Value capture: a good idea to fund infrastructure but not easy in practice

Marion Terrill and Owain Emslie are the authors of the new Grattan Institute report, What price value capture?

….Federal ministers from the prime minister down are enthusiastic about value capture and are pushing the states to embrace it. Only last week, Urban Infrastructure Minister Paul Fletcher reiterated that the Commonwealth does not want to be “just an ATM” for the states. But if the federal ministers face up to some home truths, they may find value capture less to their liking.

Value capture is a tax

Home Truth No. 1 is that a value-capture scheme is a tax. That’s how it raises revenue…..

Which brings us to Home Truth No. 2: to raise a reasonable amount, a value-capture tax would need to include the family home….. A tricky question of who’s in and who’s out.

Home Truth No. 3 is that many taxpayers are likely to feel aggrieved…..Drawing a boundary around a new piece of infrastructure to distinguish between those who must pay the new tax and those too far away to benefit is bound to involve rough justice.

Broad-based land tax is better still

A better answer still could be a broad-based land tax. Such a tax is highly efficient, because land is an immobile tax base (see the chart below).

While it would not zero in on the beneficiaries of new infrastructure, a land tax would capture the effects of all infrastructure, old and new, as these translated into land values, making it scrupulously fair. A broad-based land tax would also be simpler to administer than a value-capture tax. That’s because there would be no requirement to police the geographic boundary of the catchment area.

So a broad-based land tax has some distinct advantages over a value-capture tax…..

One of the biggest dangers with any tax is complexity. It promotes the perception of unfairness and makes collection difficult.

Funding infrastructure is a headache for government. Benefits from increased indirect taxes like personal and company taxes may prove elusive. “User pays” taxes, like road tolls, tax direct users but assume that every user benefits by the same amount. And they have no way of taxing others who indirectly benefit — landowners who build a new shopping centre for example.

A broad-based land tax is far more efficient than indirect taxes and fairer than narrowly-focused direct taxes, while encouraging broader use of new infrastructure assets.

An example of the pitfalls surrounding infrastructure funding is the Skye Bridge in Scotland, a road bridge which connects the Isle of Skye via the A87 to the mainland. The bridge was built by a private consortium and opened in 1995.

Skye Bridge

Locals objected to the tolls charged (a round trip cost £11.40). Mass protests followed and a prolonged non-payment campaign. Despite numerous prosecutions, by 2004 the issue had become such a political hot potato that the Scottish government purchased the bridge for £27m and abolished the tolls.

Land taxes would have stood a better chance of success, especially if weighted towards land and businesses that would receive the greatest benefit. They also ensure public ownership of monopoly assets that may be exploited by private operators.

Source: Value capture: a good idea to fund infrastructure but not easy in practice

Skye Bridge: Wikipedia

Sensex breakout

India’s Sensex broke through resistance at 29000, signaling another advance. Twiggs Money Flow swung upward, the trough above zero indicating strong buying pressure. Resistance at the 2015 high of 30000 may yet prove stubborn, but the target for the advance is 32000*.

Sensex Index

* Target: 29000 + ( 29000 – 26000 ) = 32000

Europe advances

Germany’s DAX is testing the band of resistance between 12000 and its April 2015 high of 12400. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Breakout is expected but we are likely to experience consolidation below 12400, or a moderate correction, ahead of this.


The FTSE 100 followed through above resistance at 7350, signaling another advance. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Target for the advance is 7600*.

FTSE 100

* Target: 7350 + ( 7350 – 7100 ) = 7600

ASX 200 bullish

The ASX 200 is testing resistance at 5800 after a weak retracement. Rising Twiggs Money Flow troughs above zero signal strong buying pressure. Breakout above 5800 is highly likely and would signal a test of 6000*.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

Dow bullish

Dow Jones Industrial Average is consolidating in a narrow band below resistance at 21000, a bullish sign. Strong buying pressure is also signaled by rising Twiggs Money Flow troughs above zero. Breakout would offer a short-term target of 22000.

Dow Jones Industrial Average

Robert Shiller: Is he right that stocks are overpriced?

I frequently come across stocks such as Netflix [NFLX], trading on a forward PE of 137 (Morningstar), or even Coca Cola [KO] and Procter & Gamble [PG] that leave me muttering about unrealistic valuations.

