Finance

The Covid pandemic caused a backlog of almost 8 million paper-filed business tax returns at the end of 2020, according to the Treasury Inspector General for Tax Administration.
That’s a 3,230% increase relative to the same time in 2019, the watchdog said.
The IRS had reduced that backlog to 291,000 by July 2021, according to an IRS official.

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The Covid-19 pandemic caused a backlog of nearly 8 million paper-filed business tax returns at the IRS in 2020, according to a report issued Tuesday by a U.S. Treasury Department watchdog.
That represents a 3,230% increase relative to the end of 2019, when the IRS had about 239,000 paper returns waiting to be processed, according to the report, published by the Treasury Inspector General for Tax Administration.

The delays are largely a result of “unprecedented and drastic actions” the IRS took to protect employees and taxpayers during the Covid-19 pandemic, the report said.
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Those measures included shutting Tax Processing Centers and other offices nationwide in early April and extending the federal income-tax filing deadline to July 15.
Backlogs primarily affected employment tax returns, nearly 5.5 million of which were awaiting processing at the end of 2020, according to the watchdog report. Delays also affected business tax returns for partnerships, corporations, estates and gifts, fiduciaries and tax-exempt organizations, for example.
The business tax return backlog has declined significantly, to 291,000 as of July 2021, according to a letter written by Kenneth Corbin, commissioner of the IRS wage and investment division, in response to the report.

The IRS expanded its telework operations, hired about 3,500 new employees in processing operations and transshipped more than 2.3 million returns, forms and documents between processing centers to balance inventories and prevent bottlenecks, he said.
“We took, and continue to take, innovative actions to address the accumulation of inventory while simultaneously protecting the health and safety of our employees and the taxpaying public,” Corbin wrote Aug. 11.
The agency also offered incentive pay and overtime for employees, according to the report.

However, the IRS continues to have difficulty hiring enough staff to continue processing tax-year 2020 returns, the report showed. The agency had met 63% of its recruitment goal for processing operations as of July, Corbin said.
“The inability of the IRS to hire sufficient staff will affect taxpayers awaiting refunds or that have claimed pandemic business credits,” the report said.

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Check out the companies making headlines in midday trading.
Spotify — The streaming company saw shares rise 2.2% after KeyBanc upgraded Spotify to overweight from sector weight. The firm said in a note to clients that the company was still showing faster growth than potential competitors.

Terminix — Terminix added nearly 1% after Bank of America double upgraded the stock to buy from underperform. Bank of America said the pest control stock’s weakness this year creates a “solid buying opportunity,” while it sees a “positive risk-reward” today.
Boeing — Shares of the aircraft maker slipped by almost 2%, dragging on the Dow, after Ryanair ended talks over a purchase of 737 MAX 10 jets. The deal would have been worth tens of billions of dollars, Reuters reported.
Match Group — The online dating company’s stock jumped 7.5% after announcement that Match will be added to the S&P 500 benchmark. As of Sept. 20, Match Group will replace Perrigo Company in the large-cap equity index.
Netflix — Shares of the streaming service gained 2.7% after Atlantic Equities hiked its price target on it to $780 from $690, the highest among major Wall Street analysts and 32% above where the stock closed on Friday. Atlantic raised its subscriber projections for 2024 and said it expects Netflix to have 311 million subscribers in 2025, compared with 209 million at the end of the second quarter.
Coinbase — The crypto services company’s stock dropped about 4% as the price of bitcoin plummeted about 10% on the day it became legal tender in El Salvador – though the rollout didn’t go smoothly, with the country disconnecting its government-run bitcoin wallet early in the morning for software enhancements. Coinbase stock trades in tandem with the bitcoin price.

State Street — The financial firm saw shares fall 3.8% after announcing its plans to acquire Brown Brothers Harriman’s Investor Services business for $3.5 billion in cash, including its custody, accounting, fund administration, global markets and technology services. The deal is expected to close at the end of the year.
PPG Industries — Shares of the paint maker dropped 3.4% after the company warned of supply chain disruptions and higher input costs that could weigh on sales this quarter. The company said it expects third-quarter sales to be $275 million, lower than the company’s forecast at the start of the quarter by about $225 million.
Johnson & Johnson, Merck, Amgen — Large-cap pharmaceutical stocks fell after Morgan Stanley downgraded them, saying they have limited upside. The firm changed its ratings on Johnson & Johnson, Merck and Amgen to equal weight from overweight. The stocks fell about 1.5%, 1.6% and 2.2%, respectively.
 — CNBC’s Maggie Fitzgerald, Hannah Miao, Jesse Pound and Yun Li contributed reporting

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Congressional Democrats are considering reforms to the 20% pass-through tax deduction for businesses as part of a $3.5 trillion spending measure.
They would phase out tax benefits for those with income exceeding $400,000 and make the tax cut available to more entrepreneurs below that threshold, according to a discussion list obtained by CNBC.
Most of the deduction’s benefits accrue to taxpayers with income of more than $500,000.

