The Tax Cut May Not Deliver All Its Promises

basic truth in life is that, if it sounds too good to be true, it usually isn’t all it’s cracked up to be. The same applies to investing. You have probably heard how great the tax cut will be for companies across the board. Well, ‘warts’ are already appearing on the tax cut front.

In an earlier article I on taxes I wrote: “Will the airlines just use the [tax] windfall to launch into another round of airfare wars? (See article here.) The industry has squandered windfalls in the past, such as from plunging oil prices.”

Based on the recent earnings call from United Continental Holdings (NYSE: UAL), it looks like another airfare price war is just around the corner.

The Airlines Never Learn

UAL’s management said it plans to increase available seat miles over the next three years by 4% to 6% per year. That compares to a 3.5% rise in 2017 and only a 1.4% rise in 2016. That sounds a lot like previous mistakes of expanding too much too quickly and then being forced to slash ticket prices.

Other airlines, of course, would respond in kind and another price war would be underway. Adding to the concerns about the industry, UAL’s management also seemed to signal a willingness to take on low-cost carriers on a price basis.

So forget about anything you may have heard about the benefits of the tax cuts for the airline industry.

Yes, the benefits are real. But it looks like, once again, that the industry will squander the benefits as it did when oil prices fell steeply. Until it becomes clear whether the airline industry will go down the path of another price war, I would avoid them and in particular, United Continental.

This should just bring home the point to you that you have should never base an investment decision solely on tax or other government policies.

While the airlines seem to be fumbling an opportunity to prosper, what really caught my eye regarding the new tax law is the potential perverse effect it will have on the prospects for technology companies repatriating their overseas assets (some cash, but mainly bonds).

Will Repatriation Happen?

Apple (Nasdaq: AAPL) garnered a lot of headlines recently when it said it would make a one-off $38 billion tax payment on the repatriation of some of its overseas profits. That led to speculation by the Trump Administration and others about how other technology companies would follow Apple’s lead.

But some tax experts say it may not happen. They point to parts of the legislation that could end up having the direct opposite effect, leading firms to shift more of their assets (and jobs) offshore.

A law professor at the University of Southern California, Ed Kleibard, told the Financial Times “The bill is biased in favor of offshore real investment.” In other words, companies may perversely be encouraged to build plants overseas, creating jobs there. Let me explain…

There is a new tax on any overseas profits above a fixed, tax-free return that companies will be allowed to earn on their tangible assets, such as plant and equipment. This is known as the GILTI (global intangible low-tax income) tax and it is aimed at taxing excess profits from intangibles, such as a technology company’s or pharmaceutical company’s patents and intellectual properties. Thanks to technology, the share of many companies’ assets that are intangible has grown a lot in recent years.

However, the GILTI tax rate is only half the new U.S. corporate tax rate. And companies can take a credit for any foreign taxes paid on this tax. This may encourage firms to keep as much of their profits in tax havens as they can, lowering their overall foreign taxes to a level where they can fully offset the minimal GILTI tax.

And here’s where it touches on the earlier point I made about real overseas investments. A law professor at the University of Pennsylvania, Chris Sanchirico explained to the Financial Times that all sorts of multinationals will have an incentive to add to their offshore facilities like factories (and the linked jobs), since such action will boost their tangible assets outside the United States, therefore sheltering even more of their profits from tax.

The likely result of all these new tax ‘games’ that will be played by the big multinationals? Likely hundreds of billions of dollars will remain ‘trapped’ outside the U.S.

What It Means to You

As far as investment implications goes, I think it means you should stick to investing in the large U.S. multinational companies. These same companies are already enjoying the benefits of a much weaker U.S. dollar that the Trump Administration is encouraging.

One prime example is Microsoft (Nasdaq: MSFT). In early December, its stock was down to $81 over worries about the tax bill. Now it is over $92 a share and still climbing. There are lots of reasons why, but I’m sure Wall Street has by now realized the new tax law won’t hurt Microsoft. Again, never make an investment decision solely on something like taxes.

In Microsoft’s case, I much prefer concentrating on its efforts in the cloud, artificial intelligence and quantum computing. For more on Microsoft and quantum computing, stay tuned for my next.

