Morning Report – The tax inversion trade continues… 7/14/14

Vital Statistics:

Last Change Percent
S&P Futures 1970.7 8.3 0.42%
Eurostoxx Index 3174.4 17.3 0.55%
Oil (WTI) 100.7 -0.1 -0.09%
LIBOR 0.233 -0.001 -0.43%
US Dollar Index (DXY) 80.16 -0.023 -0.03%
10 Year Govt Bond Yield 2.54% 0.02%
Current Coupon Ginnie Mae TBA 106.6 0.2
Current Coupon Fannie Mae TBA 105.6 -0.1
BankRate 30 Year Fixed Rate Mortgage 4.24

Markets are higher this morning after Citigroup announced earnings and a settlement with the Feds. Bonds and MBS are down small.

This week will have a deluge of earnings report, with most of the major banks reporting. We will also hear from heavyweights GE and Google. Economically, the big events will be housing starts / building permits and industrial production.

Score one for Jana. After taking a 9.8% stake in URS Corp and pushing for a management shake-up ended up seeing the company sold to Aecom for $4 billion.

The tax inversion trade in the pharma sector continues, with US drug giant AbbVie closing in on a deal to buy Irish-based Shire Pharmaceutical for about $54 billion. Shire seems ready at last to recommend the offer to shareholders pending resolution of “other terms” of the offer. At some point the government is going to try and put a stop to this, but the chances of it happening the right way (through lowering corporate tax rates and closing loopholes) are slim to none. Remember, we have the highest corporate taxes in the world. Yes, as a percent of GDP corporations pay less than in other countries, but that is a function of our high taxes. High taxes here incentivize corporations to play all sorts of transfer pricing games in order to maximize costs in the US and maximize revenues overseas. The solution is not to raise corporate taxes further, as it will only incentivize more of this behavior. Not to mention it effectively subsidizes foreign governments, as the overseas subs of these companies are declaring artificially high levels of profit. The answer is to lower taxes to be in line with our competitors. If you are the most expensive gas station in town, and you want to increase revenues, you don’t hike prices more – you lower prices and capture more market share.

Janet Yellen will be in front of Congress on Tuesday and Wednesday. If there is going to be anything market moving, it will probably be in the prepared remarks. The Humphrey-Hawkins testimony is largely a dog-and-pony show where politicians are more interested in making their political points than getting an answer out of the Fed Chairman. Expect the left to complain about income inequality and to push Yellen to claim it is a drag on the economy. Expect the right to complain about government spending and to push Yellen to claim the high level of debt is a drag on the economy. The elephant in the room will be how the Fed extricates itself from QE and ZIRP with a balance sheet the size of Jupiter.

The CFPB is warning mortgage brokers that they cannot escape compensation caps by switching to a mini-correspondent model.

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