Wall Street's Worst Call of 2018

Posted On Jan 12, 2018 By Dave Gonigam

  • New tax law skews the start of earnings season
  • Why (all else being equal) earnings will jump 21.5% this year
  • Markets soar to new highs, oblivious to what’s coming a week from today
  • Can’t keep a good metal down: Inflation figures send gold to four-month highs
  • Japanese girl band sings the praises of crypto
  • Long-suffering readers assuage our doubts about whether The 5 has lost its touch

Earnings season has begun. The early read: The tax bill giveth, and the tax bill taketh away.

Two of the big four commercial banks reported this morning. JPMorgan Chase says its fourth-quarter profit fell from a year earlier — mostly because of a one-time expense related to the new tax law. But Wells Fargo’s profit grew 17% — because the tax law “helped mask weakness in some of the bank’s main businesses,” says The Wall Street Journal.

We’ll have more to say about corporate earnings in a moment. But on Day 1 of the 42-day earnings season, we want to remind you of your last chance to make the most of it.

Last quarter, we launched Alan Knuckman’s 42-Day Retirement Plan — a unique options trading strategy keyed to earnings season. So far, out of 15 closed trades, all 15 are winners. “I’m up around $220,000,” says one satisfied reader. “I’ve made 58K,” says another. A third: “I am in training mode and was able to book at $9,000 gain!”

Moments ago, Alan recommended closing out another trade — good for a 50% gain in five weeks. Want in? Here’s your final shot.

“I’ve seen Wall Street analysts make some bad calls before, but this one really takes the cake,” says our income specialist Zach Scheidt — with a timely tale as earnings season begins.

“They’re so far off base that even a major Wall Street firm is calling them out for being behind the curve.”

Zach’s talking about a report Credit Suisse issued to clients: “Analysts have adjusted their 2018 forecasts by less than 2% for recent tax changes, a fraction of the likely impact.”

To put it another way, Wall Street wonks are minimizing the impact of new corporate tax laws on companies’ bottom lines. “Anyone investing based on those analysts’ current predictions,” Zach says, “will be in for big surprises as we move through 2018 — possibly in as little as a few weeks.

“How will this affect markets — and how can you profit from this oversight?”

Just before Christmas, Congress signed off on the new tax code; perhaps the biggest tax break went to corporations, lowering their tax rate from 35% to 21%.

“This tax cut is a major win for investors, because it means corporations will pay less in taxes, leaving more earnings on the table.

“How much will this tax cut add to earnings?”

Zach crunches the numbers: “Let’s assume we’re considering investing in shares of a company that makes pretax income of $5.00 per share.”

Quick Take on Corporate Tax Cuts

In the old days — sooo 2017 — when companies’ profits were taxed at 35%, the $5 share dropped to $3.25 after taxes. “For most responsible investors, earnings per share is the No. 1 metric for determining a fair stock price.”

In 2018, “Thanks to the new tax law, this same company will only have to pay 21% tax. This leaves our stock with $3.95 in earnings per share, good for a 21.5% increase over last year’s profits.

“Keep in mind, this projection doesn’t include any growth the underlying business may have in 2018,” says Zach. “Earnings for this stock will jump by 21.5% simply because the company is paying less in taxes.

“The majority of stocks — and the market in general — should still have plenty of room to run thanks to a 21.5% increase in earnings that is basically built in by the corporate tax cut.

“The effects could begin any moment now,” Zach says, “That’s because earnings season is kicking today and companies typically issue guidance for the year ahead when reporting fourth-quarter earnings.”

Small caps are poised to perform best, he adds: “After all, these companies have historically paid the highest tax rates simply because they don’t have the big deductions and tax breaks offered to big Fortune 500 companies.”

“Dow Jumps 100 points, opens at record high as Wall Street bets on strong earnings seasons,” says CNBC.

For some reason, CNBC saw fit to send this alert to your editor’s iPad four times between 9:32 and 9:45 a.m. EST.

