The Dividend Cafe - A Quarter Ends, a President is Confused, and More

Episode Date: October 5, 2017

A Quarter Ends, a President is Confused, and More by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. and we have our first meeting here in just a few minutes with our private equity partners and then today it's Thursday morning I'm recording and today is just one of these days we have like I think it's seven meetings back to back to back to back with different managers and hedge funds and I know I'm not going to be able to record later I kind of got to get this part done and I didn't want to go without a video this week so I just figured let me bang this out real quick so forgive me for it being a little quick and me going a little fast tax reform this week a little more clarity in terms of the path forward it's all about budget resolution right now the house should have that approved then it goes to the senate I think in a week once they have budget

resolution approved to go forward with that discussion, they can attach the reconciliation bill that will enable them to do tax reform as part of the process and only require 51 votes. The language of that tax reconciliation is going to be the most important part because I literally don't know right now if they're going to be able to do a massive tax cuts on a permanent basis. I doubt it'll go that severe without any consideration impact on deficit or the reconciliation instructions will be hyper tight or more constrictive than expected and they may even have to sunset the whole tax bill as happened in President Bush's 2001 bill. We've been believing all along and I frankly still believe now it's going to be somewhere in between something like one and a half trillion dollars of impact to deficit and so therefore they'll be able to do

really significant tax reform but have to have some pay-fors along the way things to offset the other parts of the reducing tax liability with. And then the language of that provides the bandwidth of how much flexibility they're going to have when the Senate starts debating this in November. And then we're going to know, you know, how knobs get turned around things like the state and local income tax deduction, the rates themselves, how broad the pass-through entities will be receiving 25% rate instead of the current income rates, how that will be applied. There's a lot of questions there. So as I said last week, that little nine-page deal they gave us gave us more detail than

we've had until now, but we're not getting any more detail than we've gotten until they go further into the process. That's as far as it's going to go. And then we have to let this thing play out with the kind of parliamentary aspect of the Senate. I do want to make a very quick comment. I write about it in dividendcafe.com, but look, there's so much that can be said over and over and over about the human disaster and just utter tragedy, what's taking place in the island of Puerto Rico, which is obviously a U.S. territory and not a state. They were well before, well before the hurricane in default, financially, about $72 billion of debt.

Those bonds were trading about 60 cents on the dollar, give or take. And those bonds were trading about 60 cents on the dollar, give or take. After the hurricane and the obvious economic impact and worsening of any condition you can imagine, those bonds started trading about 44 cents on the dollar, meaning the market is just pricing in an even lower recovery than bondholders will eventually get, which is obviously going to be much less than what was promised to them. President Trump this week said, well, that debt is gone. Wipe that away. I don't know if it's Wall Street, Goldman Sachs, they're not going to get anything. It was kind of an offhanded comment and so forth.

And then the bonds traded down much, much further. I believe that the market will end up shrugging off the comments. It reminds me a lot of what President Obama said about General Motors bonds back in 2009. And they were reasonably successful at kind of operating outside of case law regarding those bonds. But my fear then was a contagion that it would really impact the broader bond markets. That if borrowers on a municipal or corporate level don't trust the law to be enforced and recovery processes and bankruptcy and defaults to play out, that there'd be a lot of disruption and lack of trust in financial markets, which is a very bad thing for everybody involved, the lender and the borrower.

The borrowers that go down that path who inevitably need to tap capital markets going forward have less access to funding going forward when things like that happen. So my own personal opinion, I don't want to get political about it. I think it was an utterly absurd thing for the president to say, but I don't think he meant it. He certainly doesn't have the power to do it. It was a kind of a, I don't know, not surprising example of the president sort of saying something a little off the cuff. And so it doesn't need to be overly read into, I suppose. But my point being that there are things like that that actually have impact. A tweet here and there has really had no impact on markets all year. But I fear that reckless, not just at this point, I'm not talking about President Trump when he said, but any

reckless action that interferes in the rule of law with capital markets, there is going to be a very high concession to help the people of Puerto Rico. But the bondholders have a process that they're going to have to go through. And we don't own Puerto Rico bonds. Why am I spending so much time on this? Because it speaks to the broader aspect of rule of law and an expectation setting in capital markets to be able to drive reliable decision-making

and economic acting. It's very important. Something we have our eyes on. Spent more time on it than I meant to. Got to run out the door for this meeting. Really a lot going on in New York. Dozens of meetings, tons going through our head. I can't wait to share more with you.

Have a wonderful weekend. Thank you for listening to the Dividend Cafe, financial food for thought. Itar Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary. It does not constitute investment advice. The team

and Hightower shall not in any way be liable for claims and make no express or implied representation or warranties as the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the team and do not represent those of Hightower

Advisors LLC or any of its affiliates.