Wednesday, April 26, 2017

Wednesday, April 26, Morning Global Market Roundup: Wall Street Set For Mixed Open As Investors Await Trump's Tax Plan

By Sam Meredith
April 26, 2017

U.S. stock index futures pointed to a mixed open on Wednesday morning as traders await a much-anticipated tax plan from the White House.

There were no major economic data reports scheduled yet U.S. President Donald Trump is due to release what he has described as a "massive" tax plan on Wednesday. U.S. stocks had surged in the previous session as Congress appeared on track to release its budget in time to avoid a government shutdown later in the week.

On the earnings front, Boeing, Daimler, Fiat Chrysler, GlaxoSmithKline, PepsiCo, Procter & Gamble and United Technologies were among the major companies scheduled to report before the bell. Amgen, PayPal, F5 Networks and Tractor Supply are all due to report after the market close.

In Europe, the pan-European Stoxx-600 index was hovering around the flatline on Wednesday morning. In Asia, the Shanghai Composite in China closed 0.2 percent higher, while the Nikkei in Japan closed 1.1 percent higher.

In oil markets, Brent crude traded at around $51.97 a barrel on Wednesday morning, down 0.23 percent, while U.S. crude was around $49.42 a barrel, down 0.28 percent.

Oil prices extended losses from the previous session as the combination of increased crude supplies in the U.S. and record supplies in the rest of the world cast further doubt over OPEC's ability to sufficiently reduce a global overhang.

Article Link To CNBC:

Trump To Propose Large Increase In Deductions Americans Can Claim On Their Taxes

By Damian Paletta and Steven Mufson 
The Washington Post
April 26, 2017

President Trump on Wednesday plans to call for a significant increase in the standard deduction people can claim on their tax returns, potentially putting thousands of dollars each year into the pockets of tens of millions of Americans, according to two people briefed on the plan.

The change is one of several major revisions to the federal tax code that the White House will propose when it provides an outline of the tax-overhaul pitch Trump will make to Congress and the American people as he nears his 100th day in office.

Trump will call for a sharp reduction in the corporate tax rate, from 35 percent to 15 percent. He will also propose lowering the tax rate for millions of small businesses that now file their tax returns under the individual tax code, two people familiar with the plan said.

These companies, often referred to as “pass throughs” or S corporations, would be subject to the 15 percent rate proposed for corporations. Many pass throughs are small, family-owned businesses. But they can also be large — such as parts of Trump’s own real estate empire or law firms with partners who earn more than a million dollars annually. The White House is expected to pursue safeguards to ensure that companies like law firms can’t take advantage of this new tax rate and allow their highly paid partners to pay much lower tax bills.

Trump’s proposed tax changes will not all be rolled out Wednesday. White House officials are also working to develop an expanded Child and Dependent Care Credit, which they hope would benefit low- and middle-income families facing substantial burdens in paying for child care. Trump had touted a tax measure for child care during the campaign, but it was criticized as not significantly benefiting families of modest means.

White House officials think these changes will give Americans and companies more money to spend, expand the economy and create more jobs.

The existing standard deduction Americans can claim is $6,300 for individuals and $12,600 for married couples filing jointly. The precise level of Trump’s new proposal could not be ascertained, but it was significantly higher, the two people said, who spoke on the condition of anonymity because the plan has not yet been made public.

During the campaign, Trump proposed raising the standard deduction to $15,000 for individuals and $30,000 for families.

Like other parts of Trump’s tax proposal, an increase in the standard deduction would lead to a large loss of government revenue.

A standard deduction works like this: If a couple filing jointly earns $70,000, they deduct $12,600 from their income, adjusting their income to $57,400. They then would pay taxes on the $57,400 in income, not the $70,000 they earned. Increasing the standard deduction would reduce their taxable income, ensuring that they can keep more of their money. A taxpayer who claims the standard deduction cannot also itemize deductions for items such as mortgage interest or charitable giving. But if the standard deduction is large enough, many would be likely to bypass the itemized deduction.

The nonpartisan Tax Policy Center estimated last year that if Trump raised the standard deduction as much as he proposed during the campaign, about 27 million of the 45 million tax filers who itemized their tax breaks in 2017 would instead opt to take the standardized deduction, creating a much simpler process.

This would also match one of the goals outlined by Treasury Secretary Steven Mnuchin. He has said that filing taxes has become too complicated for many Americans and that his goal would be for many Americans to be able to file their taxes on a “large postcard.”

White House officials including Vice President Pence also met late Tuesday with congressional leaders and said they wanted to pass a tax-code overhaul through a process known as “reconciliation,” a person familiar with the meeting said, which means they could achieve the changes with only Republican votes.

They also said they were going to push for steep cuts in tax rates but would be willing to raise some new revenue with other changes to the tax code. The White House on Wednesday is expected to reiterate this openness to new revenue without getting into specifics of which tax changes it would seek, as that could create a fierce corporate blowback based on which exemptions could be cut.

Congressional Republicans praised President Trump’s ambitious effort to overhaul the tax code and slash corporate income tax rates to 15 percent.

But they cautioned that some parts of the plan might go too far, illustrating the challenges the president continues to face in his own party as he seeks political support for one of his top domestic priorities.

Sen. Orrin G. Hatch (R-Utah) and Rep. Kevin Brady (R-Tex.), who head Congress’s tax-writing panels, said they were open to Trump’s plan to push forward with sharp cuts in the rates that businesses pay but suggested that changes might be needed.

“I think the bolder the better in tax reform,” said Brady, who chairs the House Ways and Means Committee. “I’m excited that the president is going for a very ambitious tax plan.”

Hatch, meanwhile, said the White House appears to be “stuck on” the idea that certain small businesses, known as S corporations, should have their tax rates lowered to 15 percent, just like large businesses. S corporations pay the same tax rates that individuals and families pay, with a top rate of close to 40 percent.

“I’m open to good ideas,” Hatch said. “The question is: Is that a good idea.”

Meanwhile, Democrats denounced the 15 percent corporate tax rate and criticized Mnuchin, who said that faster economic growth would generate enough new tax revenue to compensate for the corporate rate cuts.

Asked whether the 15 percent target was workable, Sen. Sherrod Brown (D-Ohio) told reporters: “It is, if you want to blow a hole in the federal budget and cut a whole lot of things like Meals on Wheels and Lake Erie restoration and then lie about the growth rate of the economy.”

He said that the Trump administration would have to do something “huge” such as scrapping mortgage interest deductions, adopting a border adjustment tax or relying on “outrageously inaccurate projections.”

The Trump tax package has won the support of most of the business community, but divisions remain.

The biggest winners from the corporate tax cut would include companies in industries such as retailing, construction and services that have had trouble taking advantage of the loopholes in the existing tax code.

The list of losers from tax reform could include technology companies, domestic oil and gas drillers, utilities and pharmaceutical firms that have been adept at playing the current system by using loopholes to deduct interest payments, expense their equipment and research, and transfer profits to foreign jurisdictions with lower tax rates. Under the Trump plan, many of those tax breaks would be eliminated in return for lowering the rate.

“Retail companies are the ones who pay closest to the rate of 35 percent,” said Len Burman, a fellow and tax expert at the Urban Institute. “They can’t ship their profits overseas. They can’t take advantage of the research and experimentation credit.”

A study of 2016 data for all profitable publicly listed companiesby Aswath Damodaran, a finance professor at New York University’s Stern School of Business, showed that U.S. firms pay vastly different income tax rates.

On average, engineering and construction firms, food wholesalers and publishers paid about 34 percent. At the other end, oil and natural gas companies paid 7 to 8 percent on average.

“The U.S. tax code is filled with all kinds of ornaments” that help the oil and gas industry, said Damodaran. A decades-old depletion allowance, for example, allows companies to deduct money as a natural resource is produced and sold. This comes on top of other deductions for various expenses.

A Treasury Department study last year based on tax returns for 2007-2011 showed that debt-laden utilities paid only 10 percent in taxes, while construction firms and retailers paid 27 percent.“Retailers pay a higher effective tax rate of any sector in the United States,” said David French, the head of government relations at the National Retail Federation. “But the devil is in the details.”

With many key pieces of the Trump tax plan still missing, French is worried that Trump might propose something to offset the lost revenue from cutting the corporate tax rate to 15 percent. A border adjustment tax, such as the one House Speaker Paul D. Ryan (R-Wis.) favors, would more than offset the benefits of a rate cut to 15 percent, French said, “while others would see their taxes go to zero.”