Make that 200 points now. On top of the 200-point gain yesterday. As we check our screens, the Big Board is barely 200 points away from cracking 26,000. The 25,000 barrier was broken for the first time only eight days ago. The other major U.S. indexes are also in the green, though not quite as strongly.

With stocks soaring, traders are ignoring the news from Washington: A “partial government shutdown” is one week away… and looking increasingly likely.

The way current law is written, an immigration deal almost has to be done at the same time as a budget deal… and a budget deal has to get done by a week from today. But lawmakers say the president’s remark about immigrants yesterday — the one that rhymes with “fit mole” — dealt a setback to the negotiations.

Another sign of resurgent inflation has knocked the stuffing out of the dollar… and put still more life into gold.

The Labor Department regaled us this morning with the consumer price index — up 0.1% for December, and a year-over-year increase of 2.1%. (As always, any resemblance to your own cost of living is purely coincidental.)

Inflation is unquestionably running hotter than it was last summer, and today’s figures have sent the dollar index down to 91.3 — very near its lows last September. Because a weak dollar usually means strong gold, gold is up to $1,330 — likewise a level last seen in September.

The inflation numbers have also sent Treasury yields up today. The 2-year note hit a milestone — reaching 2% for the first time since the Panic of 2008. The 10-year note is once again approaching 2.6%.

The other big economic number of the day is retail sales — up 0.4% in December, more or less as expected. The holiday season was good, but not great.

Could a pop song called “The Moon and Virtual Currencies and Me” make it to the top of the charts in Japan?

The latest Japanese girl band iteration, Virtual Currency Girls, debuted in concert today (no kidding). The concept for the girl group’s — you guessed it — crypto; each of eight members represents a different digital currency (bitcoin, ethereum, ripple, etc.).

Japanese Tweet

When Warren Buffett said bitcoin “will come to a bad end,” is this what he had in mind?

The band’s agenda isn’t just to churn out bubble-gum pop songs either; nope, they intend to educate the masses. “We want to promote the idea through entertainment that virtual currencies are not just a tool for speculation but are a wonderful technology that will shape the future,” said Rara Naruse, 18, who personifies bitcoin cash.

“The group’s first song,” according to Quartz, “appears to take its inspiration from the warnings issued by various regulators in recent weeks — it’s a lecture on online security and watching out for fraudulent crypto businesses.”

Hmm… but can you dance to it?

[Flashback: In 2013, we chronicled another Japanese girl band called Street Corner Economists — whose shtick was that their skirt lengths rose and fell with the Nikkei stock index. Their signature tune “Abenomics,” a paean to the policies of Prime Minister Shinzo Abe, included the stirring lyric, “Let’s aim for 3% economic growth!”

Five years on, the Nikkei is now at highs last seen in 1992; a web search for Street Corner Economists turns up nothing current.]

To the mailbag, where more people wish to weigh in on the word “entitlements.”

One reader finds the word perfectly valid when applied to Social Security and Medicare. “If you paid into it, you are entitled to it, right?”

Says another, “The Supreme Court has held that Social Security is both a tax (not a savings account!) and not a right or guaranteed. It is an entitlement. See Flemming v. Nestor and Helvering v. Davis.

“This is a common misconception that certain groups push to further their liberal causes, and they miseducate many. The feds aren’t allowed to run savings accounts, or medical plans, etc., so they collect taxes (i.e. Social Security, Medicare, Obamacare, …) and spend the taxes where they see fit. How they spend the taxes is entirely up to Congress and can be changed anytime.

“Love The 5!

The 5: You are, of course, correct. We’ve previously cited the Supreme Court’s 1960 ruling in Flemming v. Nestor: “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.”

Translation: You’re entitled to precisely nothing. And the “trust fund” is an accounting fiction. Every dime of FICA and Medicare tax is spent immediately on food stamps and F-16s.

After a reader complained yesterday about how The 5 has changed over time, and not for the better, we asked long-term readers — five years or more — if they felt that was the case.