Phil Roeder

Congressional Democrats are considering reforms to the 20% pass-through tax deduction as part of a $3.5 trillion federal spending package.
Democrats’ proposal would phase out the tax break for business owners with taxable income exceeding $400,000, according to a discussion list obtained by CNBC. It would also make the tax cut available to more people below the $400,000 threshold by removing some existing restrictions.

A discussion list is a draft of ideas that lawmakers assemble before formally pitching them in the House or Senate. Democrats are weighing changes to the tax code to help raise money for up to $3.5 trillion in spending on climate, education, paid leave and other measures.
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Reforms to the pass-through deduction would raise “significant revenue while providing a new tax cut for Main Street small business owners,” according to the list.
The deduction, also known as 199A, was created by Republicans’ 2017 tax law, President Donald Trump’s signature legislative achievement. It lets the owners of pass-through businesses — such as sole proprietors, partnerships and S corporations — write off 20% of their business income.
Most of its benefits accrue to wealthy taxpayers.

In 2018, about 53% of its $40 billion value went to those with incomes over $500,000, according to the Joint Committee on Taxation, a nonpartisan body that reports to the U.S. Congress. By 2024, that share is expected to grow to 61% of a total $60 billion.

Potential changes

While Democrats’ discussion list is short on details, the pass-through policy changes it floats sound like concepts that Senate Finance Committee Chairman Ron Wyden, D-Ore., included in a recent bill.
Wyden’s legislation would phase out the 20% deduction for business owners whose taxable income exceeds $400,000, eliminating the tax break completely once income breaches $500,000.
The Wyden-sponsored bill would also expand eligibility for the tax break.

Currently, owners of certain service businesses — such as lawyers, doctors, veterinarians and financial advisors — can’t get the full deduction if their income exceeds $164,900 (single filers) or $329,800 (married couples filing jointly) in 2021. They can’t get it at all if their income exceeds $214,900 (single) or $429,800 (married).
The pass-through deduction is scheduled to disappear after 2025, meaning any reforms would end after a few years’ time absent an extension. President Joe Biden didn’t propose changes to the tax break in his annual budget.
Some business groups have argued that limiting or repealing the deduction would hurt small businesses and lead to fewer jobs, lower wages and less economic growth.
“Such changes would amount to a direct tax hike on America’s Main Street employers, a key reason why the tax plan released by the White House in March left the deduction fully intact,” according to a joint letter published in June by a coalition of trade associations.

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Michael Sonnenshein, CEO of Grayscale Investments, warned Tuesday that the SEC would be making a mistake if it granted approval to an ETF based on bitcoin futures ahead of one tied to the cryptocurrency itself.
A futures-based ETF would cost investors more in fees because of the inherent expense of rolling over futures contracts as they expire, Sonnenshein said.
It could also harm investors who currently hold the Grayscale fund, which is known by its GBTC ticker, he said.

The CEO of the investment firm running the world’s biggest bitcoin fund sounded off on comments made by Securities and Exchange Commission Chair Gary Gensler about the likely approval path for the first U.S. bitcoin ETF.
Michael Sonnenshein, CEO of Grayscale Investments, warned on Tuesday that the SEC would be making a mistake if it granted approval to an ETF based on bitcoin futures ahead of one tied to the cryptocurrency itself. His firm has been seeking to convert the massive Grayscale Bitcoin Trust, which owns bitcoin rather than contracts tied to its future price, into an ETF.