French said that he expects a middle-class tax cut and business tax reform, but he does not expect Trump to unveil a complete package with offsetting items. “I don’t think that’s going to be in the president’s plan,” French said. “I expect it will be big-picture, high-level, without a lot of details.”

“There are so many special interests involved,” said Ed Yardeni, an investment strategist and president of Yardeni Research. “This is going to be a real test of whether he’s going to be able to drain the swamp or whether he’s going to pump more water in.”

Among the other big losers could be companies such as utilities or cable companies that have accumulated large debts and currently can deduct interest payments. A lower tax rate would make those tax deductions less useful.

In a report to investors in December, a team of JPMorgan analysts said that “we see reform to the corporate tax code as currently an overall net negative” for big utilities. The analysts said that because the utilities had large amounts of debt, they would be hurt more than other companies.

A big corporate tax cut could also create a crisis for individual income taxes. Without a matching cut in individual income tax rates, individuals would be able to change the structure of their pay checks so that the payments went through limited liability companies that would pay no more than 15 percent under the business tax cut, a rate far lower than the top individual rate of 39.6 percent.

That’s similar to what basketball coach Bill Self did after Kansas exempted entrepreneurs from paying taxes and eliminated the business tax. Self, the coach of the University of Kansas Jayhawks, put about 90 percent of his pay package into a corporate entity to sidestep the taxes he would have paid if it were all considered simply salary, according to a report by radio station KCUR-FM.

“Whenever a lower rate is imposed on one kind of economic activity versus another, that low-rate activity all of a sudden becomes a lot more important,” Burman said. “A lot of tax sheltering was done to make ordinary income look like capital gains.”

He added, “An associate professor in the Kansas philosophy department probably pays a higher tax rate than Bill Self.”

But if Trump cuts individual income taxes to match the cut in corporate rates, that would create an enormous shortfall in tax revenue and a ballooning of the budget deficit.

Article Link To The Washington Post:

Populists Taking Power Tend To Be Good For Stocks, Study Shows

New research analyzes 27 precedents over the past 100 years; Stocks, bonds usually benefit despite economists’ skepticism.

By Alessandro Speciale
April 26, 2017

The Trump trade isn’t an anomaly when you look at previous market rallies after populist politicians took power, according to research at the University of Bonn.

Moritz Schularick, an economics professor at the German institution, told a conference in Frankfurt on Tuesday that his study of 27 comparable episodes in the past century shows that stocks, and to a lesser extent, bonds, tend to benefit. His research encompasses the political ascension of Juan Peron in 1940s Argentina to the three victories of Italy’s Silvio Berlusconi, to the election of current U.S. President Donald Trump.

“There is surprising little evidence that populists are bad for markets,” Schularick told the event organized by the European Association for Banking and Financial History, and Allianz Global Investors. “The contrary seems often to be the case.”

Schularick defines populists as charismatic, confrontational politicians who claim to speak for “the people” against the elites, often pursuing protectionist and nationalist policies. His study shows that bond yields fell a median of 12.7 percent 2 years after such individuals took power. Five years later, stocks gained a median of 45 percent, while sovereign ratings usually improved and currencies appreciated.

His results don’t change dramatically whether the anti-establishment leader came from the left or from the right.

“Markets seem to like right-wing populists a bit more,” Schularick said. “But left-wing populists are not a red flag for markets.”

Contrary to some populists’ own rhetoric before rising to power, what is good for the markets doesn’t prove to be necessarily bad for the people either, he says. His study shows that after five years of populist government, gross domestic product rises a median 1.8 percent, and both investment and spending are up as a proportion of the economy.

These findings go against the received wisdom of economists, identified by Rudiger Dornbusch and Sebastian Edwards in their 1991 essay on “The Macroeconomics of Populism:” “Populist policies do ultimately fail; and when they fail it is always at a frightening cost to the very groups that were supposed to be favored.”

Schularick suggests some reasons for the unlikely success of populist policies: anti-establishment insurgents usually come to power after a crisis, and thus enjoy the fruits from an overdue upswing; protectionism, competitive devaluations and public spending often prove a boon for national companies, boosting the local stock market; and some of their policies, like public investment in a downturn, just work.

Still, some aspects of populists’ success are much more sinister. Those on the right of the political spectrum offer convenient scapegoats in times when anger against elites may otherwise have led to redistribution of capital -- and business confidence rises as a consequence, Schularick says.

“Markets often embrace what, from a citizenship perspective, is dangerous,” he said. “But mainstream politicians may want to take a second look at populist policies as far as investment and public spending is concerned.”

Article Link To Bloomberg:

Beyond Weak First Quarter, Trump's Growth Goal Getting Tougher

Progress on pro-growth policies is scant in first 100 days; GDP seen bouncing back but not reaching president’s target.

By Sho Chandra and Patricia Laya
April 26, 2017

The U.S. economy is in better shape than Friday’s first-quarter figures will probably indicate, but getting the growth that President Donald Trump wants is becoming even more difficult.

Gross domestic product probably expanded at a 1 percent annualized rate from January through March, according to the median forecast in a Bloomberg survey of economists. As some transitory drags dissipate, economists project a second-quarter rebound similar to the pattern of the past three years.

Beyond the quarterly gyrations and a surge in optimism, annual estimates show just 2.2 percent to 2.3 percent growth through 2019, a tad above the average pace during the almost eight-year expansion.

While consumer spending will keep underpinning a moderately growing economy, Trump’s goal of 3 percent to 4 percent sustained expansion looks increasingly out of reach. For starters, the U.S. faces longer-term constraints such as slowing labor-force growth, and productivity remains stubbornly weak.

On top of that, though some regulations have eased and Trump’s trade rhetoric has softened, there has been little real action on major policy changes such as tax cuts, health-care reform and infrastructure investment, which are among the president’s top priorities.

“We’re in more of a steady state for the economy,” said Scott Brown, Raymond James Financial Inc.’s chief economist in St. Petersburg, Florida. While the economy is in decent shape despite a weak first quarter, “not much at all has happened on policy,” he said.

Trump’s GDP goal “is overly optimistic,” Brown said. “We could get a quarter or two of 3 or 4 percent growth, but it won’t last.”

On an annual basis, the U.S. last exceeded 3 percent more than a decade ago. Treasury Secretary Steven Mnuchin said as recently as Saturday that “we believe we can get to 3 percent or more sustainable economic growth,” while the White House website gives a target of 4 percent.

Temporary Drag

Last quarter’s GDP weakness likely reflects a temporary drag from lower utility bills and tax-refund delays that weighed on consumer spending, which accounts for about 70 percent of GDP. The Bloomberg survey projection of a 0.9 percent pace for consumption would amount to the worst first quarter of the expansion that began in 2009.

While household purchases are forecast to recover amid steady hiring and wage gains, some risks remain for the coming quarters. Automobile sales seem to be plateauing, faster inflation is squeezing Americans’ purchasing power amid tepid wage gains, and the Federal Reserve’s plan to continue raising interest rates will make credit more expensive.

Other figures suggest the economy is doing just fine, according to Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Hours worked are growing at a faster pace than the 2016 average, while industrial production excluding utilities is expanding at a 4 percent rate. The Institute for Supply Management’s monthly surveys of manufacturing and service-industry executives have recently pointed to solid expansion, Crandall said in a research note this week.

Still, as the president reaches 100 days in office this week, it’s becoming tougher to live up to the lofty expectations seen in confidence surveys and stock-market gains. Republicans in March withdrew a health-care bill and the administration’s August deadline for passing a tax plan has become less realistic.

“People need to see a tangible improvement if that confidence is going to manifest itself in hard economic data,” Gus Faucher, chief economist at PNC Financial Services Group Inc., who doesn’t expect much of a fiscal policy boost to GDP growth this year. “Sure, stock prices are up and there’s a wealth effect that may boost consumer spending, but unless we get some tangible policies and not just feel-good stuff then I don’t think the boost in confidence is, in and of itself, going to lead to anything.”

Corporate America has little incentive to accelerate spending as executives wait for lower taxes, an infrastructure boost and deeper cuts to regulations such as those from Dodd-Frank, the 2010 financial oversight law. While consumers are continuing to prop up the economy, getting faster growth calls for a heftier contribution from business investment.

Trade Effect

There’s also a question mark over trade, which depressed GDP gains during most of the past three years due to a gradually widening deficit. While global growth is picking up, the strong dollar is more than offsetting that improvement, so net exports may be a “negative generally,” according to PNC’s Faucher.

On the policy side, signals are mixed: Trump has recently softened his tone and didn’t act on his threats to name China a currency manipulator or scrap Nafta, but on Monday he slapped tariffs of up to 24 percent on Canadian softwood lumber and has recently blasted Canada’s system of protectionist dairy quotas.

