenue base. The Dow Jones reversed a near 300 point loss to end the day basically flat.
In other news, we got another positive glimpse of our employment situation with unemployment claims coming in below 400,000 for the first time since the pandemic started. In normal economic times, this number would be back to the 250,000 area. A trend in motion should continue while reopening efforts explode.
Yesterday, ADP payrolls showed a massive jump of nearly 1 million private jobs added in May, the most in a year. This is not to be confused with today’s widely-followed U.S. Bureau of Labor Statistics employment report. The ADP report does not include Government jobs. As noted, this morning’s report will drive today’s movements. Since this is being written prior to the report, I’m happy to take any questions you may have later today on the market’s reaction (negative or positive). Ideally, a lot of jobs with 3% wage increases would go a long way in taming inflation fears and getting back to full employment. With 25 states now planning on ending the extra $300 in weekly unemployment benefits, more people vaccinated, businesses fully opening and more States lifting restrictions, it should be a decent report following April’s surprise. Predicting the results of today’s employment report is a fool’s game though, so we’ll take a look at the data afterwards. Either way, we’re going to get back to full employment by year’s end.
Lastly, meme stocks are back in vogue. Simply put, meme stocks are initially triggered by retail traders who attempt to cause a short squeeze on companies who have a large portion of their float sold short. When a company has negative long-term prospects, large traders will borrow the stock and sell it in the market with an intent to buy it back at lower prices. Gamestop and Blockbuster were leading a Reddit-inspired charge earlier in the year. Blockbuster is now down 96% from recent highs and Gamestop dropped nearly 50%. Today, AMC Entertainment, Blackberry, Bed Bath & Beyond and Nokia are the new in vogue short traps. Together they accounted for 25% of trading volume on Wednesday. With those numbers it is clear that institutions are playing the game as well.
To get a sense of more ridiculousness, look no further than AMC and their 1,000 theater locations. Prior to the pandemic, it was trading around $8 with a market capitalization of $1 billion on top of $6 billion in debt. With this week’s insanity, it got up to $72 and a market cap of nearly $40 billion. AMC has not turned a profit in five years. Sure, some people will continue to see a movie on the big screen and spend time out of their homes. However, the long-term profitability of this market is suspect at best. It made perfect economic sense to short AMC stock. With an online concerted effort to support certain stocks, money keeps flowing in to damage short sellers. They then have to buy back their shorted stock, causing a vicious spiral upwards. Who knows when this ends, but I think we can all guess on the final result. Be careful out there!
Angelina Jolie turns 46 today.
James Vogt, 610-260-2214