“It would be shortsighted of the SEC to allow a futures-based product into the market before a spot product,” Sonnenshein told CNBC’s “Squawk Box” on Tuesday. “They really should be allowing both products into the market at the same time and let investors choose which way they want.”
Last month, Gensler signaled a preference for reviewing applications from investment firms seeking to launch ETFs tied to bitcoin futures that trade on the Chicago Mercantile Exchange. That’s an alarming development for Grayscale, which has sought to convert its bitcoin trust into an ETF since 2016. The approval of the first bitcoin ETF in the U.S. is viewed as a crypto milestone because it would aid in the adoption of the nascent asset class.
During the “Squawk Box” discussion and in a follow-up phone interview, Sonnenshein warned of potential downsides to the SEC’s position. A futures-based ETF would cost investors more in fees because of the inherent expense of rolling over futures contracts as they expire, Sonnenshein said.
Further, investors who want an investment fund that more closely tracks the price of bitcoin may gravitate toward a futures-based ETF, which could siphon away capital from the flagship Grayscale product, he said. That’s one of the main reasons Grayscale wants to convert its fund, known by its ticker GBTC, to an ETF. As currently constructed, the fund can trade at a discount or premium to bitcoin itself.
“If a futures-based ETF comes to market without the ability for GBTC to convert to an ETF, it has the potential to harm investors who hold tens of billions of dollars’ worth of GBTC today outright, as well as the investors who have exposure to GBTC inside mutual funds, retirement accounts and other places,” Sonnenshein said in the phone interview.

Overall, he viewed the SEC’s stance as bullish for bitcoin because if regulators are comfortable with derivatives tied to the cryptocurrency, it suggests they are comfortable with the underlying asset class.
Grayscale’s bitcoin trust has $32.4 billion in assets under management and holds more than 3% of the available supply of bitcoin, Sonnenshein said.
The SEC didn’t immediately respond to a request for a reaction to Sonnenshein’s comments.
This story is developing. Please check back for updates.

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Check out the companies making headlines before the bell.
JD.com (JD) — Shares of JD.com gained 1.5% in early morning trading after the Chinese e-commerce giant appointed a new president. The company’s founder and CEO Richard Liu is stepping back from day-to-day operations, while Xu Lei, previously CEO of JD Retail, will take the president role and fulfill those duties.

Boeing (BA) — Boeing shares dipped 0.8% in premarket trading after Ryanair, one of Boeing’s biggest customers, said it ended talks to purchase 737 MAX 10 jets. The deal would have been worth tens of billions of dollars. Ryanair cited disputes over prices.
Moderna (MRNA) — The biotechnology and pharmaceutical stock ticked 1.3% lower in early morning trading after White House chief medical advisor Dr. Anthony Fauci said the rollout of Moderna’s Covid-19 vaccine booster shots in the U.S. could be delayed. Fauci said Pfizer’s booster shots will likely be ready by Sept. 20; Pfizer shares ticked 0.2% higher in the premarket.
PPG Industries (PPG) — Shares of the paint maker dropped 4.8% in premarket trading after the company warned that supply chain disruptions and higher input costs are expected to weigh on sales this quarter. PPG expects third-quarter sales to be $275 million, $225 million lower than the company’s forecast at the start of the quarter.
Spotify (SPOT) — Spotify shares gained 4.2% in the premarket after KeyBanc upgraded the music streamer’s stock to overweight from equal weight. KeyBanc said Spotify is growing its user base faster than peers.
Johnson & Johnson (JNJ), Merck (MRK), Amgen (AMGN) — Morgan Stanley downgraded several large-cap pharmaceutical stocks, saying upside is limited for those names. The firm changed its ratings on Johnson & Johnson, Merck and Amgen to equal weight from overweight. All three names moved lower in the premarket.

Terminix (TMX) — Shares of Terminix added 4.3% in the premarket after Bank of America double upgraded the stock to buy from underperform. Bank of America said the pest control company’s turnaround “will take time to fully deliver,” but it sees a “more positive risk-reward today.”
Cirrus Logic (CRUS) — Cirrus Logic shares gained 3.4% in early morning trading after Barclays upgraded the semiconductor stock to overweight from equal weight. Barclays sees further content gains at Apple benefiting Cirrus Logic over the next few years.
Match Group (MTCH) — Shares of Match Group surged 9.5% in the premarket after news that the company would join the S&P 500 later in September. The online dating company will replace Perrigo Company.

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Forty-eight percent of renters are worried they won’t be able to afford a home during their lifetimes, according to a Lending Tree survey.
That concern is most acute among Gen X and millennials, cohorts that are in their peak earning years.
The middle class depends on home equity as a source of wealth more than upper-income families.