“As far as I can tell, its content remains as good as ever,” writes one. “It’s a daily must-read for me, giving me a good dose of salient news while potentially saving me hours of sifting through MSM blather for anything of importance and insight.

“As for all the ado about subject lines, ads and whatnot, I’m not seeing any problems that can’t be overcome by learning to scroll on your computer, tablet or phone; see again what I just wrote about… giving me a good dose of salient news while potentially saving me hours…’

“Thanks and keep up the good work!”

“I really don’t think it has changed much at all over the years,” affirms a second. “It truly is my one must-read of the day. It is what it is and always has been.

“I do feel like the advertising has increased over time from all of Agora’s publications, but hey, I get it. It has always been simple to filter through it all and still is.

“I’ve always had mad respect for the quality of all the writing and information. I love the techniques you use to sell — many are very tempting, especially when the lead line hits close to home. I’ve often dared people to read some of the advertisements and not subscribe. You guys are masters. I love when people start complaining about things such as the current 5 subject line rants — hell, I’ve probably sent a few in myself over the years.

“Keep up the great work and don’t change a thing with my favorite read of the day.”

We also heard from a newer reader, who couldn’t answer the question but who’s worth hearing out. If you’re a newer reader, check this out:

“I subscribed based on the come-on that it would help me to take a limited amount of money available for investment and turn it into more. And I can’t tell you how really tired I am of the ‘You could turn $100 into a million, just by sending me $2–3K for some magic newsletter/system that we will tout relentlessly’ — while giving very little guidance about the thing I actually signed up for.

“I’m not going to be renewing. And I’m sad that I fell for your pitch in the first place.”

The 5: First of all, regarding the “very little guidance about the thing I actually signed up for” — our records show you’re a subscriber to one of our entry-level newsletters, Rickards’ Strategic Intelligence. Are you getting your monthly issues, access to the monthly conference call and the weekly emails with Jim’s must-read articles? If not, you need to get in touch with our customer-care folks right away… because you’re not getting what you paid for!

You receive The 5 as a free bonus. Our objective with these daily forays into financial infotainment is simple and twofold — 1) that you learn at least one interesting thing you didn’t know before, and 2) that you decide to come back the next day. (If you decide to buy one of our high-end services promising bigger gains in a shorter timeframe — and as you surely know by now, Jim Rickards has several — well, that’s gravy.)

“Guessing that tantrum-tossing crowd is simply not savvy enough to sort through the few Agora emails that land in their inbox throughout the course of a day,” writes a semiregular here.

“And given that they seemingly want a free service without you folks at The 5 doing any advertising in an attempt to add paying customers, it would seem that they don’t have much economic knowledge either. Wondering if these same folks yell and scream at their televisions and radios all day when those pesky sponsors have the gall to interrupt their regularly scheduled programming.

“Keep up the great work, which includes sharing the missives from the chronically cranky crowd!”

“I never know whether to laugh or cry,” writes a true longtimer.

“The value of your free letters is infinite, based of course on simple arithmetic — just try dividing by zero!

“That being said, I’ve noticed an acceleration in marketing efforts since I began reading Bill Bonner’s musings during the past millennium. And I remain appreciative. We, your readers, are an asset that you are monetizing. What a surprise.

“You, at least, are doing so overtly. How many of your resentful correspondents realize that their search engines and social media sites are doing the same thing, and much more insidiously?

“Your signal strength far outweighs your noise. At least for me.”

The 5: Thanks for the affirmation, sir.

Have a good weekend,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Hard to keep up: While this episode of The 5 has been in progress, Alan Knuckman issued another sell alert in his 42-Day Retirement Plan. Once readers’ orders are filled, they’re in line to collect 49% on CarMax call options in a month.

One more time, Alan’s invitation to join this service ends today with the opening of earnings season.

P.P.S. Emily Clancy is here tomorrow with your weekly wrap-up, 5 Things You Need to Know. U.S. markets are closed Monday for Martin Luther King Jr. Day, so the weekday edition of The 5 returns Tuesday.


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