Nobel laureate Robert Shiller this week commented that he was no longer buying stocks as he believed they were overvalued. His justification is the CAPE index which compares current stock prices to the 10-year average of inflation-adjusted earnings.

Shiller CAPE Index

The index is below its Dotcom high but is approaching the same level that it peaked at in 1929. Is the CAPE index flawed or does this portend disaster?

Bear in mind that Shiller is not selling all his existing stocks — he has merely stopped buying — and is the first to point out that the CAPE index is a poor tool for timing market tops and bottoms.

Before we make any rash decisions let us compare Shiller’s index to a few other handy measures of market valuation.

Warren Buffett’s favorite

Warren Buffett’s favorite measure of market value is to compare total stock market capitalization to GDP. The higher the ratio, the more the stock market is overvalued.

US Market Cap to GDP

This looks even worse than the CAPE index, with market cap to GDP well above its 2007 high and well on its way to Dotcom levels.

Adapting the ratio to include offshore earnings of multinational companies makes very little difference to the results. Here I compare market cap to GNP as well as GDP. GNP, or gross national product, includes offshore earnings of domestioc companies rather than just domestic earnings as with GDP. The end result is much the same.

US Market Cap to GNP

Market Cap to Corporate Profits

When we compare market capitalization to current profits after tax, however, valuations are still high but nowhere near the irrational exuberance of the Dotcom era.

US Market Cap to Profits after Tax

The current peak resembles earlier peaks in the 1980s and 1960s.

What this tells us is that corporate profits are rising faster than GDP. And that a 10-year average may be a poor reflection of future sustainable earnings.

Sustainable Earnings

Are current earnings sustainable? There is no clear answer to this. But there are some key criteria if earnings are to remain at current levels of GDP.

First, wage rate growth remains low. The graph below illustrates how profits fall when employee compensation rises (per unit of value added).

Wage Rates

Second, that interest rates stay low. The Fed is doing its best to normalize interest rates but monetary tightening would spoil the party. That is, deliberate tightening by the Fed to subdue rising inflationary pressures.

A third element is corporate taxes but there seems little risk of rising taxes in the current climate.

The key variable for both #1 and #2 is wage rates. At present these are subdued, so no cause for alarm.

Wage Rates


Fed raises but Dollar falls

From The Age:

The Federal Reserve raised its benchmark lending rate a quarter point and continued to project two more rate increases this year, signalling more vigilance as inflation approaches its target.

“In view of realised and expected labour market conditions and inflation, the committee decided to raise the target range for the federal funds rate,” the Federal Open Market Committee said in its statement on Wednesday. “Near-term risks to the economic outlook appear roughly balanced.”

Dollar Index

Surprisingly, the Dollar Index fell sharply on news of the announcement. But selling was mainly traders who had anticipated a more hawkish stance on future rate increases.

Investors had anticipated the tightening. In fact, Treasury yields had climbed with the dollar on speculation the central bank might signal a faster pace of rate rises. But those trades unwound quickly after the announcement.

Source: Fed raises benchmark rate as inflation approaches target

Why Robert Shiller Is Worried About the Trump Rally – Bloomberg

According to Bloomberg, Nobel Prize-winning economist, Robert Shiller, says he is not buying stocks at present:

….One factor that makes him cautious on American shares is the S&P 500’s cyclically-adjusted price-earnings ratio: While the metric is still about 30 percent below its high in 2000, it shows stocks are almost as expensive now as they were on the eve of the 1929 crash.

“The market is way over-priced,’’ he says. “It’s not as intellectual as people would think, or as economists would have you believe.’’

Robert Shiller’s CAPE compares current prices to a 10-year moving average of inflation-adjusted earnings. That is likely to be distorted by losses incurred in 2009 which are more of a (hopefully) once-in-a-generation event.

Source: Why Robert Shiller Is Worried About the Trump Rally – Bloomberg

Equities Could See a Setback, But This Bull Market Isn’t Over | Bob Doll

Sensible view from Bob Doll at Nuveen:

….Given evidence of stronger economic growth, we could see the Fed become slightly more aggressive about its rate policies, but probably not to the point that it would derail the equity bull market.