“There’s certainly a potential for big disruptions in trade flow from the Trump administration,” Faucher said.

So far, early demonstrations of Congress’ inability to reach a policy consensus offer clues on the future of Trump’s goal to make big changes and spur the economy, said Brown of Raymond James. The most likely scenario is growth around the 2 percent average of this expansion or a bit weaker, unless policies can compensate for an aging workforce -- via more immigration -- and address slow productivity.

“It’s not the end of the world, though,” Brown said. “If you recognize what your limits are, that helps.”

Article Link To Bloomberg:

Inside Britain’s Other Post-Brexit Trade Talks

U.K.’s ambassador to WTO faces unprecedented challenge; Britain needs to agree global trading terms outside the EU.

By Bryce Baschuk and Dara Doyle
April 26, 2017

As dawn broke on the U.K.’s decision to leave the European Union last year, Julian Braithwaite was awoken by a phone call from a fellow diplomat in Geneva. The message was more like a warning: your world is about to change.

The British ambassador to the World Trade Organization, until now a job more in name than practice, is tasked with something that’s never been done before: to navigate a seamless move from EU member at the WTO to an independent state. The trick will be to hammer out terms without triggering a vast chain of disputes among the organization’s other 163 members. With European leaders meeting this weekend to prepare their first response to Brexit, Braithwaite’s efforts will help determine what the U.K. can count on elsewhere.

“What is at stake for Britain’s efforts here in Geneva is that upon exiting the EU, they have at least something minimal, but firm to fall back on in terms of trade relations with the rest of the world,” said Marc Vanheukelen, the EU’s ambassador to the WTO.

Braithwaite, 48, couldn’t comment because of Britain’s election campaign. It’s unlikely he imagined trade would be his main preoccupation when he became the U.K.’s ambassador to Geneva-based international organizations such as the United Nations and WTO in 2015.

Before the Brexit vote, he spent about a tenth of his time at the WTO, where the EU or its precursors have represented the U.K. in trade talks for more than 40 years. Today, Braithwaite spends about half his time on trade issues, and he has been recruiting more negotiators. He’s also recalled his deputy from secondment with the UN.

“What the UK is planning to do in the WTO has no precedent,” Braithwaite wrote on his blog. “We want the membership to be comfortable before we proceed, and we know that will take time and patience.”

Essentially, each WTO member’s relationships are governed by a list of terms of trade, such as the tariffs it levies on certain goods. Currently, for example, the U.K. applies the EU’s 10 percent tariff on car imports. After Brexit, the U.K. will have to set its own import tariffs on 9,000 to 10,000 products, while agreeing also to deals on services.

The easiest option may be to replicate the EU’s tariffs, something Braithwaite has said the country will do “as far as possible.”

Complex Talks

The trouble is, it might not be straightforward to win approval from the rest of the WTO to do that. Members may link approval of the U.K.’s plan to wider issues, according to Richard Corbett, a member of the European Parliament representing the opposition Labour Party.

“India may say: ‘Fine, as long as our citizens get easier access to living in the U.K.,’” Corbett wrote on the ambassador’s blog.

The U.K. and EU must also separate the tariff commitments that protect their farmers by limiting the amount of foreign lamb, poultry and beef their trading partners can sell. Countries like Australia and Canada want to cut a better deal for their farmers and may object to the U.K.’s approach if it lessens their access to British and European markets.

Losing Clout?

On Saturday, 27 EU leaders hold an extraordinary summit in Brussels to discuss their collective response to Brexit after the U.K. formally gave notice to leave last month and triggered the two-year legal process.

Prime Minister Theresa May has said she wants to negotiate a deal that gives Britain full control of trade and its borders, meaning it will leave the single market and probably the customs union. Some in the pro-Brexit campaign said that falling back on WTO rules wouldn’t necessarily be a problem for the world’s fifth-largest economy.

That doesn’t mean the U.K. has the same leverage as the EU. While a single WTO member can’t block the U.K.’s proposals, it can refuse to approve them. That wouldn’t prevent the U.K. from trading, but it could lead to another round of protracted negotiations and potentially compensation demands, mini-trade wars and international disputes.

So whether at his Swiss residence over pre-Christmas champagne and fish and chips or around the negotiating table, it’s Braithwaite’s job to defuse those conflicts. Yet the outcome remains uncertain, as each U.K. deal with one country has the potential to unsettle another.

“As you can imagine, sometimes an outcome that is satisfactory to those two is not satisfactory to others so it is kind of a fluid negotiation,” WTO Director-General Roberto Azevedo said in an interview. “This is a first so it is difficult to predict what kind of dynamics we will see.”

Article Link To Bloomberg:

Mining Giants Race To Fill Board Leadership Gaps

By Barbara Lewis and Clara Denina
April 26, 2017

Three of the world's biggest miners are hunting for new leaders for their boards at a time when the industry faces questions from investors about its conventional diversified business operations and strategies for growth.

BHP Billiton, Rio Tinto and Anglo American, whose chairmen have all announced their intention to step down, are also generating healthy cash flows, putting them under pressure to give more money back to shareholders.

The task to find the right candidates is particularly urgent for BHP Billiton and Anglo American due to the growing influence of major investors at both companies who have raised doubts over their future direction.

U.S. activist investor Elliott - which holds a stake of about 4 percent in BHP's London-listed shares - has taken advantage of the planned departure of incumbent Jac Nasser to launch a campaign to shake up the world's biggest miner.

Elliott's proposals include getting rid of BHP's dual company structure, spinning off its oil and gas assets and returning more cash to investors.

BHP has so far dismissed them and many other investors have also been skeptical, but say the attack highlights the need for a strong new chair to back up the CEO and unite a disparate shareholder base.

Anglo American's new board leader will also have to deal with a new share register. Shortly after incumbent chairman John Parker announced in February that he would step down, Indian miner Vedanta's chairman Anil Agarwal used an exchangeable bond to acquire a sizeable chunk of Anglo American shares and buy influence.

Wide Pool

The favorite to lead Rio Tinto's board is Sam Laidlaw, former CEO of Britain's largest energy supplier Centrica, whom Rio made a non-executive director in February this year, four industry sources said, speaking on condition of anonymity.

BHP has said it is aiming for 50 percent women in its work force within a decade, but the sources said finding a woman chair with the availability and experience could for now be tough.

All four sources said Gail Kelly, former chief executive of Australian bank Westpac, who was an early favorite to replace Nasser, was no longer being considered but declined to give a reason.

Other names that two of the sources said have been considered were outgoing Dow Chemical's boss Andrew Liveris and an existing BHP director, Malcolm Broomhead.

One candidate mooted to be Anglo's new chairman, two of the industry sources say, is Guy Elliott, a former chief financial officer of Rio Tinto. None of those mentioned as a potential candidate was immediately available for comment.

Anglo's chairman Parker's eight-year tenure included dealing with the fallout from the miner's costly 2007 investment in Brazil's Minas-Rio iron ore operation, which analysts say will struggle to justify the capital outlay.

Headhunters said that although three big companies were all looking for new heads of boards at the same time, the pool of potential candidates was wide for such a global business.

Kit Bingham, a partner at top executive recruiter Odgers Berndtson, said there should be no shortage of people keen to fill the roles, which present challenges, not just from shareholders but from wider transitions, such as rolling out new technology.

That calls for all a chairman's diplomatic skills in negotiating with governments concerned about possible job losses. "Candidates will know there's a change agenda to deliver. It's a pretty exciting time when the future needs to be different from the past," Bingham said.

Generational Shift

The new board leaders will mark a generational shift for mining companies that have spent the time since commodities prices slumped in 2015 and early 2016 cutting costs, selling off assets and restructuring their businesses to boost cash flow.

Their predecessors had overseen multi-billion dollar acquisitions at the high point of the commodity cycle, saddling their balance sheets with massive debts.

Now the search is on for new ways to grow without making the same mistakes as before.

Bruce Duguid, a director of Hermes EOS, which advises on more than 260 billion pounds ($332 billion) in client assets, says any global mining chairman needs a range of skills "to manage the many pressures on its business model".

"These include the need to reduce costs and maintain strict capital discipline in the face of unpredictable commodities demand, management of increasing sustainability challenges as ore grades decline and overseeing a material improvement in (gender) diversity at all levels of the organization," he said.

Hanre Rossouw, portfolio manager at Investec Asset Management, which owns shares in Anglo American and BHP, said the mining companies needed people able to help management deal with the breakup of assets and strategic de-mergers.

