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Jim Cramer's Action Alerts PLUS

Administration Tips Its Hand on Taxes

By Jim Cramer and the AAP Team | 2017-04-26 15:23:30.0
Stocks in Focus:

Markets are trading relatively steady today as strong corporate earnings have been able to offset some weaker ones along with some volatility in oil. Importantly, investors have mostly taken the administration's newly outlined tax plan in stride, waiting for more specifics. We note that the announced tax plan is largely just a blueprint, but it does provide an idea of what the administration is aiming for once the real negotiations with Congress begin. 

First, oil is rebounding today after a rough start to the week as inventories were mostly more bullish than expected. The Energy Information Administration (EIA) reported this morning that U.S. commercial crude inventories fell by 3.6 million barrels to a total of 528.7 million barrels in the week through April 21, a steeper drop than the expected draw of roughly 1.8 million barrels (bullish for crude). 

That being said, product inventory data were bearish as gasoline surged 3.4 million barrels, outpacing the 500,000-barrel expected increase. Distillates also grew by 2.7 million barrels, defying the 1-million-barrel projected draw. Other products rose 4.1 million barrels. For now, investors are content to focus on the crude draw as prices have seen a steep decline since the end of last week. Even so, rig counts continue to rise and production continues to increase domestically, so all eyes remain on OPEC and whether the group can reach an agreement with member countries and Russia to extend the current output limit deal. 

As for the tax reform blueprint announced this afternoon, we note there are no major surprises, yet the reaction in equity markets has been somewhat muted. The administration remains confident that tax reform will be one of the biggest opportunities for the country in recent memory. Treasury Secretary Steven Mnuchin proclaimed, "We will have a massive tax cut for businesses and massive tax reform and simplification." Leaving politics aside, we'd like to take a look at this from an investment perspective. 

Details of the plan include: 

  • Slashing the corporate tax rate to 15% from 35%:
    • Even though we know many companies do not pay this high of a rate currently, a reduction will still be a boost for the economy and especially for those companies that do pay the high rate. In addition, a more competitive tax rate will likely encourage more foreign companies to conduct business in a more corporate-friendly environment. However, more than 10% of federal government receipts come from corporate tax, so a slashing of the rate can cause the deficit to rise. This will be a key topic of debate once more details are released and the administration tries to push the plan through Congress. A potential way to offset the deficit could be to pass a repatriation holiday (another benefit for corporations), but this would likely only be a one-time offset. 
  • Individual tax reform, including lowering the max tax rate to 35% from roughly 40% and only keeping three main tax brackets (down from seven currently).
    • There are no specific details yet on what the income levels will be for the tax brackets, but the lower brackets would be set at 10% and 25%, and the standard deduction for individuals would be doubled. In addition, the tax rate on business income reported on individual returns would also drop to 15% instead of being taxed at individual tax rates. Overall, from a high level, these would seem to create more wealth for individuals, thereby creating more disposable income (especially if capital gains and dividend taxes are decreased) to be put in the stock market (and for other purchases, of course).
    • The catch to these cuts, however, is that many of the deductions that are currently commonplace (such as those allowed for state and local taxes) will be removed. This would hurt residents of high-tax states, such as New York. Again, while the details are scarce for now, the idea here is to raise enough money to mitigate the deficit while still spurring economic growth. Congress will be there to debate the issue. 

Ultimately, many questions remain unanswered, but the administration appears hell-bent on getting tax reform passed by the end of the year. Before that can happen, the details will need to be hashed out further. Tax reform, from an investment perspective, would create a wealth of opportunities for individual investors (both from a corporate perspective as companies make more money and from the individual perspective as investors themselves will have more money). But we cannot count on anything being passed given how difficult we know it can be for policies of this nature to gain approval. 

With that said, we revert to the theme we have been discussing recently and on which we always focus: fundamentals. Earnings have been strong and can continue to drive this market higher, with any benefit from tax reform being an added bonus. We cannot bank on that bonus -- we have no idea what will ultimately pass -- but we can still take our cue from company fundamentals, which have been supportive of higher stock prices. In the end, we can keep in our back pocket the knowledge that stocks might just have another ace up their sleeve if any of these tax policies prevail.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.

We're Initiating a Steel Position
Stocks in Focus: NUE

Nucor, which should benefit from Trump plans, is coming out of the bullpen.

04/26/17 - 02:12 PM EDT
Reminder: Members-Only Call Is Almost Here!

Call will be live at 11:30 a.m. today.

04/26/17 - 10:57 AM EDT
Weekly Roundup
Stocks in Focus: DHR, SNA, KEY, SLB, GE, BHI, APA, ARNC, AEP, PEP, DOW, CMCSA, LUV, GOOGL, SBUX, WDC, AGN, JNJ, NVS, XEC, C, COST, VZ, FB, SNAP, HPE, FNFG, UAL, MMP, AVGO, AAPL, ADBE, CSCO, DD, NWL, NXPI, QCOM, TJX, RAD, AMZN, WFC, WBA, DXC

Earnings and hopes for a tax plan help lift the markets. Portfolio moves include exiting a utility position.

04/21/17 - 05:26 PM EDT

Markets

Chart of I:DJI
DOW 20,975.09 -21.03 -0.10%
S&P 500 2,387.45 -1.16 -0.05%
NASDAQ 6,025.2255 -0.2660 -0.00%

Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry
AGN 0.047753198333219976 Drugs
APA 0.038072413301598745 Energy
C 0.03812824167543299 Banking
CMCSA 0.028124449623770777 Media
DHR 0.03309027471975443 Health Services
FB 0.0531312108386162 Internet
GE 0.024927368916990236 Industrial
GOOGL 0.048349909393811966 Internet
HPE 0.013493065416302505 Telecomm
KEY 0.008803482014225955 Banking
LUV 0.020641997442349937 Transport
MMP 0.02744653365578352 Energy
NUE 0.01798108663752295 Metals & Mining
SLB 0.03223979832355224 Energy
SNA 0.035484460030759696 Industrial
WDC 0.03374027650082457 Computer Hardware
XEC 0.03572218377194025 Energy
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry
AAPL 0.042711461149698066 Consumer Durables
ADBE 0.026476606290890523 Computer Software & Services
ARNC 0.02392644592896199 Industrial
CSCO 0.036324695183060474 Computer Hardware
DOW 0.034398525655302034 Chemicals
DXC 0.0047200134910352935 Computer Software & Services
NWL 0.033792117133670654 Consumer Durables
NXPI 0.02485287066489324 Electronics
PEP 0.032867686268233484 Food & Beverage
SBUX 0.02901190325459046 Leisure
TJX 0.04005432057271443 Retail
WBA 0.028033094102951104 Retail
WFC 0.037566695239918416 Banking