One other investment for you to consider is the WisdomTree U.S. Export and Multinational Fund (NYSE: WEXP). It is filled with blue-chip U.S. multinationals such as Microsoft, Boeing, Johnson & Johnson, Apple and Alphabet.

This ETF is up 21% over the past year and I would expect this type of performance to continue as long as the dollar tailwind and other macro factors (including taxes) continue to be favorable.

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Bitcoin Passes the Torch to Altcoins

Bitcoin… For the vast majority of people, this original coin has long been synonymous with cryptocurrency.

Indeed, bitcoin was basically the only game in town until recently.

As you can see from the chart below, bitcoin accounted for roughly 85% of the crypto market one year ago.

Today, bitcoin makes up only 34% of the $500 billion-plus cryptocurrency market. New competitors such as Ethereum, Ripple, Dash, NEM, Monero and IOTA have emerged to grab big chunks of the market.

And hundreds of even smaller coins combine to make up around 25% of the market.

Collectively, everything that’s not bitcoin is referred to as the “altcoin” market.

While bitcoin has lost significant market share to altcoins, its value still skyrocketed from around $1,000 a year ago to around $11,000 today.

Over the same time period, altcoins have soared even higher than bitcoin, rising from just a few billion dollars combined to around $360 billion today.

In my view, these developments don’t represent the fall of bitcoin. We still need bitcoin as a reserve cryptocurrency, a secure rock in the crypto world. Instead, what we’re seeing is the rise of crypto as a new type of investment.

Crypto: A Maturing Asset Class

This past year has been a chaotic (and wildly profitable) one for crypto investors. And we’re beginning to see the type of market I envision as being necessary for crypto to grow into one of the largest global asset classes.

I’ve known for years that we need more than just a few big coins for crypto to thrive.

We need fierce competition among hundreds of coins, all of them using the power of open-source software to innovate and create amazing technology… and growing through the power of network effects and viral organic growth.

Today we’re seeing exactly that. There are now more than 30 separate coins with market capitalizations (total value) of more than $1 billion. Each has its own community of users, developers and supporters.

Hundreds of unique cryptocurrency models are being tested in the wild today. It’s an innovation bonanza, much like we saw in the early days of the internet.

Crypto today is a global phenomenon the likes of which the world has rarely seen.

Crypto vs. Old Money

With the rise of crypto comes inevitable scrutiny from governments and central banks around the world.

For more than a century, these centralized powers have had complete control over monetary systems. They won’t give that up easily.

They claim to be looking out for the welfare of their citizens, but I believe they see crypto primarily as a threat to their monopoly on money.

China has already banned most cryptocurrency exchanges. Before it did, it made up a huge chunk of worldwide cryptocurrency trading volume.

Imagine where the crypto market would be today if China hadn’t done that. We’d probably be 2X higher than we are today.

I believe China will eventually reverse its ban once reasonable regulations are finalized. If and when it does, watch out …

But we know that the type of government pushback we saw in China is inevitable. It’s likely that it will happen in other countries.

However, we’re seeing some encouraging signs.

South Korea, one of the world’s largest cryptocurrency hubs, recently announced it was considering a crackdown and possible ban on crypto trading.

Korean citizens were outraged. More than 200,000 citizens signed a petition demanding that the government pull back on its crypto crackdown.

And its government appears to be listening. As reported by The Wall Street Journal

Hours later on the same day, a presidential office spokesman walked that back, saying that abolishing cryptocurrency exchanges was only “one possible measure” that didn’t represent a “final” decision.

Many young Koreans see cryptocurrency as a hopeful development for the future during a time of high youth unemployment and stagnant growth. And they’re not alone.

Worldwide, a new generation of investors desire something other than the traditional investment options.

For many of us, cryptocurrency is a big part of the answer. It’s a hedge against central banks printing money. A unique new asset with the power to transform financial markets through increased efficiency and decentralization.

In short, we view cryptocurrency as a rare beam of light in an often crooked and rigged financial world. Governments and banks will try to ban or kill off crypto, but we’re not going to take it lying down.

Crypto is this generation’s contribution to true free market capitalism. It offers a chance to revitalize our stagnant monetary and financial systems.

As I often say, crypto is the future of money. Let’s encourage our elected representatives to treat it as such.

Have a great weekend, everyone.

Adam Sharp
Co-Founder, Early Investing

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Source: Early Investing