"You do need a chair that can think more creatively in terms of value creation with unbundlings and break-ups always options to consider," he said, referring to Elliott's proposal to spin off BHP's oil and gas assets and Anglo's plan last year to sell or spin out its South African iron ore unit.

Rio Tinto, which is losing chairman Jan du Plessis to telecoms group BT where he will take up the same role, needs a replacement who will be able to keep a tight grip on governance.

The world's second-biggest miner after BHP is embroiled in a corruption scandal that has led to two senior dismissals last year and a legal challenge from one of those sacked.

Both Rio and BHP scrapped their progressive dividends in response to the commodity price crash of 2015 and early 2016.

Elliott wants to introduce a formula for delivering more money to shareholders, which BHP has said it cannot do because of the cyclical nature of mining. Anglo suspended its dividend at the end of 2015 and has said it will bring it back around the end of the year.

Investors will also be keeping watch on the pay packages of the new recruits. Anglo was hit last year by a shareholder revolt over CEO Mark Cutifani's pay and has since proposed a cap, agreed by shareholders this week, on how much executives can earn from share awards.

Article Link To Reuters:

Oil Falls On Bulging U.S. Crude Inventories, Ample Global Supplies

By Henning Gloystein
April 26, 2017

Oil prices resumed their downward trend on Wednesday as data showed a rise in U.S. crude inventories and record supplies in the rest of the world cast doubt on OPEC's ability to cut supplies and tighten the market.

U.S. West Texas Intermediate (WTI) crude oil futures were trading down 13 cents, or 0.3 percent, at $49.43 per barrel, after gaining 0.7 percent in the previous session. WTI has fallen for seven of the past eight sessions.

Traders said a report late on Tuesday by the American Petroleum Institute (API) that U.S. crude oil inventories rose by 897,000 barrels in the week to April 21 to 532.5 million barrels had weighed on WTI.

"Not only did the American Petroleum Institute report a crude build ... it also reported a 4.4 million barrel build in gasoline inventories, which is a massive build at this time of the year," said Sukrit Vijayakar, director of energy consultancy Trifecta.

Brent crude, the international benchmark for oil prices, eased 12 cents, or 0.2 percent, to $51.98 per barrel. Brent is around 8.5 percent below its April peak.

The Organization of the Petroleum Exporting Countries (OPEC) and a group other producers including Russia, but excluding the United States, have pledged to cut output by 1.8 million barrels per day (bpd) during the first half of the year in order to rein in years of oversupply and prop up prices.

Yet prices have largely slumped this year as U.S. inventories remained brimming and global fuel supplies set new records, despite the pledges to cut output.

The average value of the Brent crude forward curve has fallen by over $5 per barrel since the start of the year, when an OPEC-led supply cut started.

The slump in Brent is a result of record crude oil volumes in circulation on ships around the world, despite the cuts.

Shipping data in Thomson Reuters Eikon shows that 50 million bpd have been booked for shipment on tankers this month, up 10 percent since last December.

That's contributed to rising inventories, not just in the United States but also in key Asian markets like Japan.

Yet some analysts said there were signs of a tightening market.

"Supply of crude is likely to decline over next three weeks, which will support the market and create the conditions for a rebound in prices," said Georgi Slavov of commodities brokerage Marex Spectron, adding that demand was also slowly picking up.

Article Link To Reuters:

Some Oil Companies In Venezuela Pull Expats As Unrest Escalates

By Marianna Parraga and Alexandra Ulmer 
April 26, 2017

As political turmoil in Venezuela mounts, oil firms including Norwegian major Statoil ASA (STL.OL) and Spain's Repsol SA (REP.MC) have further reduced their already-dwindling ranks of expatriate employees in the country, sources familiar with the situation said.

Statoil, Repsol and Chevron Corp (CVX.N) are among the foreign oil companies that hold minority stakes in more than 40 joint ventures with state-run Petroleos de Venezuela [PDVSA.UL] (PDVSA), providing cash-strapped Venezuela with crucial crude production and income amid a debilitating economic crisis.

Venezuela, South America's largest oil exporter, has been pummeled by a brutal economic crisis that has millions skipping meals, unable to afford soaring prices for basic goods and facing long lines for scarce products.

More than a dozen people have been killed during near daily clashes this month between security forces and protesters calling for elections, the release of jailed activists, and autonomy for the opposition-led congress.

At least 10 people have also died during night-time looting. Leftist President Nicolas Maduro has accused the protesters of plotting a coup against him.

There are no reports of the unrest affecting operations in Venezuela's often isolated oil fields, but some firms have been spooked by frequent barricades blocking streets and National Guard forces firing tear gas in capital Caracas, where foreign oil companies are usually based.

Statoil, which has a joint venture in the country's Orinoco Belt extra-heavy crude region, has withdrawn its five to six expatriate staff that remained in the country, two sources said. Statoil's website says it has 30 employees in Venezuela including local staff, although it was not clear how many were native Venezuelans.

Some expatriate staff with family at Repsol, which has a 40 percent stake in the Petroquiriquire joint venture with PDVSA and also participates in the Orinoco, have recently left the country, although others remain, two separate sources said. Repsol has about 10 non-Venezuelan employees.

The sources all spoke within the past few days and requested anonymity because they were not authorized to talk to the media.

Statoil said it has been following the situation to guarantee the safety of its staff, including local employees and expatriates. Its operations are proceeding as normal, it added.

Repsol did not respond to requests for information. Chevron declined to comment on security and personnel issues. Russia's Rosneft (ROSN.MM) told Reuters on Tuesday that "the inner political situation in Venezuela does not affect the operation of the joint venture. The works are carried out as scheduled."

High-Risk Operation

The turmoil underlines the difficulty oil companies encounter maintaining operations in high-risk countries from Latin America to Africa to the Middle East. Such markets typically compel the firms to pay premium salaries for expats and employ specialized security staff to protect their families.

Chevron last year advised expats living in Venezuela with their families to transfer to other locations, company sources said, part of a gradual winnowing down of expat staff as life grew more difficult there.

Venezuela's crime epidemic has long plagued foreign staffs. Worsening shortages of goods are also making the country increasingly inhospitable.

Top Chinese oil executives nearly all relocated to neighboring Colombia about a year ago because they were frequently targeted by kidnappers, a source said.

Foreign oil executives who remain in Caracas are typically restricted to living in certain areas, sometimes banned from traveling after dark, and compelled to move around in armored vehicles.

The recent moves by foreign oil companies recall an exit of foreign staff from oil majors in Venezuela amid heightened protests in 2014. Those demonstrations ultimately wilted due to protester fatigue, a tough government response, and because unrest largely failed to spread to poorer areas.

At Chevron, which participates in two oil projects in the Orinoco Belt, expats are staying put for now but the company has been monitoring looting to decide whether to change their status, another source said.

The U.S. embassy in Caracas last week recommended its citizens living in Venezuela avoid areas where demonstrations may erupt spontaneously as protests may result in violence.

Article Link To Reuters:

U.S. Commerce Secretary Eyes More Trade Moves

By Eric Beech
April 26, 2017

The Trump administration may undertake trade actions to protect the U.S. semiconductor, shipbuilding and aluminum industries, citing national security concerns, Commerce Secretary Wilbur Ross told the Wall Street Journal in an interview on Tuesday.

He said those industries could qualify for protection under Section 232 of the Trade Expansion Act of 1962, which lets the president impose restrictions on imports for reasons of national security and was used to launch a probe of steel imports, the Journal reported.

Last week, President Donald Trump launched a trade probe against China and other exporters of cheap steel into the U.S. market, raising the possibility of new tariffs.

Ross said the Trump administration might intercede to aid Toshiba Corp's U.S. unit Westinghouse Electric Co, which filed for bankruptcy last month.

The company filed for bankruptcy protection after it incurred billions of dollars of cost overruns at four nuclear reactors under construction in the U.S. Southeast. The bankruptcy cast doubt on the future of the first new U.S. nuclear power plants in three decades.

Ross said renegotiating the North American Free Trade Agreement should be completed by the end of 2017, the Journal reported. Ross told the newspaper that if the talks with Mexico and Canada go much beyond December, it would be difficult to get the pact ratified by Mexico.

Mexico is due to hold its presidential election in July 2018.

Ross said the Trump administration was considering restarting talks on bilateral trade deals with the European Union and China that the Obama administration had begun but never finished, the Journal reported, adding that he said the United States might reopen a bilateral deal with South Korea.

Earlier this month, U.S. Vice President Mike Pence told business leaders in Seoul that the Trump administration would review and reform the five-year-old free trade agreement between the two countries.

