State of the Union and Stocks

Here is my quick read on how key points from last night's State of the Union speech could affect certain stocks or sectors, presuming any of the initiatives are translated into reality. That's a big if. I am using the highlights as summarized by ABC News. You can read the full article here. 1. General economic theme: more tax burden on the wealthy and initiatives to boost the middle class. My View: Income inequality is an economic problem (as well as political/social, for many). Lack of growth in disposable income means the middle class¿our largest segment of consumers¿cannot buy more. Open question whether government is the best channel to redirect income, versus the private sector accomplishing this, but that is not an argument for these pages. A reduced spread between top and bottom would be good for economic growth. 2. Tax hike: Raise the top capital gains rate on couples with incomes above $500,000 to 28%, the rate under President Ronald Reagan. Impose a fee on roughly 100 massive financial firms with assets exceeding $50 billion. Eliminate a tax break on inheritances. The administration estimates these changes would generate $320 billion over a decade. My View: More taxes equals more complications. Buy H&R Block (HRB). The too-big-to-fail institutions such as JPMorgan (JPM) or Bank of America (BAC) will face headwinds, although the fee may not turn out to be material, and they may be able to fight it off. 3. Tax breaks: Create a $500 tax credit for families where both spouses work and have an annual income up to $210,000. Expand the child care credit to up to $3,000 per child under age 5. Offer the Earned Income Tax Credit to childless workers and noncustodial parents. Consolidate six overlapping education tax breaks into two. My View: Tax credit is nice but unlikely to appear in economic statistics. If it ever actually becomes reality, what the Internal Revenue Code (IRC) giveth, the alternative minimum tax (AMT) taketh away. Tax breaks are generally good for the average consumer, but they have been coming for years and hasn't really seemed to matter, because state taxes, sales taxes, and property taxes always go the other way. Assessment: neutral. 4. Education: Offer two years of free community or technical college. Students would need to go to school at least half-time, maintain a 2.5 grade point average and make progress toward a degree. The White House estimates that would cost $60 billion over a decade. My View: Yet another nail in the coffin of the private education sector. The remaining survivors like Apollo (APOL) are not going to zero but this could syphon any incremental demand they were hoping to see in the next couple years. 5. Paid leave: Call for federal and local laws allowing workers to earn up to a week of paid sick time a year. Urge Congress to give federal workers an additional six weeks of paid parental leave. Call for more than $2 billion from Congress for paid family and medical leave programs. My View: Not as bad as it sounds. Small business will probably be exempt, and large corporations can absorb the cost¿they will just not give raises as an offset. Assessment: minimal real impact. 6. Home ownership: Cut insurance premiums for government-backed mortgages by half a percentage point to 0.85 percent. The White House says the reduction would save new home buyers and those who refinance $900 a year compared to current rates. My View: Sounds great but really, mortgage rates are so low that the cost of borrowing is not really an issue. Higher incomes for first time buyers would help more. Assessment: no impact for home builders. 7. Retirement savings: Boost retirement savings by automatically enrolling people without access to a workplace retirement plan in an Individual Retirement Account. Expand access to employer plans for certain part-time workers. My View: Small but incremental positive for the self-directed financial firms like Charles Schwab (SCHW) or E*TRADE (ETFC). 8. Middle East: Urge Congress to pass a new authorization for use of military force against the Islamic State group and militant extremists in the Mideast. Until now, Obama has been relying on 9/11-era war powers. My View: Small but incremental positive for defense contractors, but unlikely to have dollar magnitude to move the needle on results. 9. Cuba: Seek support for normalizing diplomatic relations with Cuba. Obama wants Congress to lift the economic embargo on Cuba, though the White House doesn't expect Congress to take that step quickly. My View: Positive for Caribbean travel operators. Add to Carnival (CCL). 10. Trade: Ask Congress for so-called fast-track trade promotion authority to allow an up-or-down vote on trade pacts. Obama wants to secure two major trade agreements ¿ one with the EU, and one with Asia-Pacific nations. My View: A positive for the economy, although trade is relatively free now so probably not a big boost for the economy near-term. May help individual industries over time depending on which get targeted for opening up. 11. Cybersecurity: Call for legislation enabling information-sharing between the private sector and U.S. agencies like the Homeland Security Department. Companies would qualify for targeted liability protection if they comply with certain privacy restrictions. My View: Highlights that this is a big issue in general, positive for security vendors from McAfee to Checkpoint Systems (CKP).

State of the Union and Stocks

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