FIG Topics of Interest



The House increased the chances of a partial U.S government shutdown by voting to give President Donald Trump funds for his proposed border wall in a spending bill the Senate is sure to reject hours before a midnight Friday deadline.
The 217-185 House vote Thursday capped a tumultuous day in which Trump surprised fellow Republicans by insisting he won’t sign a bill without the border money, after the White House had hinted he would accept it. Now, the House and Senate have passed spending measures that differ in one crucial way -- the House bill includes the $5 billion Trump is demanding for a wall and the Senate version, passed a day earlier, does not.
The Senate is scheduled to convene at noon Friday. Senate Majority Leader Mitch McConnell of Kentucky is almost certain to advance the same measure, without wall money, that the GOP-controlled chamber easily passed by voice vote Wednesday.

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But buried in 439 pages of proposed regulations released by the Internal Revenue Service last month was an unfortunate surprise for investors in so-called trader hedge funds like Point72, which trade stocks or other assets frequently: Their tax bills might increase as a result of the deduction limit.
“The rules create the worst possible situation,” said David Miller, a tax lawyer at Proskauer Rose LLP.
Trader funds that borrow money to make their wagers could be hit hardest. Here’s how it works: Those funds can now only deduct a certain amount of the interest they pay on that borrowed money (previously they could deduct it in full). Any remaining interest costs get passed to fund investors.
Investors can only deduct those interest costs along with any of the fund’s investment interest expenses on their 2019 tax returns if the fund has had relatively strong performance and generated enough interest income against which to take the deductions.
With hedge funds overall down 3.62 percent this year through November, many funds won’t meet that hurdle -- and wind up saddling investors with a “double whammy” of non-deductible fund expenses, said Simcha David, a tax partner at accounting and advisory firm EisnerAmper, which works with investment funds.
Hedge funds that buy and hold assets -- so-called investor funds that aren’t engaged in quick trading -- aren’t affected by the deduction cap. And businesses with average annual gross receipts of less than $25 million are also exempt.

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Announced buybacks for 2018 are now at $1.1 trillion. And companies are using their authorizations. About $800 billion of stock has already been bought back, leaving about $300 billion yet to be purchased. We’ve seen buyback announcements recently from Lowe’s, Pfizer, and Facebook, but in the last few days, as stocks have moved to new lows, companies are picking up the pace of activity.
Several companies have announced new buyback programs, including Boeing, Johnson & Johnson, Universal Health Services, Shoe Carnival, and Playa Hotels, and several have announced accelerated buyback programs:

Allstate, for example, announced it had just bought back $1 billion in stock using an existing buyback program. Lincoln National, whose stock is down 18 percent this month alone, also announced an accelerated buyback.

What’s all this activity mean? It’s a sign that many CFOs believe their stock is undervalued. Traders tell CNBC much of the buying is based on the belief that the recent spate of selling is due largely to political issues (Brexit/China tariffs/Italy) that will resolve favorably and that global economic weakness may not be as pronounced as markets believe.

Will the buybacks continue into 2019? The answer is yes, providing two important conditions continue:

1. Companies continue to throw off significant free cash flow. While some companies borrow to fund buybacks, most fund them through free cash flow, which has been strong for the last several years. If there is a significant economic slowdown, that cash flow will likely diminish, and the pace of buybacks will diminish as well.

2. Companies need to continue to believe that reducing share count and boosting EPS is a more valuable use of their cash than making investments elsewhere, like actually investing in their businesses.

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“The United States remains the world’s most powerful nation, but national rivalries are surfacing and we recognize the importance of the strategic competition with both China and Russia as they challenge the regional order,” said a 10-year defense program outline approved by Prime Minister Shinzo Abe’s government on Tuesday.
Japan will accelerate spending on advanced stealth fighters, long-range missiles and other equipment over the next five years to support U.S. forces facing China’s military in the Western Pacific, two new government defense papers said.

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“It looks like we’re headed to a shutdown. But who knows? We’ve got time,” Senate Appropriations Chairman Richard Shelby, an Alabama Republican, told reporters at the end of last week.
"The president drew a pretty clear line in the sand and said he won’t compromise with anybody," said longtime Republican congressional aide Jim Dyer, now a senior adviser at the lobbying firm of Baker Donelson. "You’re at the point where you are looking around for somebody to talk to and that means we are looking at a shutdown."
Shelby floated a compromise this month in which Trump’s $5 billion would be split over two years. Trump privately said he was open to the idea, but Schumer rejected it. As a shutdown deadline approaches, this possibility could look more appealing.
All sides could agree to extend current funding until sometime next month and resume the fight over the wall then. House Republicans, in the waning days of their majority, are having trouble getting their own departing members to show up and fight for the wall, and Trump plans to spend 16 days at his Florida resort over the holidays.

Waiting until January would make the wall dispute a more direct confrontation between Trump and likely House Speaker Nancy Pelosi of California, while also stepping on her planned message of cooperation with the president in the new year.

Lawmakers could keep current spending levels into March or later. The federal debt ceiling comes back into effect March 1 and will require another negotiation, so both parties may decide it makes sense to combine the issues. Congress will also try to strike a new deal on budget caps to prevent automatic spending cuts now slated for 2020.

