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MARKET-ALERT – Rumblings Up, Down, and Around Wall Street – Issue #420 dated February 12, 2017 – with Ray Dirks of RAYDIRKS Research and his team of securities analysts and money managers, along with the internationally-followed Web Sites, and, where Fashion meets Finance and where Stocks meet Blonds.

Well, well, well…’Twas another exciting week for the stock market in the United States as all of the major indexes closed at all-time highs! Rumblings’ Favorite Stocks for 2017 did especially well in the week just ending on Friday, February 11, with Apple, Inc. leading this group of ours upward by over 3% to reach another recent high to close at $132.04. We’ll discuss some of the stocks of our favorite companies later in this report, but first – let’s take a look at “The Trader” column in tomorrow’s Barron’s, the Business and Financial Weekly, where the headline reads : “Trump Talks, Market Listens, Up 0.8% on Week”.

The column starts off : “It may not be chocolate and peanut butter, but a dose of healthy earnings and pro-business comments from President Donald Trump was enough to send the major indexes to all-time highs last week

It sure didn’t look that way at first, as the market barely moved on Monday, Tuesday, and Wednesday. But Thursday, while meeting with airline executives, Trump promised a “phenomenal” tax plan – and stocks were off to the races. By Friday, the Dow Jones Industrial Average had gained 198 points, or 1%, to 29,269, the Standard & Poor’s 500 index had risen 0.8%, to 2,316, and the Nasdaq Composite had climbed 1.2%, to 5,734.

It’s no secret that the market has reveled in Trump’s pro-business comments, even though he has offered few details, particularly on his tax plan (more on that later). Don’t expect the market reaction to change, says Mike O’Rourke, chief market strategist at Jones Trading, “It’s a void,” he explains. “until we have substance and a framework, we will see this kind of reaction to noise.”

But stocks are also reacting to something more fundamental: corporate earnings. Yes, there have been some high-profile disappointments. Gilead Sciences {GILI) tumbled 8.3% to $66.36 after offering downbeat 2017 sales guidance, while General Motors (GM) dropped 3.2% to $35.17 as investors appear reluctant to believe its forecasts of continued strong profits in 2017. But fourth-quarter earnings are on pace to grow by 8.4%, according to Thomson Reuters I/R/E/S, nearly double the 4.3% gain reported during the third. And analysts see earnings advancing at a double-digit clip during 2017’s first two quarters.

The stronger earnings growth is particularly important because the S&P 500 rose 9.6% last year, despite little-or-no earnings improvement, says Daniel Chung, CEO of asset manager Alger. That meant stocks were rising simply because values were climbing. Now it’s earnings that are driving shares higher. “With earnings turning positive,” he says, “we have a solid catalyst for 2017 turning out to be a good year.”

But if it’s earnings you’re interested in, it might be time to look to Europe. On the surface, that sounds risky, perhaps even ridiculous. Greece was back in the headlines last week after the IMF said the struggling European nation needed more debt relief. That sent Greek bond yields soaring, as investors worried about the possibility of a renewed crisis. Then there’s the potential for chaos from elections in the Netherlands, France, and Germany, which could take a populist turn, akin to that taken by voters in Britain and the U.S.

Yet Merrill Lynch strategist Ronan Carr notes that earnings growth in Europe could be faster than in the U.S. this year and next, after lagging behind by 76 percentage points since 2009. At the same time, the value of the MSCI USA index, hit its highest level in 40 years. “A strong earnings recovery could be the catalyst to unlock the value potential in Europe,” Carr writes.

To which we can only say: finally.

Taxing Tax Changes : Trump’s comments that he planned a “phenomenal” tax plan sent the major indexes to new highs, as we noted above, and continued the bull run that began after the election win. But will the stock market still love the plan for tomorrow?

Much of the attention has been focused on the possibility of slashing the corporate tax rate – Barron’s has recommended trimming it to 22% – a change that, on its own, would be fantastic for companies, especially those that pay close to the U.S. statutory rate of 35%.