On balance, we think the risks are skewed to the upside for stocks. While we could see higher volatility and a near-term correction, we expect equities to move higher over the coming year.

Source: Weekly Investment Commentary from Bob Doll | Nuveen

Government, CBA in landmark $230m solar deal

Mathew Dunckley from The Age reports on a new $230 million solar project:

The backers of three large solar farms have locked in the final piece of their funding puzzle after securing debt financing from a group including the federal government and Commonwealth Bank of Australia.

Local developer Edify Energy and its German investor, Wirsol, will now look to begin work on the farms in Queensland and Victoria and have the first power flowing by early next year.

….The combined project will add 165MW of renewable energy capacity to the national electricity grid by the start of next year and generate enough electricity to power an estimated 87,000 households.

The Clean Energy Finance Corporation (CEFC) will provide $77 million, taking its total large-scale solar commitments to $281 million across seven projects.

….The lending consortium brings together the CEFC, Commonwealth Bank and Germany’s NORD/LB.

CBA’s managing director and global head of infrastructure, Michael Thorpe, said the bank was proud to support the “landmark” transaction.

“The strong risk profile and expertise of both Edify Energy and Wirsol contribute to excellent project fundamentals of the Whitsunday, Hamilton and Gannawarra solar farms,” he said.

This infrastructure project ticks all the right boxes:

  • private-public partnership
  • leading international expertise
  • renewable energy
  • short delivery time

The big question is whether electricity delivery will be at competitive prices.

Source: Government, CBA in landmark $230m solar deal

India: Sensex resistance continues

India’s Sensex continues to meet resistance at 29000. Twiggs Money Flow now displays a mild bearish divergence. Breakout above 29000 would find resistance at the 2015 high of 30000 which may prove stubborn. Reversal below 28000 is less likely but would warn of another test of primary support at 26000.

Sensex Index

Europe advances

Dow Jones Euro Stoxx 50 represents the 50 largest blue chip stocks (Volkswagen, Bayer, Allianz, L’Oreal, Phillips, Unilever, etc.) in the Eurozone, in terms of free-float market capitalization. Breakout above resistance at 3330 signals an advance to 3500*.

Dow Jones Euro Stoxx 50

* Target: 3300 + ( 3300 – 3100 ) = 3500

The FTSE 100 is testing support at its former resistance level of 7350. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Respect of support is likely and would confirm an advance to 7500*.

FTSE 100

* Target: 7100 + ( 7100 – 6700 ) = 7500

Long-term target is 8000: 7000 + (7000 – 6000).

ASX 200: Resources or Banks?

The ASX 200 reflects a tussle between the resources and banking sectors which are pulling in opposite directions. The ASX 300 Metals & Mining Index is falling, with declining Twiggs Money Flow warning of long-term selling pressure.

ASX 300 Metals & Mining

The banking sector, however, is rallying. The ASX 300 Banks index recovered above 9000, signaling another advance, while rising Twiggs Money Flow indicates long-term buying pressure.

ASX 300 Banks

The banking sector is larger, but more vulnerable to shocks from other parts of the economy, so this is an even match.

The ASX 200 is again testing resistance at 5800. The ascending triangle (5600 to 5800) and rising Twiggs Money Flow are both bullish signs. Breakout above 5800 would signal a test of 6000*.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

Banking performance tends to lag other sectors, however. It takes time for consequences of a slow-down in other parts of the economy to impact on banks, through slower growth and higher bad debt provisions. I expect stubborn (ASX 200) resistance at 6000.

Dow: How long will stage III last?

Dow Jones Industrial Average is testing resistance at 21000. Another narrow consolidation, as in December-January, would confirm strong buying pressure already signaled by rising Twiggs Money Flow troughs above zero.

Dow Jones Industrial Average

We are witnessing stage III of a bull market. While this is the final leg, it could last several weeks or several years. My guess is that it will last until the Fed is forced to hike interest rates in 2018, to cool inflation.

CEO pay is rigged | Barry Ritholz

From Barry Ritholz:

CEO pay is rigged.

If that sounds more like a late-night presidential tweet than a fact, let’s consider the evidence.

The compensation packages of the chief executive officers of America have been rising faster than just about any rational metric upon which they are supposedly based. “CEO pay grew an astounding 943% over the past 37 years,” according to a recent Economic Policy Institute analysis. EPI further observes this was a far faster growth rate than “the cost of living, the productivity of the economy, and the stock market.”