Pence said the U.S. trade deficit had more than doubled in the five years since the U.S.-South Korea free trade agreement began and there were too many barriers for U.S. businesses in the country.

Article Link To Reuters:

The Electric-Car Boom Is So Real Even Oil Companies Say It's Coming

Oil major Total SA says EVs will drive 30% of car sales; Outlook is more bullish on EVs than most forecasters.

By Tom Randall
April 26, 2017

Electric cars are coming fast -- and that’s not just the opinion of carmakers anymore. Total SA, one of the world’s biggest oil producers, is now saying EVs may constitute almost a third of new-car sales by the end of the next decade.

The surge in battery powered vehicles will cause demand for oil-based fuels to peak in the 2030s, Total Chief Energy Economist Joel Couse said at Bloomberg New Energy Finance’s conference in New York on Tuesday. EVs will make up 15 percent to 30 percent of new vehicles by 2030, after which fuel “demand will flatten out,” Couse said. “Maybe even decline.”

Couse’s projection for electric cars is the highest yet by a major oil company and exceeds BNEF’s own forecast, said Colin McKerracher, head of advanced transport analysis at Bloomberg New Energy Finance.

“That’s big,” McKerracher said. “That’s by far the most aggressive we’ve seen by any of the majors."

Other oil companies have been trimming their long-term forecasts for oil demand. Royal Dutch Shell Plc Chief Executive Officer Ben van Beurden said in March that oil demand may peak in the late 2020s. It set up a business unit to identify the clean technologies where it could be most profitable.

Electric cars are beginning to compete with gasoline models on both price and performance. The most expensive part of an electric car is the battery, which can make up half the total cost, according to BNEF. The first electric cars to be competitive on price have been in the luxury class, led by Tesla Inc.’s Model S, which is now the best-selling large luxury car in the U.S.

But battery prices are dropping by about 20 percent a year, and automakers have been spending billions to electrify their fleets. Volkswagen AG is targeting 25 percent of its sales to be electric by 2025. Toyota Motor Corp. plans to phase out fossil fuels altogether by 2050.

Electric cars currently make up about 1 percent of global vehicle sales, but traditional carmakers are preparing for transformation. In 2018, Volkswagen plows into electrification with an Audi SUV and the first high-speed U.S. charging network to rival Tesla’s Superchargers. Tata Motors Ltd.’s Jaguar and Volvo Cars both have promising cars on the way too, and by 2020, the avalanche really begins, with Mercedes-Benz, VW, General Motors Co. and others releasing dozens of new models.

“By 2020 there will be over 120 different models of EV across the spectrum,” said Michael Liebreich, founder of Bloomberg New Energy Finance. “These are great cars. They will make the internal combustion equivalent look old fashioned.”

Article Link To Bloomberg:

Inconvenient Truths About The US Trade Deficit

By Martin Feldstein
Project Syndicate
April 26, 2017

The United States has a trade deficit of about $450 billion, or 2.5% of GDP. That means that Americans import $450 billion of goods and services more than they export to the rest of the world. What explains the enormous US deficit year after year, and what would happen to Americans’ standard of living if it were to decline?

It is easy to blame the large trade deficit on foreign governments that block the sale of US products in their markets, which hurts American businesses and lowers their employees’ standard of living. It’s also easy to blame foreign governments that subsidize their exports to the US, which hurts the businesses and employees that lose sales to foreign suppliers (though US households as a whole benefit when foreign governments subsidize what American consumers buy).

But foreign import barriers and exports subsidies are not the reason for the US trade deficit. The real reason is that Americans are spending more than they produce. The overall trade deficit is the result of the saving and investment decisions of US households and businesses. The policies of foreign governments affect only how that deficit is divided among America’s trading partners.

The reason why Americans’ saving and investment decisions drive the overall trade deficit is straightforward: If a country saves more of total output than it invests in business equipment and structures, it has extra output to sell to the rest of the world. In other words, saving minus investment equals exports minus imports – a fundamental accounting identity that is true for every country in every year.

So reducing the US trade deficit requires Americans to save more or invest less. On their own, policies that open other countries’ markets to US products, or close US markets to foreign products, will not change the overall trade balance.

The US has been able to sustain a trade deficit every year for more than three decades because foreigners are willing to lend it the money to finance its net purchases, by purchasing US bonds and stocks or investing in US real estate and other businesses. There is no guarantee that this will continue in the decades ahead; but there is also no reason why it should come to an end. While foreign entities that lend to US borrowers will want to be repaid some day, others can take their place as the next generation of lenders.

But if foreigners as a whole reduced their demand for US financial assets, the prices of those assets would decline, and the resulting interest rates would rise. Higher US interest rates would discourage domestic investment and increase domestic saving, causing the trade deficit to shrink.

The smaller trade deficit would help US exporters and firms that now compete with imports. But a decline in the trade deficit would leave Americans with less output to consume in the US or to invest in the US to produce future consumption.

And that is only part of the story. In addition to shrinking the remaining amount of goods and services available to US households and businesses, reducing the trade deficit requires making US goods and services more attractive to foreign buyers and foreign goods less attractive to US buyers. That means lower US export prices and higher import prices, brought about by a fall in the value of the dollar. Even with the same physical volume of national output, the value of US output to domestic consumers would fall, because the US would have to export more output to obtain the same value of imports.

Trade experts estimate that reducing the US trade deficit by one percent of GDP requires export prices to fall by 10% or import prices to rise by 10%. A combination of these price changes is about what it would take to shrink the current trade deficit by 2% of our GDP, bringing the US close to trade balance. But, because US exports and imports are 15% and 12% of GDP, respectively, a 10% decline in export prices would reduce average real (inflation-adjusted) income by 1.5%, while a 10% rise in import prices would reduce real incomes by an additional 1.2%.

Thus, eliminating the trade deficit would require shifting about 2.5% of US physical production to the rest of the world, as well as a change in export and import prices that reduces their real value by another 2.7% of GDP. In short, with no change in the level of national output, Americans’ real incomes would decline by about 5%.

Over the longer run, the growth rate of national output depends on what happens to overall US investment in plant and equipment. If the trade deficit shrinks because consumption rises and investment falls, the lower level of investment would cause the growth rate to decline, further decreasing the long-run level of real income. But if the trade deficit narrows because households save more and government deficits are reduced, it is possible to have a higher level of investment – and thus higher incomes in the long term.

So changes in America’s saving rate hold the key to its trade balance, as well as to its long-term level of real incomes. Blaming others won’t alter that fact.

Article Link To Project Syndicate:

Softwood Lumber Dispute Fires Up Trade Fight Between Canada, U.S.

By David Ljunggren 
April 26, 2017

The United States and Canada faced off on Tuesday in a renewed battle over softwood lumber that threatened to spill over into multiple other sectors, though President Donald Trump said he did not fear a trade war.

Canada vowed to resist Washington's move on Monday to impose tariffs on lumber that mostly feeds U.S. homebuilding, noting trade authorities have consistently sided with Ottawa in the long-standing dispute.

Prime Minister Justin Trudeau called Trump on Tuesday to reject "the baseless allegations" against Canada's industry and the "unfair decision" to impose tariffs, said a statement from Trudeau's office.

"The Prime Minister stressed the government of Canada will vigorously defend the interests of the Canadian softwood lumber industry," said the statement, which nevertheless added both men agreed that a negotiated settlement was important.

A White House statement said the two leaders had a "very amicable call" about lumber imports and the U.S.-Canada dairy trade.

The heated rhetoric came amid fresh attacks from the U.S. president against Canada's dairy industry, and just two months after the two leaders held a warm meeting where Trump said the bilateral trade relationship only needed "tweaking."

"People don't realize Canada's been very rough on the United States ... They've outsmarted our politicians for years," Trump said during a meeting with agricultural leaders.

"We don't want to be taken advantage of by other countries, and that's stopping and that's stopping fast," he added.

Washington said Monday it will impose preliminary anti-subsidy duties averaging 20 percent on imports of Canadian softwood lumber, a move that affects some $5.66 billion worth of imports.

The affected Canadian firms are West Fraser Timber Co Ltd (WFT.TO), Canfor Corp (CFP.TO), Conifex Timber Inc (CFF.TO), Western Forest Products Inc (WEF.TO), Interfor Corp (IFP.TO) and Resolute FP Canada Ltd (RFP.N).

Shares in Canadian lumber companies rose as the level of the new tariffs came in at the low end of what investors were expecting. Canada's main stock index .GSPTSE notched a two-month high.

The two countries found themselves on a collision course over lumber -- a subject that has irritated bilateral relations for decades -- after a previous agreement had expired.

