The Overnight Report: All About Tax

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This story features G8 EDUCATION LIMITED, and other companies.
For more info SHARE ANALYSIS: GEM
The company is included in ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 58 points or 0.2% while the S&P fell -0.2% to 2639 as the Nasdaq lost -1.1%.

All About Switching

At face value a 4 point increase for the ASX200 yesterday suggests a quiet session and indeed volumes were to the low side. But there was still quite a bit going on under the surface.

The index jumped 11 points from the open on anticipation the passage of the Senate tax bill in the US would lead to a Wall Street rally last night, and supported by a move up in the Dow futures during the session. But right on 6000 the sellers moved in once more, and down we went by -20 points to lunchtime, before chopping our way back again.

Sector moves varied significantly by the close.

The banks were the biggest drag on the index, falling -0.6% as Royal Commission fears reverberate. Last week’s run-up for consumer discretionary came to a halt when G8 Education ((GEM)) revealed its child centre occupancy has fallen to 77% from almost 80% in 2016. That stock fell -23% and the sector closed down -0.8%.

Topping the winners list was grocery/hardware chain Metcash, which posted a better than expected first half result thanks to strength in hardware. It rose 9% and consumer staples closed up 0.4%.

The biggest winner on the day was last week’s biggest laggard. Good luck trying to understand how the Telstra ((TLS))-NBN relationship actually works, but if the government writes off its investment in the disastrous network, Telstra will benefit. Telstra rose 2.3% and the telco sector closed up 2.1%.

An upgrade to metal and bulk price forecasts by Citi helped materials to a 0.9% gain.

So a lot of moving parts but no progress. 6000 remains a barrier.

In economic news, yesterday’s September quarter data revealed a -0.2% fall in company profits following the June quarter’s -3.3% fall, on lower commodity prices. The wages bill for companies rose thanks to stronger employment, which is actually a positive for GDP, while an increase in inventories helped to net out to a mildly positive result.

Work to do yet

Trump and Russia? No one seemed to care on Wall Street last night. All they did care about is that the Senate has now joined the House in passing a tax bill.

The Dow jumped 300 points from the open, led by the banks and industrials, and basically anyone that was deemed to be a winner from proposed tax reform. Even energy opened higher despite profit-taking in oil.

On the flipside, Big Tech was sold off. Aside from there being plenty of reason to lock in gains in FANG and Co, these companies don’t pay much tax so thus won’t see much benefit from a lower rate.

But it wasn’t to last. There were likely two issues to consider: (1) How much higher can Wall Street keeping pushing on every incremental step towards tax reform? (2) Will the two houses of Congress be able to reach a compromise between what are still two conflicting bills in many ways?

Perhaps the most significant difference between the two is that while they both cut the corporate rate to 20% from 35%, the House wants the cut effective immediately and the Senate wants a year’s delay. Thereafter, the list of differences over deductions and various other vagaries is long.

It should be noted that the Senate is the house that has to consider tax reform in light of budget constraints. This is not a policy matter but a financial barrier. It may be the House that has to concede some ground, and a one year delay, for example, would be a big disappointment to Wall Street.

So what was a 300 point rally for the Dow ended as only a 58 point rally. The Nasdaq still managed to lose -1%. But most tellingly, the Russell small cap index jumped 1.2% from the open and closed down -0.3%. Small caps are the biggest tax winners.

Then of course, there’s still the Russia Thing in the background.

The common consideration is that while two different bills still need to be reconciled, no one expected the two bills to be passed in each house so quickly. This bodes well for possible reconciliation, but “before Christmas” still seems like a big ask.

Speaking of Christmas, one highlight of the day, and of the prior week, was the ongoing comeback of bricks & mortar retail. Some of the big chain store names have risen 20% in that time from their Amazon-inspired lows. But those lows were very low – to the extent household name department stores were being valued effectively only for their property, and zero for their businesses.

Commodities

Iron ore is on a tear again. It’s up another US$2.00 at US$71.30/t.

Nickel rose 1% in London but all other base metals fell, with lead down -1.5% and zinc down -2%.

West Texas crude is down -US90c at US$57.45/bbl on profit-taking.

The tax bill passage has helped the US dollar index up 0.3% to 93.20, sending gold down -US$3.80 to US$1275.10/oz.

The Aussie is down -0.1% at US$0.7600.

Today

The SPI Overnight closed down -30 points or -0.5%. Seems harsh.

Today brings Australia’s September quarter current account and terms of trade, and October retail sales numbers. The RBA will meet, but no one expects any change in tone.

CSL ((CSL)) hosts its R&D day today. Aristocrat Leisure ((ALL)) goes ex.

Rudi will connect with Sky Business through Skype to talk share market and broker calls at around 11.15am.

****

The Australian share market over the past thirty days…

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