Everyone is watching AMC. They should be watching the Fed.
AMC, granted, is more exciting than arcane central banks. AMC shares are up another 20% in premarket trading Thursday. The meme frenzy and short selling losses are dramatic. Still, the Fed is a bigger deal.
And on Wednesday, the Fed said it would sell its corporate bond portfolio built up to keep the economy functioning during the depths of the pandemic. The Fed was the buyer of last resort, stepping in when others were too scared to.
The end of Fed support shows the economy doesn’t need the help anymore. But the removal of a big buyer can make it tougher to sell new bonds, which might drive up bond yields, making it more expensive for companies to fund their business plans.
The market is focused on the negative. S&P 500 and Dow Jones Industrial Average futures are both down about 0.4%. The iShares iBoxx $ Investment Grade Corporate Bond ETF, meanwhile, is off 0.4%.
The decision raises the specter of tapering in the coming months, even if the Fed says that’s not what this is. The Fed has been buying Treasuries and mortgage-backed securities, and changes to those buying patterns will impact investment portfolios more than meme stocks.
Don’t forget, the total rise in AMC has generated roughly $30 billion in market value. The 0.4% drop in S&P 500 futures wipes out about $150 billion.
*** Hear from Palantir CEO Alex Karp, Vimeo CEO Anjali Sud and other tech executives and investors at Barron’s Investing in Tech. The virtual event on June 16 will examine innovations and opportunities in tech investing. Learn more and sign up here.
AMC, GameStop Bets Put Short Sellers Down More Than $3 Billion on Wednesday
AMC Entertainment’s market capitalization eclipsed GameStop, its peer in the so-called meme stock trade, on Wednesday. But any way you slice the incredible rallies in these stocks, short sellers betting against them are down big.
- AMC stock climbed 95% to $62.55 on Wednesday, bringing its market cap to $28.17 billion. GameStop jumped 13% to $282.24, hitting a $19.97 billion market cap. Shares of both companies have rallied amid heightened short interest, options volume, and enthusiasm from retail traders.
- Ihor Dusaniwsky, managing director at the short selling analytics firm S3 Partners, told Barron’s he estimates short sellers betting against AMC were down $2.77 billion on Wednesday alone, bringing year-to-date losses to more than $5.22 billion. For GameStop, he estimates a loss of $375.7 million on Wednesday, and $7.15 billion in 2021.
- On Reddit investing forums such as WallStreetBets and AMCStock, the recent action has been celebrated as a win for the average person. But not everyone has been so enthused: Whitney Tilson of Empire Financial Research wrote that the recklessness of “a segment of retail investors appears to have no bounds.”
What’s Next: What’s ahead for investors is anyone’s guess. Calling a top for meme stocks has been a fool’s errand this year. But eventually, the fundamentals will need to catch up to the valuation.
Biden Announces More Promotions to Reach 70% Vaccination Goal
President Joe Biden kicked off a month-long campaign to achieve his goal of inoculating 70% of adults with at least one Covid-19 vaccine shot by July 4, including a pledge by brewer Anheuser-Busch to buy a free round of beer, seltzer or other beverage for those 21 and older if the U.S. hits that goal.
- Four of the nation’s largest child care providers will offer free drop-in appointments for parents or caregivers to get vaccinated or recover from shots, and thousands of pharmacies will stay open late on Fridays in June. Black-owned barbershops and beauty salons will host “Shots at the Shop” vaccination clinics.
- Vice President Kamala Harris will lead a “We Can Do This” vaccination bus tour, along with first lady Jill Biden and Second Gentleman Doug Emhoff. Competitions among 50 cities and 230 college campuses are designed to see who can boost their vaccination numbers the most.
- As of Tuesday, 168.7 million Americans were partially vaccinated, including 63% of adults, per the Centers for Disease Control and Prevention. Covid cases have dropped more than 90% and deaths are down 85% since Biden took office.
- Vaccination rates have declined to an average of 1.2 million shots a day from nearly 3.4 million a day in mid-April, according to CDC data. At least 351 federally-supported mass vaccination sites have closed, the New York Times reported.
What’s Next: At least 10 states are offering vaccine lotteries and other promotions to encourage unvaccinated residents to roll up their sleeves, with prizes ranging from $5 million in New Mexico and New York to free college scholarships in Ohio to custom hunting rifles and shotguns in West Virginia.
—Janet H. Cho
Mayors, Cities and Counties Oppose Republican Plans to Claw Back Covid-19 Aid
As President Joe Biden tried to reach an infrastructure deal with Sen. Shelley Moore Capito (R., W.Va.), the lead Republican negotiator, associations representing local elected officials objected to GOP calls to “claw back” Covid-19 relief funds to pay for other initiatives, including infrastructure.