In a telephone call earlier in the day with the premiers of Canada's 10 provinces, Trudeau said Ottawa would use litigation to press its case, a separate statement from his office said.

Natural Resources Minister Jim Carr said Canada was mulling options such as a World Trade Organization or NAFTA challenge, and would help companies and workers who lose their jobs because of the tariff.

Pointing At NAFTA

The tensions, which follow comments by Trump about Canada's "unfair" dairy system, sent the Canadian dollar to a 14-month low as investors braced for tense negotiations with Canada's largest market.

U.S. Commerce Secretary Wilbur Ross on Tuesday called Canada a close ally, but said that did not mean Canadians do not have to play by the rules. Ross said that while no immediate further actions were being contemplated, the disputes point to the need to renegotiate the North American Free Trade Agreement sooner rather than later.

Canada's Carr rejected any suggestion that Canada was not playing by the rules.

"Independent trade panels have repeatedly found these (U.S. lumber) claims to be baseless. We have prevailed in the past, and we will do so again," he told a news conference.

The two countries and Mexico are preparing to renegotiate the 23-year-old NAFTA.

Canada's share of the U.S. lumber market has ranged from 26 percent to 31.5 percent since 2006, when the countries signed an agreement, down from 34 percent, before that, said Duncan Davies of lumber producer Interfor Corp (IFP.TO).

"For us, (U.S. tariffs are) a negative effect on our Canadian business, but the real loser in all of this is the U.S. homebuilder and U.S. consumer ... That's why we think this is such a misguided effort," Davies said.

A U.S. homebuilder group called the ruling "shortsighted."

Canadian Trade Minister Francois-Philippe Champagne, in China to boost sales of softwood lumber, said there had never been a better time to diversify exports.

"There is enormous potential," he said from Beijing, citing heavy Chinese demand.

Article Link To Reuters:

Softwood Lumber Dispute Fires Up Trade Fight Between Canada, U.S.

YouTube Bets Its Future On Asia

By Akiko Fujita
April 26, 2017

YouTube is betting big on Asia, aggressively pushing to expand localized content in the region, even as the online video platform threatens to eclipse television viewership in the U.S., Chief Business Officer Robert Kyncl said.

Speaking at Google's APAC headquarters in Singapore, Kyncl said the momentum in user and revenue growth throughout Asia highlighted a key opportunity for the company.

Alphabet's video platform has seen triple digit growth across the region in all metrics, including viewer watch time and partner uploads in the last year alone.

"Not only does Asia have the largest amount of people, in a few decades, countries here will have the largest GDPs," Kyncl said.

Vietnam, Thailand, Japan, and India already rank among the top 10 markets with the highest viewership. In India alone, there are 500 YouTube channels that surpassed the 100,000 subscriber threshold within a year, Kyncl said.

Hoping to capitalize on the momentum, the platform has unveiled features that address the region's specific needs. YouTube first introduced its offline function in India 2014, before expanding the service to 80 markets globally. Most recently, the platform rolled out the "YouTube Go" app in India, allowing users to view video content offline through its app. Earlier this year, it launched a new Video Checkup Tool in Malaysia, to enable users to check the mobile data quality of different telecommunications providers.

The region-specific products are aimed at reaching users with limited connectivity and data, part of a broader initiative to get the "next billion" users online.

"We're constantly trying to remove friction from the system, whether it's advertisers, users, or telcos," Kyncl said.

In addition to making the platform more accessible to Asian users, the site is investing in localized content for its subscription-based YouTube Red service, launched in 2015.

Case in point: a new reality series featuring Korean Pop boy band Big Bang, the platform's first Asia-specific show. Titled "Run, Big Bang Scout," the series was timed to coincide with the band's 10th anniversary. The five-member group already boasts more than 7.1 million subscribers on its YouTube channel.

While the platform doesn't break out specific numbers, YouTube sources say the move from free demand to subscriptions had been successful so far.

"Creators featured in Originals get a significant boost in YouTube subscribers and watch time on their main channels as well," Kyncl said.

The growth in Asia has been driven in large part, by content providers' desire to reach a global audience.

About 90 percent of K-pop watch time, for example, comes from viewers outside of South Korea. And Clicknetwork, a lifestyle channel which recently surpassed 1 million subscribers, is based in Singapore, but gets nearly a quarter of its viewers from the U.S.

With YouTube users watching more than 1 billion hours of video a day, the platform is now on track to surpass television viewership stateside.

But the company's rapid expansion has resulted in growing pains. Major advertisers including AT&T, Verizon, and Volkswagen recently suspended advertising on the platform, after some ads were featured alongside extremist content.

The company has since implemented several changes, including giving advertisers more control over where their ads appear on the platform and other Google services. YouTube has also beefed up investments in additional staffing and artificial intelligence, to expedite the process of reviewing content.

"We can't fail at this," Kyncl said. "This is the number one thing we have to resolve."

Article Link To CNBC:

The Next iPhone May Be Much Slower Than The Galaxy S8 -- Here's Why

-- The new iPhone may not support Gigabit LTE networks, which the Galaxy S8 does.
-- Qualcomm's modems support Gigabit LTE, but Intel's won't until next year, CNET says.
-- Gigabit LTE is starting its rollout in some cities this year.

April 26, 2017

The next iPhone may not be able to hold a candle to the Galaxy S8 when it comes to how fast you'll be able to download music and movies or surf the web.

CNET published an enlightening report on Tuesday that explains why this might be the case, especially if history repeats itself.

Earlier this month, for example, Qualcomm countersued Apple alleging in part that Apple doesn't use Qualcomm's modems to their full potential. Apple buys modems from both Intel and Qualcomm and needs both to perform similarly for the end user, even if one chip can technically outperform another. That's why the company may hold back some modems from their full potential, at least according to Qualcomm.

Here's why that will matter moving forward.

Qualcomm's latest chip, the Snapdragon 835, features the Snapdragon X16 LTE modem, which is capable of providing Gigabit LTE download and upload speeds. Without getting too technical, Gigabit LTE has the potential to be much, much faster than 4G LTE — the current wireless standard in the U.S. A very fast wireless speed right now would come in around 100Mbps, so we're talking about 10x that.

U.S. carriers will begin rolling out support for Gigabit LTE this year as they move to rolling out 5G networks, and phones like the Galaxy S8 are "future-proof" with support for the new tech. Intel won't offer Gigabit LTE in its chips until next year, CNET said, which is where the problem lies. (Intel declined to comment.)

Apple uses its own processors in the iPhone but will almost certainly purchase modems from both Qualcomm and Intel, as it typically does. If this is the case, Apple may have some modems from Qualcomm that are capable of supporting Gigabit LTE — and others from Intel that are not. Several scenarios could play out if that happens.

Apple could launch a new iPhone with modems from Intel and Qualcomm that don't support Gigabit LTE at all. Or it could launch smartphones with modems from Intel that don't support Gigabit LTE and modems from Qualcomm that do, but sandbag the Qualcomm modems to keep everything even. It might also decide to keep the Qualcomm chips for launch in the U.S., as CNET suggests, and deploy Intel chips in international markets where Gigabit LTE isn't ready to launch yet.

Finally, and here's just a shot-in-the-dark scenario, Apple could reserve the Gigabit LTE modems from Qualcomm for the rumored iPhone 8 and leave 4G LTE modems in the rumored iPhone 7s and iPhone 7s Plus. Customers who want to pay for the added speeds could simply buy the more premium smartphone.

Gigabit LTE is expected to start hitting only some cities this year, so it might not seem necessary for consumers to buy smartphones with Gigabit LTE support just yet. If you're planning to keep it for a few years, however, Gigabit LTE is definitely something you'll want to make sure your new smartphone supports.

Article Link To CNBC:

Trump’s 15% Corporate Tax Rate Could Cost The Government $2 Trillion

President preparing to roll out tax package on Wednesday.

By Robert Schroeder
April 26, 2017

If President Donald Trump does propose slashing the U.S. corporate tax rate to 15%, as reports have suggested, one estimate is that it could cost the government some $2 trillion in lost revenue.

Trump is preparing to roll out what he’s called a “big tax reform and tax reduction” package on Wednesday, and one of the details that has leaked out is cutting the corporate rate to 15% from 35%. Businesses and politicians regularly decry the 35% rate, though corporations often pay effectively less in taxes via deductions and credits.

Trump has told staff he wants a major tax cut to sell to Americans, and it was less important to him if the plan loses revenue, The Wall Street Journal reported Monday.

