We hosted a call with David Hoppe, former chief of staff to Speaker of the House Paul Ryan, Macro Policy Analyst JT Taylor and Health Policy Analyst Emily Evans on the first draft of the tax reform package just after its release by House Ways and Means Committee Chairman Kevin Brady. Hoppe walked us through the major provisions, where he expects changes in the House, and reactions he’s gauging from the Senate. Listen to the REPLAY HERE to find out why he gives the package a 53% chance of passing by the end of 2017.
LET THE BATTLES BEGIN: House Ways and Means Chair Kevin Brady released the first draft of tax legislation. Now begins the lobbying phase, as House Republicans try and fend off opposition by moving quickly to Committee markup and ideally onto the floor the following week. The response in the House has been very positive from Republicans who feel like the bill included many of the compromises factions sought. If the Committee sticks together during markup - our probability of passage in 2017 increases. Both Republicans and Democrats are sure to raise a lot of questions next week; members are already pushing to include removing the Obamacare mandate, keeping the mortgage interest deduction for homes up to $1M, changing the standards for pass-through income qualifications, and keeping the estate tax - to name a few. If the bill holds as is - it passes a major litmus test for Republican unity around provisions. If these debates poke holes in the legislation and it gets bogged down with too many modifications - moving through the floor becomes much more difficult.
WHAT’S IT ALL ABOUT: The text sticks to the major themes discussed by the Administration and Congressional leadership throughout the year: lower rates, simplification, and making the U.S. competitive globally. It lowers the corporate rate from 35-20%, lowers pass-through rates from 39.6-25%, and lowers individual brackets and rates from seven to four at 12, 25, 35, and 39.6%. House leadership says with the elimination of many deductions, credits, and the AMT - 90% of taxpayers will be able to file their taxes on a postcard. To spur economic growth, there are provisions for the middle class and businesses sprinkled throughout the bill such as doubling the standard deduction and expanding the child tax credit. As for businesses, they will be allowed to immediately expense capital investments for up to five years and repatriate dollars to the U.S. during a tax holiday at 12%. This, along with penalties for companies who move operations abroad and a lower ongoing corporate rate is aimed at creating a more fertile domestic business environment.
AHEAD OF THE JOBS REPORT: What’s going to matter most to Mr. Market this morning? The October Jobs Report. Expectations are high, looking for +310,000 non-farm payroll adds vs. -33,000 lost during the September hurricanes. As Hedgeye CEO Keith McCullough wrote recently, “We’re expecting to see US Wage Inflation #Accelerating as it usually does at this stage of the employment cycle. A hawkish wage growth report should keep the Yellen Fed (yes, she’s still there) relatively hawkish.” It’s logical to think that improving profits, productivity and investment growth should support corporate hiring and a further tightening in the labor market. That would increase the probability of accelerating wage inflation as shown in the chart below.
TAKE A SEAT: President Trump announced the nomination of Federal Governor Jerome Powell to be the next Fed Chair when Janet Yellen’s term ends at the end of January next year. Given widespread support within the Republican Party and little controversy elsewhere, his confirmation should move quicker than other Trump picks. Congress is still battling over former Rep. Scott Garrett (R-NJ) to be the new EX-IM Bank President. Garrett has discredited the bank for years, saying it should be shut down, but now says he wants to run it and that it would be fully operating; Congressional Republicans continue to be split on whether the bank should remain and question Garrett’s intentions.
A WRENCH FOR NAFTA: In another attempt to bolster U.S. competitiveness, the Commerce Department is imposing heavy tariffs on Canadian softwood lumber. They say Canadian manufacturers receive unfair subsidies and sell to U.S. markets well below value. While the U.S. lumber industry is happy with the decision, home builders and other buyers of soft lumber are worried about the spike in price that is sure to come. These negotiations have stayed outside of NAFTA, but will surely spark tensions between the countries.
SCALES FALL FROM EYES: CURRENT U.S. NUCLEAR RECAP PROGRAM COSTS $1.2T. BA, NOC, LMT, RTN ON ALERT: The sum of all "budget safe" U.S. nuclear programs is not affordable and sooner or later will have to be reduced. Read the full piece here.
MORE BAD NEWS FOR HOSPITALS | CMS REDUCES PAYMENT RATES TO NEW OUTPATIENT DEPARTMENTS | THC: Our Senior Health Analyst Emily Evans writes that the rate applies to new hospital outpatient departments and negatively impacts growth strategy through acquisitions of physicians practices and ASCs. Read the full piece here.
REPORTS ON DOJ CONCERNS WITH AT&T/TIME WARNER (T, TWX): Our Senior Telecom Analyst Paul Glenchur writes that news reports speculate DOJ has concerns over AT&T/Time Warner and could sue to block. We think the deal still wins approval. Read the full piece here.
OPEC OPTIONS TRACKER & BASE CASE FOR NEXT ACTION: Our Senior Energy Analyst Joe McMonigle writes Saudi/Russia are pushing a nine-month extension, but other producers cool to full year of cuts. Minimum action is three-month extension of the deal. Read the full piece here.
ANNOUNCING OUR NEW LEGAL CATALYSTS VERTICAL WITH PAUL GLENCHUR: We are pleased to announce the launch of our new Legal Catalysts vertical, highlighting key cases and legal developments with significant potential impact across multiple sectors. Paul Glenchur, our longtime telecom and media analyst, but also a former federal appellate court law clerk, attorney, and member of the Supreme Court Bar, will lead this research offering. Check it out here.
