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Good morning.
It’s the busiest week of the quarter for corporate results and economic data. One-third of S&P 500 companies report this week, and we get GDP readings from the U.S. And Europe. Alas, stocks are flat just about everywhere this morning.
All the action is in the cryptocurrency market. Bitcoin is rallying, notching its biggest gains since early February.
Let’s see what else is moving markets.
Markets update
Asia
- The major Asia indexes are mixed in afternoon trading with the Shanghai Composite down 0.9%.
- For a fifth straight day, India has set a new COVID record for daily cases. Under incredible international pressure, the Biden Administration has revoked its ban on the export of the raw materials needed to make COVID vaccines.
Europe
- The European bourses were as flat as a pomme frite (singular—one that falls on the ground, and, oops, gets stepped on) out of the gates, with the Stoxx Europe 600 up 0.05%. Last week, European shares fell for the first time since early March.
- Travel stocks on both sides of the Atlantic are gaining this morning on news the European Union will allow vaccinated American tourists to visit this summer. The big hitch: the U.S. State Department is currently advising Americans to avoid Europe at all costs.
- After more than three months of closures, most of Italy will reopen today with outdoor dining and aperitivi al fresco. I’m not sure where officials are finding the improved data to justify this move.
- Europe’s banks will be in the spotlight this week, with Deutsche Bank and UBS reporting earnings. The Stoxx Europe 600 banks is flat today, but up 16% YTD.
U.S.
- U.S. Futures have been trading sideways all morning. That’s after all three major averages finished in the red last week despite a strong rally on Friday, led by tech stocks.
- Big tech is up next this week for corporate results. We have earnings calls from: Tesla today; Microsoft and Google’s Alphabet tomorrow, and Apple on Wednesday.
- Also on tap: the Q1 GDP reading and the Fed’s FOMC meeting tomorrow and Wednesday.
Elsewhere
- Gold is up, trading around $1,780/ounce.
- The dollar is down. Again. Even after the recent slide, Goldman Sachs thinks the greenback is still overvalued, slapping a €1.25 exchange rate target on the global reserve currency.
- Crude is down more than 2% this morning with Brent trading below $65/barrel.
- Bitcoin is rallying to trade near $53,000.
***
Taxman cometh
I know, everybody hates the T-word: taxes.
On Friday, a few of you sent me your tax gripes. And one of you even accused me of being an apologist for Biden’s latest tax proposal. This genuinely surprised me as I counseled you all to not worry, that there’s no way a president—any president—is going to drive up the capital gains tax to 40% or higher.
But, I get it. You’re justifiably concerned. So, let me bring in some other voices on the matter that can hopefully set your minds at ease.
Much ado about…
David J. Kostin’s team at Goldman Sachs puts the Biden plan in historical perspective with previous rounds of tax-hikes. They looked at the data and found:
“Unsurprisingly, the wealthiest 1% were the biggest net sellers of equities across U.S. Households around the last capital gains rate hike in 2013,” Kostin’s team wrote. “During the three months prior to the hike, the wealthiest households sold 1% of their starting equity assets, which would equate to around $120 billion of selling in current terms…
However, the trend of net equity selling and falling stock prices around capital gains rate changes has usually been short-lived and reversed during subsequent quarters. In 2013, although the wealthiest households sold 1% of their assets prior to the rate hike, they bought 4% of starting equity assets in the quarter after the change and therefore only temporarily reduced their equity exposures in order to realize gains at the lower rate. Total household equity allocations demonstrated a similar pattern around the two preceding capital gains tax hikes.”
The net result: the tax tantrum proved short-lived. Stocks fell at first, then rebounded.
Shock! Horror!… But your portfolio is probably fine
Ryan Detrick, Chief Market Strategist for LPL Financial, put out an investor note that doubled as a polite scolding. He writes:
I’m shocked the market was surprised that higher capital gains taxes are coming. We knew this was going to happen the second President Biden won in November. Calmer heads are prevailing [on Friday] with the broad rally at least. Still, questions are all around, as we don’t know if this will be retroactive or start early in 2022. If it is in 2022, people have some massive gains they might want to book now instead of later. And let’s be honest, will it really come in at 39.6%? At this point we’ve got to say no, as the Democrats are likely starting high and there will be some back and forth as the sausage is made.
