Scary Times

Scary Times

This time of year, is fraught with scary events, the least of which is the annual Trick or Treat festivities. This year is particularly scary no matter what side of the political spectrum you happen to favor. The policy choices that will be selected in the not-too-distant future stand to have lasting effect on the economy and on the markets.

I will not cover all the policy considerations in this short space. Two possibilities that are vexing are tariffs and paying taxes on unrealized capital gains. These may not be the most critical factors to our collective future economic success, but they are worth assessing.

Walk into any department store, big box retailer, or on-line outlet and you find that much of the clothing that is available is manufactured in China. It used to be that just the less expensive merchandise was manufactured in China. Now many higher end goods are also produced there. The prices for merchandise produced in Europe are even higher. Not that anyone wears suits anymore, but the average all wool suit is $1000 and an item from a European brand can be $5000 or more. Add a substantial tariff that will be directly passed on and the cost of these items becomes prohibitive for consumers. Is it any surprise that casual dress has taken over the world.

Taxing unrealized capital gains on an annual basis is exceedingly difficult and labor intensive or may have already been implemented. There are just so many questions surrounding the implementation. The amount of revenues produced for the federal government may not be worth the effort. I believe that taxes due on a capital gain once the asset is sold are already delivering quite a bit of cash to the federal coffers. CPA’s would be called upon to do even more at a time when there is already a critical shortage in the profession.

Hopefully, there will be a high turnout for this election so preferences will be clear.

I recently attended a High Yield conference held by Smith’s Research and Gradings. The mood of the high yield participants is positive despite many select challenges. High Yield supply was very lean in the early part of the year but this status has been rectified to a degree.

It is quite clear that if an investor is to participate in the transaction, that investor wants to have other investors in the mix. Knowing the available remedies in detail before entering into a transaction is of paramount importance. Even then there are questions as to the reliability of the remedies and their legal basis. Apparently hiring outside counsel is compulsory for workouts no matter what bucket the legal team is being paid from. This practice appears to produce greater recoveries.

There were discussions about pressures facing the hospital sector. There is a need to keep the average age on the plant down and the number of days of cash on hand high. Nursing costs remain high as always when there are shortages and per diems must be hired. Reimbursement, particularly for Medicaid can be very challenging also depending on the state of operation. Despite the challenges, the volume in the sector is much higher than last year. Merge; be acquired, or close appears to be the mantra.

The session featured discussion of the ongoing Puerto Rico insolvency and the recent court rulings. The way forward remains hazardous. Much of the time was spent on the plan to restructure PREPA. I could not believe what I heard that it has already been eight years since the entire process had begun. One speculation was that there would be a settlement in the range of 20 cents to 90 cents on the dollar with a more likely outcome of 60 cents on the dollar. I know some participants would not be pleased with the latter. But what about the time value of money. Is that a consideration for any of the participants. I know from my experience on the sell side that the time value of money may be the most important consideration present. While the legal process continues to extend, patience is wearing thin. Despite the circumstances, some trading is taking place.

I prefer not to see a ruling that turns the basis for revenue bonds in the municipal market upside down. It would be better to continue to view what happens in Puerto Rico concerning the bonds as a one off.

I am not prepared to talk about volume for next year. I do believe that the first quarter will be slower due to uncertainties about policies going forward with a new administration in office.

Be safe with the scary apparitions on this Halloween.

John Hallacy

John Hallacy Consulting LLC

10/31/24