There is an old story that goes “beware what you wish for…” Things don’t always turn out as expected.
Along those lines I watched a fascinating interview of Tom Lee, head of research at Fundstrat, on Bloomberg this morning.
His feeling is that a Tax cut, as it is currently being discussed, could be negative for investors. “There’s two reasons; First, when cutting tax rate you raise the after tax cost of debt. Leverage becomes a problem for a lot of businesses. Second, because you are cutting tax rates you are effectively giving cash to all businesses, even businesses where you want to reduce allocation.“
His observation is that companies that are currently struggling with cash flow will have a temporary life preserver tossed to them, but it will not change the fundamental issues facing a lot of industries. It will distort markets.
Lee states that cuts to tax rates will “amplify negative return industries because they will get more free cash flow. “ But, again, it doesn’t change the fundamental issues that are making those industries less competitive. Examples can be seen in the struggles of brick-and-mortar retail vs online, as well as fossil fuel vs renewables.
In addition Larry summers, former Treasury Secretary, was recently quoted as saying this is the worst time to give a tax cut because of where we are in the economic cycle.
Lee continues by saying “Companies that benefit most, for example retail capital, that are invested in areas getting killed in digital age. “
Lee goes on to explain the impact of leverage and borrowing on companies and the market. “BB rated companies are borrowing at 50 bps less the US Treasury Bond. These are not companies with reliable cash flow. Junk grade companies in Japan borrowing at 10 bps over JGBs (Japanese Government Bonds). Central banks have made it possible for weak companies to borrow. “ Lee continues by saying many companies are, “Trading like they are never going to default.”
The reality of Tax Reform may or may not transpire depending on what happens in Washington DC. The impact of those decisions will impact the performance of your portfolio in the months and years to come.
It is crucial to manage risk in an appropriate fashion. To discuss this topic and/or your portfolio in more detail please feel free to reach out to me.
If you feel uncomfortable investing in the market at these levels, please reach out to me to discuss options that can help you protect your lifestyle regardless of what happens in the markets.
If you want to discuss these issues or learn more please feel free to contact me.
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Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 954 Ridgebrook Rd. Suite 300, Sparks MD 21152. 410-828-5400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Devon Financial Partners, LLC is not an affiliate or subsidiary of PAS or Guardian. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
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