CEO compensation isn’t the pay for performance its advocates claim. Instead, it is unmoored from any rational basis.

We may blame corporate boards for allowing this abuse to happen, a breach of their duty of stewardship, but why isn’t more being done about it?

Those in the best position to press for changes in executive pay are the giant fund companies like BlackRock Inc. and Vanguard Group Inc….. Vanguard Chairman and CEO Bill McNabb said in an interview last fall that rather than only rely on proxy votes, the firm has been pressuring companies behind the scenes to pare back outrageous packages. That approach makes sense, given that the indexing giant, for the most part, can’t simply sell the stock of uncooperative companies without uncoupling their funds from the indexes they are trying to track.

It looks like passive investing is part of the problem. Membership of an index ensures that a stock will be supported by passive, index investors. Plus boards can use stock buy-backs to support their own stock price, giving them partial control over the major performance metric on which they are rewarded.

Only active fund managers will dig deeper and rate management on their ability to create long-term value. Unfortunately their influence over stock prices is shrinking.

Source: Excessive CEO Pay for Dumb Luck – Bloomberg View

ASX 200 slows as resources fall

The Australian Resources sector has been on a tear over the last 12 months, something I was slow to pick up on. China’s PBOC stepped in to boost a slowing economy, sending property prices surging. But now the central bank is tightening monetary policy and housing price growth is slowing.

China House Prices

The ASX 300 Metals & Mining Index is losing momentum, falling below its long-term trendline. Declining Twiggs Money Flow, with peaks near zero, warns of selling pressure.

ASX 300 Metals & Mining

The fall has slowed advance of the ASX 200. Resistance at 5800 is proving stubborn. Breach of support at 5600 would complete a double top reversal, warning of a primary down-trend. But declining Twiggs Money Flow indicates no more than medium-term selling pressure at present, recovery above 5800 is more likely and would signal a test of 6000*.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

Dow Jones Industrials

Dow Jones Industrial Average closed the week above 21000 for the first time. Twelve months ago the index was at 17000, an increase of 23.5 percent. Shallow retracements since then signal buying pressure, highlighted by Twiggs Money Flow troughs above zero. The latest trough, higher than zero, reflects growing enthusiasm from investors.

Dow Jones Industrial Average

Prices are rising faster than earnings in expectation of future growth. Clearly the Dow is in Phase III of a Bull Market. As I pointed out in December, this could last for several years.

Forward P/E turns back up

Dow Jones Industrials

Dow Jones Industrial Average continues to climb, heading for a target of 21000. Rising troughs on Twiggs Money Flow signal strong buying pressure.

Dow Jones Industrial Average

The S&P 500 follows a similar path.

S&P 500

With the CBOE Volatility Index (VIX) close to historic lows around 10 percent.


However, at least one investment manager, Bob Doll, is growing more cautious:

“…we think the easy gains for equities are in the rearview mirror and we are growing less positive toward the stock market. We do not believe the current bull market has ended, but the pace and magnitude of the gains we have seen over the past year are unlikely to persist.”

Forward P/E Ratio

Bob Doll’s view is reinforced by recent developments with the S&P 500 Forward Price-Earnings Ratio. I remarked at the beginning of February that the Forward P/E had dropped below 20, signaling a time to invest.

Actual earnings results, however, have come in below earlier estimates — shown by the difference between the first of the purple (latest estimate) and orange bars (04Feb2017) on the chart below.

S&P 500 Forward Price-Earnings Ratio

In the mean time the S&P 500 index has continued to climb, driving the Forward P/E up towards 20.

This is not yet cause for alarm. We are only one month away from the end of the quarter, when Forward P/E is again expected to dip as the next quarter’s earnings (Q1 2018) are taken into account.

S&P 500 Forward Price-Earnings Ratio

But there are two events that would be cause for concern:

  1. If the index continues to grow at a faster pace than earnings; and/or
  2. If forward earnings estimates continue to be revised downward, revealing over-optimistic expectations.

Either of the above could cause Forward P/E to rise above 20, reflecting over-priced stocks.

Be fearful when others are greedy and greedy only when others are fearful.

~ Warren Buffett