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Economic Looks Good, Housing Still Showing Slowdown

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.

Summary
• Economic View
• Housing View

Economic 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.

 

 

 

 

Housing View

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.

 

Why is Bitcoin Falling

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.

Oil is Lower, Is OPEC helping out your Christmas?

Oil is Lower, Is OPEC helping out your Christmas?

OPEC helping the USA economy

OPEC Helping Your Wallen

On Tuesday, the U.S. Census Bureau reported that housing starts increased 1.5% month over month in October to a seasonally adjusted annual rate of 1.228 million, up from September’s revised rate of 1.21 million, however, below expectations of an increase to a 1.23 million rate of sales. With October’s reading, housing starts are down 2.9% from the same time last year.

As for building permits, units authorized in October fell 0.6% month over month to a seasonally adjusted annual rate of 1.263 million, in line with expectations of 1.26 million. This follows a revised September reading of 1.27 million. With September’s monthly decline, permits are down 6.0% from the same time last year.

Summary

  1. Economic Outlook
  2. Oil

 

All in, I believe the reading serves to back our view that an aggressive Fed is making debt-inducing purchases such as homes, simply unaffordable due to the impact on mortgage rates, which increase monthly payments – this is, in turn, causing builders to slow down on the pace of home starts in fear that demand will begin to wane in coming months. That said, while the reading was technically a “disappointment” as it missed expectations, I remind you that because I want the Fed to walk back it’s hawkish commentary, I are inclined to view bad as good as it could give the Fed the data it needs to provide a more dovish tone at the next meeting.

On Wednesday, the Commerce Department reported that new orders for manufactured durable goods dropped 4.4% in October to $248.5 billion, following a 0.1% decline in September (revised down from +0.7% previously reported). The reading greatly missed expectations of a 2.6% decline. Excluding transportation equipment (airplanes and automobiles), new orders were up 0.1% in October, missing expectations of a 0.4% advance. Excluding defense, new orders decreased 1.2% last month. New orders for non-defense capital goods, excluding aircraft (i.e., core capital goods) were unchanged in October, missing expectations of a 0.2% monthly increase. This followed a 0.2% decline in August and a 0.5% decline in September.

All in, while the reading did miss expectations, I am viewing it as a positive. Recall, this is counter-intuitive as strong readings point to a strong economy, something I always want to see. However, strong readings may also bolster the Fed to raise rates too quickly and therefore derail the economic expansion I have been witnessing. Therefore, our thinking is that with every disappointing reading comes another piece of evidence the Fed must consider when making rate change decisions and hopefully, given enough disappointing readings, the Fed will choose to slow its pace of rate hikes. Remember, what I want now is a rise in December and guidance that they will hold off on further hikes until the data deems it necessary.

Also on Wednesday, the National Association of Realtors (NAR) reported that existing home sales — completed transactions for single-family homes, town homes, condominiums, and co-ops – increased 1.4% in October to a seasonally adjusted annual rate of 5.22 million. This followed six consecutive months of declines. With October’s reading, which was above expectations of an increase to a 5.2 million unit adjusted sales rate (or +0.97% MoM, before), existing home sales are down 5.1% from the same time last year. Perhaps the most important takeaway from the report, speaking on the results, NAR chief economist Lawrence Yun stated, “Rising interest rates and increasing home prices continue to suppress the rate of first-time home buyers. Home sales could further decline before stabilizing. The Federal Reserve should, therefore, re-evaluate its monetary policy of tightening credit, especially in light of softening inflationary pressures, to help ease the financial burden on potential first-time buyers and assure a slump in the market causes no lasting damage to the economy.”

However, as I’ve noted, there are signs of a slowdown on the horizon, a key factor in our calls for the Fed to come out less hawkish on future rate hikes. To this point, Williamson also noted that, “the November survey does raise some warning flags to suggest growth could slow in the coming months. In particular, the growth of hiring has waned as companies grew somewhat less optimistic about the outlook. Goods exports also appear to be coming under increasing pressure, often linked to trade wars rules dampened demand. However, it should also be remembered that some pullback in growth was to be expected after October’s numbers were boosted by a post-hurricane rebound, especially given the historically high levels of production, order books, and employment.”