Under the corporate plan, losing revenue is exactly what would happen, according to an analysis done by the Tax Foundation during the campaign. Trump’s 15% number matches his campaign proposal, and that rate would cost the federal government $2.1 trillion over 10 years, according to the foundation’s estimate.

The estimate shrinks when accounting for growth that would result from tax cuts, but still comes in at just over $1 trillion over 10 years, the same estimate found.

Projected revenue loss of that magnitude is almost certain to be a non-starter for deficit hawks on Capitol Hill, and analysts are already predicting that Trump’s corporate number could come down in negotiations.

“We doubt he can get the top corporate rate down to 15%, as he apparently will propose [Wednesday], but this is how he deals,” writes Greg Valliere of Horizon Investments. “Shoot for 15% but take 20% in negotiations — still a dramatic reduction from the present 35% top rate.”

During the campaign Trump also criticized the growing national debt. But his tax cuts could wind up increasing it even more.

Article Link To MarketWatch:

Tuesday, April 25, 2017

Tuesday, April 25, Morning Global Market Roundup: World Stocks Rise On French Vote Relief, Trump Tax Plan Talk

By Nigel Stephenson 
April 25, 2017

World stocks hit record highs on Tuesday, with investors' relief at centrist Emmanuel Macron's victory in the first round of the French presidential election supported by speculation about U.S. tax reform.

Safe-haven assets such as gold and the Japanese yen retreated as opinion polls suggested Macron would easily beat far-right, anti-EU candidate Marine Le Pen in a May 7 run-off.

The yield gap between French and German short-term government bonds, a closely watched measure of political risk in the euro zone, tightened further after hitting a three-month low on Monday DE2FR2=RR.

"This (the second round) is going to be a non-event for the market," said Commerzbank currency strategist Thu Lan Nguyen in Frankfurt.

"Markets have pretty much priced out the risk of a Le Pen victory, and rightly so, because the first round of the elections has shown that the polls in France were correct...and this increases the confidence in the polls for the second round...It's highly likely that (Macron) is going to win."

European shares measured by the STOXX 600 index edged up by 0.2 percent, after rising 2.1 percent on Monday. French shares .FCHI pulled back 0.1 percent, having risen 4.1 percent on Monday in their biggest daily gain since August 2012.

Euro zone bank shares .SX7E edged higher after big gains on Monday. The European Central Bank said in a quarterly survey of lenders that while banks would tighten access to credit for companies in the second quarter, lending volumes were still expected to rise.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.6 percent, hovering near its highest level since June 2015 hit earlier in the session, on its fourth straight day of gains.

Japan's Nikkei .N225 rose more than 1 percent to a three-week high. South Korea's KOSPI .KS11 also advanced 0.7 percent to its highest level since April 2015.

These gains helped push MSCI's world stocks index, comprising shares from 46 countries .MIWO00000PUS to a fresh all-time high after chalking up its biggest rise since shortly after Britain's vote last June to leave the European Union.

The euro added to Monday's gains against the dollar, rising 0.2 percent to $1.0884, albeit off Monday's high of $1.0940 EUR=.

The yen, however, pulled back 0.6 percent to 110.39 per dollar. Sterling GBP=D3 rose 0.1 percent to $1.2806.

The Canadian dollar CAD= fell 0.5 percent to C$1.3561 per U.S. dollar after the United States announced new duties averaging 20 percent on Canadian softwood lumber imports.

French and German 10-year government bond yields DE10YT=RR FR10YT=RR rose and the spread between them hit its tightest since November at around 41 basis points. The two-year spread was its narrowest since late January.

Trump Tax Talk

With one of the year's major risks to markets seen less acute, markets were also looking ahead to other factors, including U.S. President Donald Trump's promise to announce on Wednesday "a big tax reform and tax reduction."

The Wall Street Journal reported Trump wanted to cut the corporate tax rate to 15 percent. The White House budget director told Fox News on Monday Trump's announcement would focus on principles, ideas and rates.

"I'm becoming little concerned over the President’s big announcements, especially since we haven’t seen any major legislative achievement so far and he will be marking his 100th day in the White House this Saturday," said FXTM chief market strategist Hussein Sayed in a note.

Gold, sought as a shelter for wealth in turbulent times, fell 0.4 percent to just under $1,270 an ounce.

Copper reversed falls in Asia and headed higher, last trading 0.7 percent higher at $5,695 a tonne CMCU3.

Oil prices steadied after six straight days of losses. Brent crude, the international benchmark LCOc1, was just 4 cents down on the day at $51.59 a barrel.

Article Link To Reuters:

Not An Inside Job: How Two Analysts Became SEC Whistleblowers

By Sarah N. Lynch 
April 25, 2017

Four years ago, two analysts who liked to swap notes on numbers they thought looked odd took a fateful step and tipped off U.S. regulators about a company that one of them had watched for months.

Orthofix International NV (OFIX.O) caught one of the analysts' attention in 2012. The Texas-based medical device maker kept hitting ambitious earnings targets and many analysts had "buy" recommendations for the stock.

But the analyst thought something was off. Its earnings reports showed it was taking longer than usual for the company to get paid by wholesale customers, invoices were piling up and executives struggled to offer a convincing explanation, saying logistical problems at foreign offices were partly to blame.

He spent months tracking quarterly reports and earning calls, and using algorithms to compare Orthofix’s ratios and patterns of sales and inventory turnover with financial data of its peers stored in databases such as Compustat.

"I am always on the lookout for something unusual, either just unusually good and under appreciated, or unusually bad," the analyst told Reuters. "This one showed up as a company that looked like it had the potential to be unusually bad."

In the spring of 2013, he e-mailed his spreadsheets to a fellow analyst and a friend of more than a decade, with whom he regularly chatted about companies and sectors.

"The way we work together is one person makes a suggestion and the other person challenges it," that friend told Reuters.

"It is like a war game."

Now both men stand to win as much as $2.5 million after Orthofix reached a $8.25 million settlement in January with the Securities and Exchange Commission and several former executives collectively paid $120,000 in penalties to resolve accounting fraud charges.

The award might even be bigger, if the SEC also credits the analysts' tip for leading to a second civil settlement concerning foreign corrupt practices charges.

The pair declined to be publicly identified, citing concerns that it might jeopardize their current professional relations.

Referring to its January settlement with the SEC, Orthofix spokeswoman Denise Landry said the company had self-reported to the regulator and fully cooperated with the government during the investigation.

"We are pleased these matters are behind us," she said, declining to comment further.

By entering the SEC whistleblower program the duo showed how outsiders with analytical skills and tools and time to spare can accomplish what is typically done by those with inside access to confidential information.

The program, established in 2011 under the Dodd-Frank financial reform law, aimed to bolster the SEC's enforcement program by encouraging insiders to report potential fraud.

However, since its inception through Sept. 30, 2016, just over a third of the more than $111 million awarded to whistleblowers went to outsiders such as analysts or short-sellers, according to the SEC.

"Sometimes outsiders have a particular expertise and they are able to independently piece things together that might not be as obvious to those close to the matter," said Jane Norberg, the head of the SEC's Office of the Whistleblower.

"Channel Stuffing"

In Orthofix's case, what the two analysts pieced together suggested that Orthofix was goosing its earnings by "channel stuffing."

If not disclosed to investors, the practice of flooding distributors with more products than they can use or pay for is illegal. It lets the company smooth earnings by prematurely recognizing revenue, and pushing shortfalls into the future.

As the SEC settlement later showed, Orthofix was sending various implants from its spine division to distributors in Brazil that either lacked regulatory approval, or lacked medical instruments needed to use the implants. It then was recording products that could not be resold as revenue, and also treating some of the price discounts as expenses instead of a revenue reduction, the SEC said.


Even without such details, the analysts felt they had enough to try the SEC's program.

Their suspicions turned into near-certainty when in May 2013, Orthofix missed its first quarter earnings targets, reporting a 14 percent year-over-year drop in net sales that sent its share price tumbling 15 percent.

"That was when the light bulb really goes off," the analyst who first started watching the company said.

By then the two had already contacted Jordan Thomas, an attorney at the law firm Labaton Sucharow, which specializes in class action litigation and also takes on a limited number of whistleblower cases.

The law firm gets paid for its services from a portion of the award, but it does not publicly disclose its share.

A Tip And A Follow Up

In June 2013, Thomas submitted a tip to the SEC on his clients' behalf, promising to follow up with a more detailed submission, records show. To bolster their case the analysts kept picking through the Orthofix's financial statements, while Labaton's investigators, led by a former FBI agent, hit the phones and scouted industry message boards looking for former Orthofix employees.

