Yesterday, the slow and methodical rally shifted into blast-off mode with corporate earnings serving as rocket fuel. The upshot is that U.S. and global economies are surging; here at home, consumers are spending money on fun stuff, such as off-road vehicles and snowmobiles. This is the ultimate sign of confidence.

Earnings Highlights:

• Caterpillar (CAT) enjoyed strong growth around the world, including North America
• 3M Co (MMM) saw growth across the board, led by its industrial business
• McDonald’s (MCD): same-store sales in the United States are gathering momentum
• General Motors (GM) continues to take market shares as it preps its electric vehicle fleet
• Polaris Industries (PII) had a record quarter as folks shell out for snowmobiles and off-road vehicles

In addition to a variety of earnings beats, management at several big names hiked their full-year outlook, suggesting that the economic momentum is here to stay. 

Tax Reform & Your Money

With all the turmoil in Washington, D.C., it’s critical to understand what tax reform means to your 401K.  According to FactSet, in the first week of earnings, 13 of the first 52 companies that posted financial results mentioned “tax reform” during their conference call; it went up a lot more compared to the first and second quarter through the same period.

For now, the administration remains adamant on a 20% corporate tax rate as the GOP tries to figure out individual rates. This point was driven home by Treasury Secretary Steven Mnuchin.

Twitter Steven Mnuchin‏ No inconsistent messages on tax reform: we are committed to a 20% corporate rate & middle income tax relief for hardworking Americans.

 

What 20% Really Means

Yesterday morning, three companies in the Dow Jones Industrial Index reported earnings that beat the Street. If 3M, McDonald’s, and Caterpillar paid 20%, they would have saved a combined $702,000,000.

Dow Components	Tax Rate	EPS Reported	EPS at 20%	Savings
MMM	28%	$2.33	$2.61	$165,000,000
MCD	33%	$2.32	$2.77	$372,000,000
CAT	31%	$1.77	$2.03	$165,000,000

 

Domestic Economy

On Tuesday, shares of Pulte Homes (PHM) hit a ten-year high on mixed results since it was impacted by hurricanes Harvey and Irma. The details of the release are very encouraging.

Key Highlight from Earnings Release:

We continue to be extremely pleased with the strength of homebuyer demand and the sustained course of the housing recovery, said Ryan Marshall, President, and CEO of PulteGroup.  Despite the disruptions caused by Hurricanes Harvey and Irma, our 11% increase in year-over-year orders for the quarter points to the health of the market, while the 15% increase in our backlog puts us in an excellent position to deliver strong fourth quarter and full-year financial results.

First-time homebuyers are the key to getting back to a normalized housing market. It only happens with better jobs, higher pay, and buoyed confidence. That said, Pulte data suggests this is happening and could be sustained:

• Orders increased by 525 or 11% from a year ago
• Order value surged to $2.2 billion or 23% year-over-year

PHM 3rd Quarter New Orders	2017	2016
Northeast	316	325
Southeast	1,004	938
Florida	991	946
Midwest	861	817
Texas	881	852
West	1,200	893

Speaking of taxes, the company paid a 34% effective tax rate at 20% that would have saved more than $38.0 million. By the way, we get the latest on new home sales today.

After the close earnings summary:

Beats

• (TXN)Texas Instruments crushed on revenue, beat earnings $1.26 versus $1.12
• (AKAM) Akamai Technologies
• (IRBT) i-Robot Corporation

Misses

• (T) AT&T
• (CMG) Chipotle
• (AMD) Advanced Micro Devices

Despite yesterday’s amazing session, earnings seasons are treacherous. That means you have to be careful not to panic; by the same token, be prepared to take losses. 

Today’s Session

It’s still about the economy and the economy continues to come on strong on both the consumer and business side of the ledger.

This morning Durable Goods came in better than expected- we’ll break down the report on the afternoon note.

On the consumer side lots of earnings this morning point to growing confidence and purchasing power including beats by KO and V.

Consumers

This morning Visa posted financial results that beat on revenue and earnings reflecting growing consumer confidence around the world.

Visa Total Volume Billion USD	Regional Volume Billion USD	Growth Constant currency
Asia Pacific	$557	+4.0%
Canada	$69	+11.7%
CEMEA	$263	+10.7%
LAC	$254	+7.5%
Europe	$555	+9.33%
USA	$977	+8.2%

In the United States credit card use is staging a comeback which might be alarming to some but for me there is also a degree of confidence associated with credit card use. To be clear, consumer use of debit versus credit surged in the aftermath The Great Recession as people were forced to spend only what they could afford.

US Volume

• Credit $463 billion +9.1%
• Debit $515 billion +7.5%

Of course, cash use of debit cards has become a way of life.  Grab a cup of coffee and a doughnut, swipe your debit card and don’t miss your train. In the last quarter cash transactions for debit surged to $127 billion volume +5.7% while cash volume for credit cards slipped to $14 billion volume – 7.0%.

We still use credit a lot more for payments. During quarter Visa US credit transaction volume $449 billion +8.0%.

As people feel more comfortable with their jobs and begin to earn more money and who knows even get to keep more of what they earn, I suspect credit card volume will increase.  There is an inflection point where red flags should be waved but we are a long way from that place.

Let’s not force the issue this morning. 

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