Controversy in Wisconsin

Aug 11, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After a streak of nine consecutive record high closes, the Dow Jones Industrial Average closed lower on Tuesday.  Stocks have largely drifted in recent sessions with trading volumes near their lows for the year as second quarter earnings season has wound down, while the S&P 500 has failed to post a 1% daily move in either direction since the middle of May.  Stocks finally dipped into the red after President Trump warned that North Korea will be “met with fire and fury like the world has never seen.”  The market took notice.

It is hard to discuss this week without talking about the escalation of tensions between the United States and North Korea.  Although you’ve likely heard much of what I’m about to say it bears repeating.  North Korea is explicitly examining a strike on the U.S territory of Guam.  Furthermore, intelligence reports now suggest Pyongyang has successfully developed a miniaturized nuclear weapon and has up to 60 nuclear weapons in its arsenal.  The last time the U.S. went to war was 2003 when we invaded Iraq to topple the Saddam Hussein regime.  In that case, the market pulled back in the months prior to the start of the war, only to recover its losses and go on to exceed its previous high over the following twelve months.  The point I’m making is that the market usually moves ahead of the triggering event but typically recovers in the months that follow.

On to more “normal” news.  You know the kind of stories that pit politicians against one another.  You might have heard that Foxconn, the large Chinese manufacturer that is among those that make Apple’s iPhone, is planning on building a $10 billion research and development plant in Wisconsin.  The focus of the plant will be on autonomous driving which is another topic I seem to be discussing more and more these days.  However, recent reports suggest it is far from a done deal.  Wisconsin’s republican-led state senate could vote against republican Governor Scott Walker’s efforts and reject the plan.  At issue is an estimate that the state wouldn’t break even on the project for 25 years if it gives Foxconn the negotiated $3 billion in tax subsidies.  And that’s still assuming that Foxconn actually creates the 13,000 jobs it claimed it might create, at the average wage — just shy of $54,000 — it promised to create them at.  In fact, the plant is only expected to start with 3,000 jobs; the 13,000 figure is the maximum potential positions it could eventually offer. If the factory offers closer to 3,000 positions, the report notes, “the breakeven point would be well past 2044-45.”

While this one isn’t about autonomous cars, it is about pilotless planes.  According to new research by UBS, pilotless planes could not only be the future method of transport, but an “economically-beneficial one too.”  The report believes there may be a material profit opportunity of more than $35 billion per year for the aerospace and aviation industry.  It states commercial aircraft already use computers and technology on-board to assist in a number of functions, including the autopilot system.  Would you buy a ticket for a pilotless fare?  More importantly, will we still have to pay baggage check fees?

In closing, we turn to the theme of unintended consequences.  Sometimes the best of intentions can backfire in their outcomes.  In a surprising twist, Philadelphia’s tax on soda has made these carbonated beverages more expensive than beer in the city.  A new study from the nonpartisan Tax Foundation found that the 1.5-cent per ounce tax has fallen short of revenue projections and has forced some Philadelphians to drive outside the city to buy groceries.  Philadelphia’s tax on soda is 24 times higher than its tax on beer.  The irony is that the study found consumers facing taxes on sugary drinks are more willing to substitute alcoholic beverages in place of soda, mitigating the original reason for the tax, the reduction of caloric intake and perhaps creating new issues in the process.  Now you know.

August 11, 2017

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