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U.S. stock funds bled $27.6 billion in the days through Dec. 12, which includes last Friday’s plunge in the S&P 500 Index that capped the worst week for the gauge since March, according to BofA’s note, which cited EPFR Global data. This is the second-biggest redemption since February’s spike in the VIX volatility measure, according to Jefferies Financial Group Inc.
Instead of U.S. equities, market players flocked to Japanese and emerging-market equity funds, as well as government bonds as global equity funds saw a record weekly outflow of $39 billion, according to BofA. Investment-grade bond funds also set a historical precedent with an $8.4 billion redemption, the data show.

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The data breach lasted four years, and the intruders stole information about 500 million customers. On Tuesday, The New York Times reported that investigators had traced the hack back to the Chinese government, calling it part of a broader intelligence-gathering operation. Reuters had previously reported Chinese involvement.
But back in 2015, the Obama administration struck a data-theft deal with Chinese President Xi Jinping, agreeing that neither country would steal personal information of the other’s citizens. 

The Marriott breach would have crossed right through that timeline. If it can indeed be attributed to China, it would give the Trump administration more leverage for its position that China has not been acting in good faith on cybersecurity.

“The agreement was struck very quickly at a time when the U.S. was threatening retaliation over IP theft, and President Xi Jinping was traveling to D.C. for a summit with President Obama,” recalled Robert Silvers, who helped sign the deal in his prior role as assistant secretary for cyber policy at the Department of Homeland Security.

“There was leverage there, and we capitalized on that leverage.”

The deal was informal and didn’t impose significant consequences on either party for not complying. It called for more communication and cooperation over investigating cybercrimes between the two countries, in addition to prohibiting either side from stealing intellectual property or trade secrets from the other.

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The U.S. Congress, facing a Friday deadline for approving about $450 billion in funding for several government agencies or forcing them into a partial shutdown, is steering toward a two-week extension as President Donald Trump and Democrats argue over border wall funding.
Without action by Congress, federal agencies including the Department of Agriculture, State Department and Department of Homeland Security would find themselves without any money to pay employees and administer programs through the fiscal year that ends next Sept. 30.

Trump has demanded $5 billion for this year as part of his plan to build a wall on the border with Mexico that Democrats argue would be ineffective at keeping out illegal immigrants and illicit drugs.

Instead, Democrats want to continue improving less costly fencing and employing high-tech instruments to detect illegal border crossings.

If at any point Congress and Trump cannot agree on legislation to keep the government agencies running, essential services, such as the FBI and other federal law enforcement, would continue.

But some vital programs would have to be suspended until the money dispute was resolved.

For example, visitors most likely would not be admitted to national parks, some Securities and Exchange Commission and Internal Revenue Service activities could be curtailed, as well as some Justice Department programs.

Funding already is in place for many agencies, such as the Defense Department.

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Canada’s largest oil producing province ordered an unprecedented output cut, an effort to ease a crisis in the nation’s energy industry and adding to global actions to combat a recent price crash.

The plan announced Sunday will reduce production of raw crude and bitumen from Alberta by 325,000 barrels a day, or 8.7 percent, from January until excess oil in storage is drawn down. The reduction would then drop to 95,000 barrels a day until the end of next year at the latest.
Alberta Premier Rachel Notley is following the advice of producers like Cenovus Energy Inc. and Canadian Natural Resources Ltd., which have been hammered by record low prices for heavy Canadian crude, which at one point were $50 a barrel less than U.S. grades. The crisis has caused some producers to reduce production on their own, slash dividends and delay next year’s drilling plans.

“Every Albertan owns the energy resources in the ground, and we have a duty to defend those resources,” Notley said in a statement. “But right now, they’re being sold for pennies on the dollar. We must act immediately, and we must do it together.”

The amount being cut is more than the total production of each of OPEC’s three smallest members: Equatorial Guinea, Gabon and the Republic of Congo.

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"Chinese growth is still slowing and suggests that more vigorous policy stimulus is likely required to help stabilize it," said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney. That’s particularly so "if there is no breakthrough with the U.S. on trade soon."
Manufacturing output prices plunged in November, dropping to 46.4 from 52 a month earlier , while input prices fell to 50.3 from 58. That "cliff-drop" points to a further weakening of industrial profitability and manufacturing investment growth going forward, said economists led by Eva Yi at China International Capital Corp. in Beijing in a note.
"Domestic demand leading indicators are collapsing in China," they wrote, adding that stabilizing that demand "should be taken as the top priority for cyclical management right now, where delays in proper policy adjustments may lead to further pain later."
The cooling property market in November weighed on construction, according to Liu Xuezhi, an economist at Bank of Communications Co. in Shanghai. Construction activity dropped to 59.3 from 63.9 last month, but Liu says the faster expansion of new orders and business activity expectations indicate a potential increase in building work.

The next key event to watch is the Central Economic Work Conference that’s likely to be held in mid-December, according to Bank of America Merrill Lynch economists led by Helen Qiao. Should Xi and Trump fail to reach a trade deal this weekend, Chinese policymakers are expected to roll out more easing measures to shore up growth, they said.

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