 

Key Global Economic Readings

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OIL

 

On the commodity front, oil prices remain under pressure as the U.S. continues to produce at record levels, the dollar remains strong (making U.S. oil more expensive for foreign buyers and therefore adding additional pressure on prices) and OPEC and Russia have yet to announce a production cut agreement. Moreover, compounding the immense output, prices are also being pressured by fears of a global growth slowdown, growth expectations being a factor correlated to future demand expectations.

While the dynamic of increased supply and waning demand will likely continue to result in pressure on prices in the near-term, I want to provide you with a few thinking points that I rule currently weighing internally, and factors I believe help members in better analyzing their own portfolios.

First, on the bearish side of the equation, there is the fact that President Trump has come out in strong support of Saudi Arabia following the killing of Saudi journalist Kamal Khashoggi, despite U.S. intelligence agencies implicating high-ranking Saudi officials in his killing. The reason this could be viewed as bearish is that it could cause Saudi Arabia to rethink its previous calls for a production cut in order to appease President Trump’s calls for lower oil prices.

That said, on a more-bullish note, with WTI now hovering around the $50 level, I could start to see support as U.S. producers (depending on the producer) are now starting to reach break-even levels, meaning that another leg lower could result in losses and therefore prompt producers to reduce output so as not to incur losses or go free cash flow negative. Operating within free cash flows have been a key focus of producers and investors in recent months.

 

Tax Cut and Jobs Act of 2017

Tax Cut and Jobs Act of 2017

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).

Summary

  1. Few Tax Changes
  2. 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:

Tax Rates
20172018
10%10%
15%12%
25%22%
28%24%
33%32%
35%35%
39 .6%37%

Standard Deduction

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
Filing Status20172018
MFJ, QW$12,700$24,000
HH$9,350$18,000
S, MFS$6,350$12,000

 

 

 

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:

  • A capital gains rate of:

» 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.

Hacking Your Taxes

HACKING YOUR TAXES IN 2019

IRS ISSUES WARNING FOR TAX SCAMS

IRS WARNING

The Internal Revenue Service (IRS) is warning about a new “tax transcript” scam. In the scam, taxpayers are tricked into opening emails that look like they are from the IRS—but they potentially carry malware. Here’s what you need to know.

In the past few weeks, taxpayers have received emails pretending to be from “IRS Online.” The scam email carries an attachment labeled “Tax Account Transcript” or something similar, and the subject line uses some variation of the phrase “tax transcript.”

Tax transcripts, which are summaries of your tax records and history, are available online, and taxpayers do need access to an email account to register with the IRS. However, the IRS reminds taxpayers it does not send unsolicited emails to the public, and the agency would not email a sensitive document such as a tax transcript.

 

 

 

EMAIL IRS

If you are using a personal computer, delete the email or forward the scam email to phishing@irs.gov.

If you are using a work computer, notify your company’s technology professionals as soon as possible. If anyone at your workplace opens the malware, it could spread throughout the network and potentially take months to remove successfully.

Emotet MALWARE

The malware is known to the IRS. Known as Emotet, the malware generally poses as specific banks and financial institutions to trick people into opening infected documents. According to the IRS, “scores” of Emotet emails were forwarded to phishing@irs.gov.

 

Call from IRS????

If you receive a call from someone claiming to be from the IRS, and you do not owe tax or if you are immediately aware that it’s a scam, don’t engage with the scammer, and do not give out any information. Just hang up.

Don’t Call BACK

If you receive a telephone message from someone claiming to be from the IRS, and you do not owe tax or if you are immediately aware that it’s a scam, don’t call them back.

CALL IRS at 800.829.1040

If you receive a suspicious letter or call from someone claiming to be with the IRS, do not give out any information. Call the IRS directly at 1.800.829.1040 to discuss your specific situation.

Don’t fall for the tricks. Keep your personal information safe by remaining alert. When in doubt, assume it’s a scam. For tips on protecting yourself from identity-theft-related tax fraud