One former employee they found revealed in an interview that in order for them to "make their numbers," the company sent large orders to distributors, only to have them returned and then reshipped to other customers, according to the updated submission Labaton send to the SEC in August.

The update included the analysts' estimates by how much Orthofix would need to lower their earnings and sales for 2011 and 2012. Those numbers later turned out to be right in line with what the company ultimately restated in 2014 and 2015.

The SEC still does not know the identities of the two analysts, but it will find out in May, when Thomas submits a claim on their behalf asking the SEC to consider giving them an award for their tip.

The analysts, who live in different cities, said that the day the SEC charged Orthofix, they were just too far apart to get together and celebrate, but that an award would justify the trip.

"If and when the actual award settlement is disclosed, then we can meet up for champagne," one said.

Article Link To Reuters:

For Wells Fargo Directors, Narrow Wins May Not Be Enough

By Ross Kerber and Dan Freed
April 25, 2017

A shareholder vote scheduled for Tuesday could throw Wells Fargo & Co's (WFC.N) leadership into question if many directors, criticized for their slow response to the bank's phony-account scandal, fail to win solid majorities.

A dozen of the 15 directors on the ballot face negative recommendations from influential proxy adviser Institutional Shareholder Services (ISS), which argued the group, including Chairman Stephen Sanger, failed in their oversight duties.

Technically Wells Fargo's guidelines require that directors offer to resign if they fail to receive a majority of votes cast. But in practice, directors who win with less than 80 percent support should consider exiting the board, said Charles Elson, a University of Delaware expert on corporate governance.

"If they're below 80 (percent) I'd say they have a lot of soul-searching to do," he said.

Spokesmen for the bank and Wells Fargo's board said on Monday that they would not comment ahead of the meeting. But the country's third-largest bank has struggled for months to move past revelations that thousands of employees created as many as 2.1 million accounts in customers' names without their permission to hit lofty sales targets.

The bank's board and management have said steps taken to fix problems and punish employees responsible for abuses show there is now strong oversight, and that directors nominated deserve to be elected. But the public firestorm that hammered its shares and led to the resignation of then-Chairman and Chief Executive John Stumpf last year is not forgotten.

At most S&P 500 companies, director support averages around 95 percent of votes cast, according to pay consulting firm Semler Brossy. Typically a recommendation from ISS that investors vote "against" a director will reduce the support they receive by an average of 17 to 18 percentage points.

Not all of Wells Fargo's critics are in lockstep, meaning some directors may do better than others. California's two largest public pension funds, for instance, have said they oppose only nine Wells Fargo directors.

"We do want a core of directors left able to reconstitute the board," said Anne Simpson, Calpers' investment director of sustainability. "Simply declaring 'off with their heads' is not reasonable."

Should Wells Fargo directors win narrow majorities - between 50 to 80 percent of votes cast - the board would have to decide whether to accept any individual director's resignation.

University of Pennsylvania law professor Jill Fisch said a likely outcome, in the event of a close vote, would be for the board to bring in fresh faces over a period of months or longer.

"From a business perspective that may be the best response you could make," she said. "You don't want the whole leadership to be in flux."

Banks can be sensitive to narrow wins. Goldman Sachs Group Inc (GS.N), for instance, revamped its pay structure this year after 33 percent of votes cast went against executive compensation packages in 2016.

Wells Fargo's top investor Berkshire Hathaway Inc (BRKa.N) has already voted in favor of the bank's board. Representatives for other top shareholders declined to comment.

If the whole Well Fargo board receives a narrow majority, Vining Sparks analyst Marty Mosby expects few changes, saying it would be impractical to get rid of a nearly full slate of directors. But low vote totals concentrated on certain directors would likely force them to step down soon, he said.

The board would have sent a stronger reform signal by naming former banking regulator Elizabeth Duke as chair when it split the chairman and CEO roles in October, Mosby said.

"The only thing they haven't really changed substantially is the board," he said. "That last step would have completed the whole process and made this vote much easier on them."

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Waymo Testing Self-Driving Car Ride Service In Arizona

By Peter Henderson
April 25, 2017

Alphabet Inc's Waymo autonomous vehicle group will begin testing a self-driving car program for hundreds of families in Phoenix, Arizona and is buying 500 Chrysler minivans to do so, the companies said on Tuesday.

Waymo, which along with Google is owned by Alphabet Inc(GOOGL.O), recently has been quietly testing the service for a handful of families, learning what potential customers would want from a ride service, the company said in a blog post.

It urged people to apply to take part in an expanded test, which is the first public trial of Waymo's self-driving cars. The vehicles include human operators from Waymo behind the wheel, in case intervention is required and to take feedback.

Silicon Valley is racing to master self-driving technology, betting that it will transform the auto industry and be a gold mine for leading companies. Waymo has one of the best technology track records, and it has an alliance with Fiat Chrysler Automobiles (FCHA.MI).

Many companies expect that customers will use autonomous vehicles as a service, rather than owning them outright. Ride service Uber in particular expects to use autonomous cars.

The new Waymo test in Arizona is meant to help the company understand what people want out of self-driving cars and see how they use and integrate the service. Testers will get access every day at any time.

Waymo already has with 100 Chrysler Pacifica minivans and is acquiring five times more, partly to be able to support the service.

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ECB Meeting Comes At A Precarious Time For Markets

By Ben Emons
The Bloomberg View
April 25, 2017

The recent economic data out of the euro zone is encouraging. Production, manufacturing and confidence are robust, and inflation has stabilized. That’s not to say that there aren’t risks to the downside, such as growing populism, global geopolitical tensions, and uncertainty about sustainability of the economic recovery. To insure against these risks, the European Central Bank, which has a monetary policy meeting Thursday, has the option of boosting asset purchases.

For that to happen, though, the economic outlook has to become less favorable and financial conditions would need to be inconsistent with achieving sustainable inflation. Then there is the issue of credibility. If the ECB were to increase purchases, it could signal the economic outlook is deteriorating. But if the ECB keeps the status quo, it risks seeing an unexpected shock tighten financial conditions too quickly. When political events such as elections in France and Germany impact the economy, the ECB may choose to hold off on any action until the effects are revealed, but by then it may be too late. Markets understand this credibility issue, and financial conditions have begun to tighten while real interest rates have risen. The last time this happened was in April 2010 right before the Greek debt crisis erupted. 


The ECB has other options at its disposal besides asset purchases. There is forward guidance, the Outright Monetary Transactions Program, Long Term Refinance Operations and Emergency Liquidity Assistance. This arsenal should be sufficient to stave off a financial calamity. Yet, markets were still hedged for an adverse outcome from the French election by pricing in higher currency volatility and a possibility of restructuring French sovereign debt in case euroskeptic Marine Le Pen were victorious. The hedge has not been fully unwound, as seen in euro risk reversal rates (the difference between put and call volatility) that remain near levels last seen at the height of the euro crisis.

The outcome from the first round of elections suggests French polls are more reliable than what polls during the U.K.’s Brexit vote and U.S. election were indicating. On that basis, there is a near certainty that centrist candidate Emmanuel Macron will be the next French president. Markets remain cautious, however, not only of the possibility that Le Pen may still win, but also because of how the ECB may respond. That is because the economic data remains strong and should result in tighter ECB policy. Risk aversion, on the other hand, remains elevated as seen in currency risk reversals and negative German bond yields.


In a recent speech, ECB board member Benoit Coeure highlighted the dichotomy between interest rate expectations and risk aversion. On the one hand, expectations have firmed that the ECB may normalize policy based on the trajectory of the economy. On the other hand, risk aversion picked up in the aftermath of Brexit, due to rising geopolitical tensions and uncertainty about French and German elections.

Coeure pointed out that the ECB’s forward guidance consists out of two components -- one based on economic assessment and one based on action. Financial markets have priced this accordingly, whereas expectations of a hike derived from overnight rates (i.e. ECB’s policy rate) and that of economist surveys is higher than market expectations from Euribor futures. The ECB may convey a message of optimism to normalize policy, and economists agree, but markets are likely to bet the central bank will sit on its hands until election uncertainty dissipates. 

Although the ECB may begin normalizing quicker once the French election passes, market expectations price in a far slower pace. That is because tapering of quantitative easing and tightening of policy is seen as clearly linked. And because the ECB has set conditions when to increase or decrease asset purchases, markets assessed that data dependent policy should for now err on the cautious side because of unpredictable election outcomes. If the ECB were to follow economist surveys, it therefore may act too soon with policy normalization. This can put the ECB’s credibility at stake, and markets are rightfully questioning this.

Article Link To The Bloomberg View: