Alpha Agenda, ASSA edition

As a reminder, this is still new, so suggestions are welcome! Please send them to alphaville[@] or alex[dot]scaggs[@]

On the agenda:

Welcome to US earnings season, everyone! It’s going to be a weird one, as companies see what share of tax-bill costs global they can pull forward into 2017.

From equity strategists at Bank of America Merrill Lynch:

Repatriation to boost recurring EPS by 2%, but with a big one-time charge

With an estimated $1.2tn in S&P 500 ex-Financials overseas cash and as much as $1.3tn in additional non-cash accumulated overseas profits, the one-time tax bill on deemed repatriation could result in an additional $215bn tax liability, or $25/share. The cash impact of the repatriation tax is likely to be even greater, as some of the biggest multinationals provision for US taxes on a portion of their foreign earnings, but have yet to pay the taxes. We estimate that cash owed to the US government for the deemed repatriation could be as much as $300bn, or $35/share (payable over eight years).

Bank of America itself reports on Thursday, and has said the tax bill will take a $3bn bite out of its 4Q earnings. Most of that will come from writedowns of the value of deferred tax assets, or DTAs, which include some lingering deferrals from financial-crisis-era losses.

JPMorgan reports Friday — CFO Marianne Lake said that the tax law effects would be “negative and not small” at a December conference, but said that most of it would be repatriation costs, with offsets from deferred tax liabilities.

Delta Air Lines, which reports Thursday, expects a charge of $150-$200m.

The real tax-writedown fireworks should come next week, though, in Citigroup’s quarterly results. CFO John Gerspach said at the December conference that the bank could write off as much as $20bn this quarter, with $16bn to $17bn of the charge coming from the lower value of deferred tax assets. (That was his estimate under the proposed 20-per-cent corporate tax rate. The final rate was 21 per cent, so the charge could be slightly less.)

Here’s a breakdown of the effects of deferred tax asset/liabilities by strategy from the BAML strategists:

By our estimates, Telecom would see (by far) the biggest benefit due to their significant deferred tax liabilities, followed by Staples and Discretionary. While these impacts are significant, they would generally be one-time in nature (and thus may not benefit pro forma EPS despite the GAAP benefit).

Planning ahead:

We pulled aside former Reserve Bank of India Governor Raghuram Rajan at the ASSA annual meeting last week, and asked what’s top of his agenda for the week(s) ahead.

First on his schedule was a trip back to the University of Chicago, where he teaches international corporate finance. Broadly, though, he’ll be watching highly leveraged industries for signs of pain as central banks withdraw the “tremendous amount of liquidity” they have sent into the system since the financial crisis.

In specific, he’ll be paying attention to housing in Canada, Australia and Sweden; US car loans; and private-equity pricing, which he described as “…what is the euphemism? Robust.”

Getting local, dry January style:

Happy New Year! As you all start cutting down on your drinking and exercising more, we should direct your attention to one recurring topic at this year’s annual ASSA meeting.

The topic was commitment devices, any current decision that limits your future options — agreeing to do a Dry January, for example. Or purchasing the Freedom App to limit your social-media browsing like Olivier Blanchard, who told ASSA attendees about his purchase while introducing a lecture on the topic from Harvard’s David Laibson.

You could also have a commitment device imposed on you by a government or employer, as Laibson discussed in a lecture Friday night. That sounds like no fun at all, but panelists presented some interesting evidence on the potential benefits of some targeted government interventions.

One group studied slot machines. In 2001, the Albertan government decided to gradually move slot machines from bars into designated gambling areas over an 11-year period. The moves happened gradually over 11 years, which gave researchers a nice “semi-natural experiment”.

They found a statistically significant drop in bankruptcies in the neighborhood directly around the machines — like, 100 meters or less — even though the overall number of machines didn’t fall significantly.

Over at One Southwark Bridge:

Unless JFK has devolved into complete chaos (which seems likely), Alex should be in the air on her way to OSB by the time you read this. And because this is a full-service newsletter, she will buy you a coffee or beer if you email her at Maybe wait until Tuesday to email, though. Her flight left New York at 2am her time (7am yours).

Closing quote:

More Dry January motivation from one of our commitment-device panelists:

Our findings show that greater access to alcohol led to higher demand for credit in both the pawn credit market and the mainstream credit market. In addition, we document that increased access to alcohol led to higher default rates. Finally, consistent with the idea that alcohol may lead to poor decision making in other dimensions, and therefore has indirect costs, we document that the increase in alcohol consumption had also spillovers to the labor market. Specifically, treated populations were likely to experience higher rates of unemployment and lower wages. Since alcohol consumption is triggered by present bias, and its consumption imposes direct and indirect costs on consumers, policymakers can improve financial wellbeing of myopic consumers by limiting their access to alcohol.

Copyright The Financial Times Limited 2019. All rights reserved. You may share using our article tools. Please don't cut articles from and redistribute by email or post to the web.

Read next:

Read next:

Lookout, there’s a dollar crunch!

FT Alpha Tweets