If only it were that simple. Congress made other proposals, ranging from the elimination of interest deductability to a shift to a border adjustment tax, which would make companies pay a tax on the goods they import, but not on their exports. The border tax, in particular, has the potential to upend industries that rely on cheap goods from abroad – retailers would be particularly hard-hit – and that’s one reason that many observers contend that it just won’t happen. They’re wrong.

While a border tax is often taken as a protectionist measure – and protectionism, as we all know, is bad – that’s not how it’s being presented by its proponents in the House of Representatives. They note that 160 countries already use some variation of a border adjustment tax, most often in the form of a value-added tax. That makes the U.S. an exception , rather than the rule. “They position it as leveling the playing field,” says Jason Pride, director of research at Glenmede. “And leveling the playing field is more politically viable.” He contends that some form of border tax will be enacted, even if it ends up being watered down.

But not only could a border tax happen, it’s essential to what House Republicans are trying to accomplish. Steven Englander, global head of G10 FX strategy at Citigroup, argues that the purpose of any changes, at least as designed by House Republicans, should be to create jobs and attract capital, something that won’t happen simply by cutting the tax rate. A 20% border tax would bring in the equivalent of 2.8% of U.S. gross domestic product in revenues, according to Englander, and even if it were watered down, it would mean some 2% of GDP entering the government coffers. “This is real money,” Englander writes. “Tax reform without the border tax adjustment will be a Spinal Tap tax reform.”

While that might be great for the country, it’s not good news for the S&P 500, which is heavy on importers. So while a tax cut to 20% would boost total S&P 500 earnings by 12%, a border tax would shave off 6%, estimates Keith Parker, U.S. head of asset allocation at Barclays. At the same time, a border tax could slow U.S.GDP and cause the dollar to rise, which would mean that “S&P 500 earnings per share wouldn’t really get a boost,” he says.

Nor is the border tax the only thing that could hurt publicly traded companies. Congress has discussed eliminating interest deductibility, depriving debt-heavy companies of a major tax break.

That, by itself, could shave 4% from S&P 500 earnings per share in 2018, says Savita Subramanian, head of U.S. equity trading at Bank of America Merrill Lynch.

But it’s the unintended consequences that could be the real problem, Subramanian says. For instance, if a tax holiday for overseas cash is instituted, corporations are expected to use a big chunk to buy back their own stock, as they have done in the past. But if they no longer get a tax break on interest, they might choose to pay down their debt instead, robbing the market of the corporate buyers who have helped fuel the post-financial crisis rally. In addition, depending on the details, companies could actually decide to issue more stock to pay off debt if the math makes it a more profitable use of capital. “There are victims and beneficiaries here,” Subramanian says.

Companies with high leverage, high interest expenses, little overseas cash, and a need for debt could be particularly at risk. A screen for such stocks turned up Charter Communications (CHTR), Devon Energy (DVN), and Micron Technology (MU), among others.

And now, as promised earlier in this report, we’ll discuss the companies in Rumblings’ Top Stocks for 2017 list, which generally outperformed the market as a whole. In addition to Apple, which did extremely well again, both of the insurance companies on our list were up nicely – Aflac (AFL) to $69.98 and Hartford Financial Services to $47.86. In Rumblings’ opinion, Aflac and Hartford are the two best insurance stocks in the United States, particularly at their current prices. Aflac is the leader in selling health and life insurance in Japan, and its stock is at a very low multiple of earnings per share historically. Rumblings is convinced that President Trump’s new financial agenda will help Aflac considerably, as is currently indicated by the meeting between the leaders of the two countries. Hartford sells at a very low price in relation to its book value, and Rumblings thinks its stock will move up sharply as some of his economic and financial policies are implemented.

Rumblings suggests that readers/investors do their due diligence, consult with their investment advisers, and possibly purchase shares in the companies listed above, as well as in the other companies in Rumblings’ Favorite Stocks for 2017.

Rumblings also suggests that readers/investors place no more than one percent of their portfolio in the securities of any one company. It pays to diversify…!

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