There's no time to lose, I heard her say,
Catch your dreams before they slip away…
- Ruby Tuesday, The Rolling Stones
Tuesday, December 19, 2017 is going to be a red-letter day. A "Ruby Tuesday." The Senate, I am told, will vote on the Tax Cuts Bill in the morning and then the House will vote on it in the afternoon. The odds on passage are quite high, in my estimation. If you wish to explore the legislation in greater detail, you can read the following:
- Here is a link to the Conference Agreement.
- Here is a link to the Joint Explanatory Statement of the Committee of Conference.
- Here is a link to the House Ways and Means Policy Highlights of the Conference Agreement.
Besides the stuff mentioned in the general press, there are a few items worthy of note:
The corporate Alternative Minimum Tax is repealed.
The individual Alternative Minimum is retained with exemptions for incomes up to $500,000 for single filers and $1 million for joint filers. These exemptions expire on December 31, 2025.
State and local income sales and property taxes deductions are capped at $10,000 for personal filers.
On interest deductibility: Four years of a limit based upon 30 percent of EBITDA followed by a limit based upon 30 percent of EBIT. A prior provision with respect to a further limitation on worldwide interest is not included in the Bill.
The amortization of research and experimental expenditures, expenditures must be capitalized and amortized over a 5-year period for expenditures paid or incurred after December 31, 2021.
One fascinating part of the new Tax Cuts Bill, for investors, is a last-minute amendment by Sen. John Cornyn, R-Texas, which will allow owners of oil-and-gas publicly traded partnerships (MLPs) to take a deduction of 23% on pass-through income. I would say that you should take a hard look at both the equities and the debt of MLPs now, as they "may" produce some very positive results. Here may be one bit of sparkle on our "Ruby Tuesday."
While all of the hoopla in the media is focused on equities, I make the point that the bonds of some companies will also certainly benefit from the lowered taxes causing their balance sheets to improve. The ratings agencies will likely be quite happy with what they see in the forthcoming quarters, in my view. It may well be worth the time to investigate certain High-Yield bonds that may be headed into the Investment Grade space.
UBS points to General Motors (NYSE:GM), Ford (NYSE:F) and AutoNation (NYSE:AN) as some of the potential winners. Another area to consider are the American retailers. The vast bulk of their earnings comes from the United States and their bottom lines should improve with the implementation of the tax cuts. I would also check out the "profitable" American big oil and energy companies. Bloomberg says that now have an effective tax rate of thirty-seven percent. This will dramatically change if the Tax Cuts Bill passes.
I would also consider the major insurance companies. Leerink Partners estimates a fifteen percent increase in their profitability. Another note of interest here is that some of the insurance companies, and some of the banks, will no longer utilize Municipals because of their lowered tax rate, which may cause some indigestion in that market.
I make one other comment about the Municipal market, to consider. Moody's is proposing to change the manner in which it rates the States. Under their proposed new guidelines, debt and pension obligations will have a 25% weight on state credit ratings, up from 20% currently. The individual state's economy, another factor in Moody's ratings, will also have a 25% weight, up from 20%. Governance will fall to 20% from 30% and finances will be maintained at 30%.
The debt and pension factor "is critical because debt and pension obligations are the primary long-term liabilities that states have," Moody's said in an announcement on the proposed changes.
As these liabilities grow, states face rising expenses to pay debt and pension benefits. High fixed debt service and pension costs can crowd out other budgetary priorities and force states to raise taxes in order to meet them. Debt and pensions can curtail a state's budgetary flexibility and heighten the risk that it will seek to deleverage through a debt restructuring.
Also, you may wish to check out the companies in the Telecom space. The Tax Cuts Bill will allow the deduction of certain capital expenditures to be immediate, instead of parsed out over several years. The CEO of AT&T (NYSE:T), Randall Stephenson, stated, "This is a capital freeing event."
Tuesday will be here soon enough. Be prepared!