I’m seeing that the US economic outlook is still running bullish, but big ticket items like housing are slowing down. House is 1/10 of the US economy. The housing skilled labors are in high supply, but General Motors (GM) is going to layoff over 14,000 employees in the coming years. This is the outlook, both good and bad.
• Economic View
• Housing View
On Wednesday morning, before the opening bell, the Bureau of Economic Analysis reported, in its “second” reading (based on a more complete set of data than the preliminary reading released last month on Oct. 26), that real Gross Domestic Product — GDP adjusted for inflation, our best gauge for economic growth — increased at a seasonally adjusted annual rate of 3.5% in the third quarter of 2018, matching expectations and unchanged from the advance reading. This follows an unrevised 4.2% annual rate in the second quarter of the year.
However, while the headline number was unchanged, there were fluctuations in the underlying metrics as “upward revisions to nonresidential fixed investment and private inventory investment were offset by downward revisions to personal consumption expenditures (PCE) and state and local government spending.”
Regarding PCE, a crucial metric given the importance of consumption to U.S. economic growth, I note that on a seasonally adjusted annual basis, the PCE index came in at +3.6 from the preceding period, below the +3.9% increase expected by analysts and down from +4.0% previously reported.
On Wednesday, shortly after the opening bell, the U.S. Census Bureau reported that new home sales in October dropped 8.9% to a seasonally adjusted annual rate of 544,000. Making up the headline reading were sales of 22,000 homes in the Northeast, 60,000 in the Midwest, 313,000 in the South and 149,000 in the West.
The reading greatly missed expectations of 575,000, however, serving to partially offset the miss, September’s reading was revised up to a rate of 597,000 (from 553,000, previously reported). With the monthly decrease, on a year-over-year basis, sales are down 12.0% from October 2017’s estimated rate of 618,000.
It is also worth noting that of the 544,000 new homes sold during the period, 177,000 have yet to begin construction, while 196,000 remain under construction. Recall, looking at the stage of construction can be helpful for two reasons. First, it can indicate additional work to come for labor forces tied to the home building market, a factor that could mean more wage inflation on the horizon as skilled laborers are already in short supply, and second, it can point to the potential for additional sales to come for those companies that supply building materials for new homes.
Digging deeper, month over month, sales declined across all major regions, falling 3.2% in the West (-1.3% YoY), 7.7% in the South (-11.6% YoY), 18.5% in the Northeast (-46.3% YoY) and 22.1% in the Midwest (-16.7 YoY). As for costs, the average selling price in October rebounded to $395,000 (from $794,000 in September). The median sales price, however, ticked down to $309,700 (from $321,300 in September).
Given the current supply of new homes for sale, which at the recent pace of sales sits at 7.4 months, I would not be surprised to see average prices hover at current levels, or pullback as supplies have now been at or above the six-month level many consider to be balanced between supply and demand for five consecutive months and will likely also seeing pressure from the recent rise in mortgage rates, should the Fed maintain its hawkish stance.
I continue to believe the housing market, which I reiterate tends to punch above its weight due to its influence on various other sectors of the economy such as construction, associated services subscription and expenditures (think internet, utilities, etc.) is showing cracks in the U.S. economy. And while the U.S. economy continues to expand, I maintain the view that the Fed must walk back its hawkish commentary if it doesn’t want to derail the expansion I are still seeing.
Further backing this view, I remind you that in past months the narrative was that a lack of supply was causing pressure on sales, well, we’ve clearly got the supply now as indicated by inventory sustaining above the 6-month level, however, the housing markets continues to struggle. I believe this leaves one factor left to blame: prices. However, I do not believe the list prices to be the issue, rather, I believe higher rates, and more importantly the Fed’s guidance for additional hikes to come, are making it so that once potential buyers start to calculate monthly mortgage, the prospects of buying homes become dim.
Bottom line, the housing market is telling us that as strong as the consumer may be based on smaller purchases, like those made on Black Friday and Cyber Monday, they are not strong enough (or optimistic enough about their economic outlook) to take on a ~5% mortgage! I look forward to hearing from Fed chair Powell later today and reiterate that in order for the market to take the next meaningful leg higher, he must walk back his hawkish commentary and revert back to a data-driven path. Right now the data is telling us that three hikes in 2019 (after an expected hike in December) is simply too aggressive at the moment, especially should I see no resolution on the China trade front.
I’ve seen international interest in cryptocurrency and now Japan is starting to regulate all cryptocurrency.
The cryptocurrency market has watched in despair as over $60 Billion has left the building in less than a week from a price drop that has ravaged cryptocurrency’s top contenders—Bitcoin (BTC) , Ethereum (ETH) and Ripple (XRP). Investors are watching fearfully as volatility ensues and values—especially that of Bitcoin—is plummeting to unprecedented lows.
Bitcoin’s Value Purge
Bitcoin, while still dominating the crypto market cap, has suffered serious losses in the first weeks of November. The price of a single Bitcoin, which hit almost $20,000 USD late last year, dropped from a long-sustained rate of mid $6K all the way down to levels of $3,604 before rebounding to just above $4K. This presents as the worst Bitcoin drop since April of 2013.