- The U.S. Conference of Mayors, National League of Cities, and National Association of Counties wrote a letter to leaders in the Senate and House objecting to the proposal to repurpose those funds.
- The local officials said they support a comprehensive infrastructure plan, but not the reclamation of already-authorized funds to pay for it. The relief is critical for public safety, vaccine distribution, housing assistance, economic and workforce development, broadband expansion, and social safety-net services, they wrote.
- Biden has proposed paying for his $1.7 trillion infrastructure package by raising the corporate tax rate to 28% from 21%, but Republicans have rejected that idea. Capito has suggested instead using “trillions of dollars” in unspent Covid relief.
- The GOP’s $928 billion infrastructure proposal doesn’t include $400 billion Biden wants to care for elderly and disabled Americans. Minority Leader Sen. Mitch McConnell on Wednesday said he was hopeful “that we can actually reach a bipartisan agreement on infrastructure.”
What’s Next: Although some Democrats say infrastructure should be passed along party lines by budget resolution, Sen. Mitt Romney (R., Utah) and Sen. Joe Manchin (D., W.Va.) have been drafting a separate proposal in case talks between the White House and Republicans break down.
—Janet H. Cho
As Economy Rebounds, Businesses Report Labor Shortages and Supply Issues
The economy grew at a moderate pace from early April to late May, but businesses reported being hamstrung by supply-chain disruptions and delivery delays, according to the Federal Reserve’s most recent Beige Book survey of businesses by 12 regional Fed banks.
- Some companies said labor and inventory challenges were holding back business, the Beige Book said. Manufacturers in the Philadelphia region said production would have been higher but for labor shortages and supply-chain disruptions.
- Companies said lack of child care, lingering concerns about getting sick, and expanded federal jobless benefits were keeping some job applicants at home. Businesses said they were raising wages or offering bonuses to entice applicants.
- Businesses also said they had price increases they passed along to customers. Half those surveyed in the Cleveland region plan to raise prices in the second half of the year, often to maintain profit margins.
- Philadelphia Fed President Patrick Harker on Tuesday said he is getting ready to think about paring back central bank Treasury and mortgage bond buying as the economy continues to recover.
What’s Next: The Fed will begin selling the corporate bonds and exchange-traded funds it bought last year in an emergency vehicle meant to instill confidence in the Covid-stricken market. The vehicle holds $5.2 billion of bonds from companies such as Whirlpool and Walmart, and $8.6 billion of ETFs.
U.S. Announces—and Immediately Suspends—Tariffs on Six Countries Over Digital Taxes
The Biden administration said on Wednesday it would slap 25% tariffs on imports worth more than $2 billion from six countries over their taxes on U.S. tech companies. But it immediately suspended the duties for 180 days to allow time for multilateral negotiations on a new international tax framework to continue.
- The office of the U.S. Trade Representative said the tariffs on the U.K., Austria, India, Italy, Spain and Turkey, followed a year-long investigation that concluded that their digital taxes discriminated against U.S. technology companies like Alphabet’s Google, Amazon and Facebook.
- “The United States is focused on finding a multilateral solution to a range of key issues related to international taxation, including our concerns with digital services taxes,” USTR representative Katherine Tai said. The U.S. seeks to resolve the issue through the Organization for Economic Cooperation and Development and G20 processes.
- The news comes as finance leaders from the Group of Seven are due to meet in London on June 4 and 5 to agree on a global corporate minimum tax, which the U.S. has suggested should be at least 15%.
What’s Next: The decision by the U.S. to suspend the tariff increases suggests its willingness to agree on an international tax deal, which could be key to President Biden’s proposal to increase the domestic corporate tax rate to 28% from 21% to pay for his infrastructure plan.
Is deferring taxable income a good idea?
Conventional wisdom says that taking steps to defer your current individual federal income bill is almost always a good idea. True, if you expect to be in the same or lower tax bracket in future years, and you turn out to be right about that.
If so, making moves to lower this year’s taxable income will at least give you more cash to work with until the bill comes due. If your tax rate drops, deferring taxable income into future years will cause the deferred amount(s) to be taxed lower rates. Great.
But is that really very likely? I don’t think so. So, let’s discuss tax deferral opportunities and whether they make sense for you in today’s uncertain tax environment.
Read more here.
—Newsletter edited by Liz Moyer, Stacy Ozol, Matt Bemer, Ben Levisohn