But what does it mean? Well, on the surface you’d think higher taxes wouldn’t be a good thing, but that’s actually not reality. In fact, the past two times we had an increase in the capital gains tax stocks did really well for the next six months in 1987 and 2013. Of course, stocks did poorly after the hikes of 1969 and 1976, so we have a mixed bag. But could it be as simple as those times weren’t the best for the economy, while in 1987 and 2013 the economy was healthy? For now, we’d side with an improving economy and accommodative Fed will take the higher coming taxes in stride.
Here’s the graphic that Detrick produced:
Where yours truly stands on taxes
I’ve paid taxes to Uncle Sam, zio Mario (Italy) and to Her Majesty (in Blighty…erm, the U.K.). Paying taxes in Europe feels like a stick-up. But the public schools are great, and the healthcare world-class, and so my gripes are short-lived. And, besides, as my wife reminds me, nobody wants to hear you gripe about taxes. It’s like complaining about rain. So just zip it.
The U.S. Tax code, on the other hand, just may be the world’s funnest. There, I said it. It’s a grab bag of tax breaks. Over the years, there have been tax credits for whaling captains, railroad employees, and any working stiff who moves her pets while relocating for a job. There’s even a tax break that benefits scruffy journalists. Did you know that subscribing to a magazine is tax-deductible? Hint, hint.
If filing taxes in Europe is a miserable experience, the U.S. Experience is something like a gameshow. You never know if you’re going to be a winner or loser.
In most tax seasons, I come away disappointed. Why didn’t I get a job working for the railroad?, I’ve wondered (fleetingly) more than once.
Still, I marvel at the U.S. Tax code. It’s fascinating to see who gets a break, and who doesn’t.
That’s where I stand on taxes.
Clarification: As an eagle-eyed reader pointed out on Friday, the capital gains tax climbs from 20% to 23.8% for long-term capital gains. Using that then as the top tax rate, the Biden proposal of 43.4% would amount to an 82% rise over the current level.
***
Postscript
I have more than once packed in my suitcase a small hunk of metal with a big black handle: my Moka Express coffee pot (pictured below). I’ve brought it to Africa. I’ve brought it to India. I’ve brought it to the New Jersey suburbs. I’ve brought it to just about every coffee-deficient hardship posting I’ve journeyed to in recent years.
I just can’t start the day without a strong brew from this trusty little wonder, which I’ve had for years.
The makers of the Moka pot, Bialetti Industrie, have been brewing an unlikely comeback. I knew it was beloved by a small set of coffee snobs. But it turns out there’s a lot more going on at Bialetti. Sales are up, and the stock is absolutely crushing it. You can read the full story here, by the Rome-based journalist Eric J. Lyman.
Bernhard Warner
@BernhardWarner
[email protected]
As always, you can write to [email protected] or reply to this email with suggestions and feedback.
Today's reads
The next Coinbase? The mammoth cryptocurrency exchange, Coinbase, is off to a rough start as a listed company, down roughly 30% from its all-time high on IPO day earlier this month. Speaking of crypto IPOs, there are plenty more in the pipeline. Anne Sraders handicaps the field.
Is bitcoin, you know, useless? The king of cryptocurrencies "has flopped as a vehicle for buying things, and it failed in its first big test as a safe harbor during the past year's stock market crash," writes Coins2Day's Shawn Tully. Simply put, bitcoin's Achilles heel is that it really has no practical uses as a, erm, currency. Maybe we should define it as something else. Any suggestions?
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Market candy
$10 trillion
Corporations are sitting on a lot of cash. By Mike Bird of the Wall Street Journal's count, non-banks have amassed a cash pile topping $10 trillion. What they do with that cash mountain is something investors ought to be scrutinizing, particularly in this era of rock-bottom rates. "When a company determines that sitting on near zero-yielding assets is the best use of their funds, it paints a very dim picture of their collective view of the economy’s future," Bird writes.
