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How Jack Lew is punishing Allergan & Pfizer shareholders: Trader

Keith Bliss

 By Keith Bliss, Cuttone & Co.

Once again transparency takes center stage in today’s trade

Like most Fed related items, the release today of the FOMC minutes from the March meeting will undoubtedly be poured over for any clues as to monetary policy changes. Interestingly, the most talked about clue to be found is who is on “Team Yellen” and who isn’t. This is a somewhat gossipy analysis, but will be used to determine if she still has control of the FOMC for her vision or if the "hawks" are seizing control. It is a fairly light day data-wise, so I expect a quiet trade until the release at 2:00 p.m. ET.

Of course, the minutes may just be the appetizer, as Yellen is due to participate in panel discussion with former Fed chairs Bernanke, Greenspan, and Volck—which should be interesting, indeed. Will we hear anything that will move markets? I doubt it. But, as I wrote last week, in the age of Fed transparency, the market has become a slave to anything Fed-related.

Earnings are coming into focus and unofficially kick off next Monday

Much of the market’s recent apathy can be attributed to the unusual convergence of events and holidays.  The Easter break and many school spring break holidays were earlier than normal and fell before we get to an important earnings season. After the mighty run-up from February 11, this break has afforded traders of all stripes to take a breath and think about repositioning. In a period like this, we inevitably see low volumes with a sideways-trending market into indecision.

First quarter earnings are due to be poor. Sure there will be pockets that outperform, but the overall expectation for the market is a year-on-year earnings decline in the 7-10% range. If that’s the case, this would be the fourth consecutive quarter of year-over-year earnings declines. We haven’t seen a performance like that since 2008-2009. What that may forecast for the U.S. economy is anyone’s guess, but I can be reasonably sure that poor earnings, and more importantly, top-line sales performance, won’t be good for valuations.

A word about policy and inversions

Whatever one may think about the moral obligation for corporations to pay their “fair share” of taxes (whatever the arbitrary term “fair share” means), they also have a fiduciary duty to their shareholders (many of whom are individuals that own shares in a company through pensions, 401ks, mutual funds, or retail accounts) to maximize the value of that ownership. That means limiting their expenses—including taxes—as much as possible.

The recent volley by Secretary Lew to stop “serial inverters” is a troubling development. These corporations have done nothing wrong and are simply acting within the rule of the law (a turn of phrase uttered relentlessly yesterday by President Obama to justify why corporations should stay in the U.S. and pay a federal and state tax rate that often runs close to 40%) to do what is right by its owners, the shareholders.  This hasty rush-to-rules setting has cratered the Pfizer/Allergan deal. As a result, the shareholders of both companies have now paid their “fair share” and then some. Allergan lost $15B in market value once the deal collapsed, and Pfizer will now pay a $400 million breakup fee. By the way, that’s $400 million that won’t be used for research, jobs, or to pay taxes.

This edict from Treasury is troubling because it does not solve the problem, makes the U.S. less competitive, essentially sets tax policy without the involvement of Congress, and will undoubtedly have unintended consequences. In a world where a traditionally liberal society like Great Britain is reducing its corporate tax rate to 17% by 2020 to attract businesses, jobs, and additional tax revenue, we should be doing the same. Politics should stand aside and let rational economic policies prevail.