What is Causing Bitcoin’s Deflation?
Analysts have made speculations that Bitcoin’s steep drop is due to the hard fork experienced by Bitcoin Cash in mid-November. Bitcoin Cash (BCH) was a previous hard fork from Bitcoin by a group of developers in response to rising fees on the traditional coin, but unlike other crypto separations, Bitcoin Cash has held a successful stance in cryptocurrency since its birth in 2017, rooted at 4th place in the overall crypto market cap.
Hard forks are generally experienced when miners and developers don’t agree on new developments for a particular token. One group stays with the original token while the other creates a new blockchain and an entirely new digital currency.
In the case of Bitcoin Cash, there was much building tension between developers before the November 15th split, propelling investor unease. There was a testy battle between the two parties for the rights to keep the Bitcoin Cash name, but ultimately, the groups became Bitcoin ABC and Bitcoin SV.
Also to blame are numerous ICO scams which the SEC has cracked down on. Coming months will determine if the king of cryptocurrency will rebound or will continue to drop.
IRS New Changes
This section of the text highlights provisions in three new Acts: Tax Cuts and Jobs Act of 2017 (TCJA of 2017).
I’m getting a lot of questions about new Tax Cuts and Jobs Act of 2017 (TCJA of 2017). I am, currently going to show how these changes will affect you in your tax return next year (2019) and tax bracket. I hope it helps you understand the new tax code changes. The new 1040 forms and other forms are changing (thus showing you drafts of the changes).
- Few Tax Changes
- Tax forms
Few Tax Changes
Tax Cut and Jobs Act of 2017
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJAof2017). Arguably the most significant changes to the Internal
Revenue Code in decades, the law reduces tax rates for individuals and corporations, repeals many deductions, but adds some significant deductions as well that benefit many taxpayers.
Which taxpayers’ benefit, and which end up with a high tax liability depends on numerous variables including tax bracket, state of residence, home or business ownership, or specific deductions taxpayer has relied on in the past. In some cases, deductions have increased and in others, they have been reduced or, in many cases, they have been suspended altogether. Each client’s unique facts and circumstances determine whether this sweeping legislation is a win or lose.
Mostoftheindividualchangesexpireattheendof2025, meaning the old tax code rates and deductions return in 2026 unless Congress passes another law before then. Unless otherwise indicated, the following provisions are effective fortaxyearsbeginningafterDecember31,2017, and before January 1, 2026. Therefore, many of the following changes are temporary.
In this section of the text, we look at the most important changes that impact most taxpayers.
Cancellation of Student loan indebtedness
Gross income generally includes the discharge of indebtedness of the taxpayer. Under an exception to this general rule, gross income does not include any amount from the forgiveness (in whole or in part) of certain student loans, provided that the forgiveness is contingent on the student working for a certain period in certain professions for any of a broad class of employers [§108(f)].
The exclusion from income resulting from the discharge of student loan debt is expanded temporarily for years beginning in 2018 through 2025 to include discharges resulting from death or disability of the student [§108(f)(5)].
Income Tax Rates
The TCJA of 2017 introduced new tax rates for regular income tax as follows:
Under the TCJA of 2017, the standard deduction increased significantly, nearly doubling, for years 2018 through 2025.
|2018 Standard Deduction Compared to 2017 Standard Deduction|
The increased standard deduction for the blind and elderly remained unchanged.
Capital Gain Rates
For 2018, there are still three general rates that apply to most: long-term capital gains, an unrecaptured §1250 rate, and the collectibles rate. However, because of the changes to ordinary income tax rates, determining which capital gain rate applies has changed:
» 0% applies to the adjusted net capital gains of individuals for the portion of the gain that formally would be taxed at a rate below 25% (10% or 15%) but does not exceed the maximum 0% rate amount.
»15% applies to adjusted net capital gains of individuals for the portion of the gain that formally would be taxed at a rate below 39.6%. Exceeds the amount subject to the 0% rate but does not exceed the maximum 15% rate amount.
» 20% applies to adjusted net capital gains of individuals for the portion of the gain that formally would be taxed at the 39.6% rate amount but exceeds the maximum 15% rate amount.
- Unrecaptured 1250 gain for depreciation claimed on real estate is taxed at the applicable graduated ordinary income tax rates up to a maximum of 25%.
- Collectibles are taxed at the applicable graduated ordinary income tax rates up to a maximum of 28%. When the §1202 exclusion applies to gain on the sale of qualified small business stock (QSBS), the taxable gain is taxable at the applicable graduated ordinary income tax rate up to a maximum of 28%.
NEW Proposed 2018 Tax forms
The IRS released a new Form 1040 for the 2019 tax season. The new Form 1040—about half the size of the current version—replaces the current Form 1040 as well as Forms 1040A and 1040EZ. ThenewForm1040 uses a “building block” approach, in which the tax return is reduced to a simple form. That form can be supplemented with additional schedules if needed.