Forty-eight percent of renters worry they won’t be able to buy a home during their lifetimes, according to a new Lending Tree survey.
That concern is largest among renters in Generation X (41 to 55 years old) and millennials (25 to 40 years old). To that point, 55% of Gen X renters and 52% of millennial renters are worried about their prospects of homeownership, according to the survey, which was published Aug. 31.

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“People in the midst of their careers, especially Gen Xers in their peak earning years, are thinking, ‘If I haven’t bought a house at this point, it’s probably not going to happen,” said Jacob Channel, a senior economic analyst at Lending Tree.
The sentiment is concerning since homeownership represents a large source of wealth for the average family, Channel said.
“What they’ve been seeing for a while now, especially [during] the pandemic, is home prices rising really, really fast and wages not necessarily keeping up,” Channel said of renters.

The U.S. middle class depends on home equity as a source of wealth more so than wealthy families, who tend to own more financial assets like stocks and bonds, according to the Pew Research Center.

Americans held $34 trillion in real estate assets in the first quarter of 2021, or about 23% of total household assets, according to Federal Reserve data. Households also had $11 trillion in total home mortgage liabilities.
Lending Tree’s online survey polled 2,050 U.S. consumers from Aug. 2 to 6. The firm hasn’t conducted this survey annually, making it difficult to compare homeownership sentiment in past years.

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FEW MIGHT have guessed that Guinea, a west African country of 13m people, played a big role in global commodity markets. In recent years the country has ramped up its production of bauxite, a dirty-red ore that is processed to make aluminium, thanks to hefty investment from China. In 2020 Guinea produced around 90m tonnes of the stuff, about a quarter of the global total, up from 21m in 2015. It now supplies more than half the bauxite used in Chinese refineries. And those refineries, in turn, produce more than half the world’s aluminium.Small wonder then that the military coup that threw Guinea into turmoil on September 5th also reverberated in commodity markets. The price of aluminium went on to reach its highest level in ten years. (Guinea is also home to Simandou, one of the world’s richest untapped deposits of iron ore. Share prices in China Hongqiao and Rio Tinto, two investors in Simandou, dipped when news of the coup broke.)Guinea is only the latest factor behind the surging aluminium price. So far this year it has shot up by around 40%, faster than that of any other highly traded metal. One reason is growing demand. Locked-down consumers slurped more beverages at home, boosting demand for aluminium cans. As economies have slowly recovered from the deep downturn of 2020, demand for aluminium for construction has picked up. Sales of electric vehicles, which tend to contain a bit more aluminium than conventional cars, have pushed up demand, too.Supply constraints, however, have been more important. In August a fire put a large refinery in Jamaica out of action. Rio Tinto is trying to resolve a workers’ strike at a smelter in Canada. Even bigger disruptions stem from China. Making aluminium uses a huge amount of energy (some traders refer to the metal as “congealed electricity”). New energy-consumption targets have led some provincial authorities, such as those in Inner Mongolia and Xinjiang, to scale back aluminium production. Drought in Yunnan, meanwhile, has limited the supply of hydropower. Together these could lower Chinese annualised aluminium output by about 5%, estimates Gregory Shearer of JPMorgan Chase, a bank.Whether the coup in Guinea will limit supply further is unclear. So far, mines in the country are still running, ships are still being loaded with bauxite and warehouses in Chinese ports are well stocked. That may explain why the price reaction has been modest (see chart). But analysts worry that other countries will impose sanctions on the new government, or that the new regime itself will tax miners. Either would disrupt the flow of bauxite out of Guinea.Even then, however, bauxite is abundant enough that Chinese refineries have other options. This suggests that a bigger concern for the aluminium market is where Chinese regulations go next. Authorities are already worried about soaring metals prices hurting Chinese manufacturers. They have released some aluminium, along with other metals, from their strategic reserves to try to curb inflation.This objective bumps up against others. One is the energy-consumption targets. Another is a limit on China’s aluminium output, set in 2017, when authorities thought the country was producing too much. If Chinese refineries start to restrict production as they approach the threshold, prices may rise until new capacity is built elsewhere.One possibility is that China starts to move production abroad, to countries where labour is cheap. Indonesia is a possible location. Some nickel production has already moved there and China Hongqiao, the world’s largest aluminium producer, recently said it would expand its refinery operations there. Guinea’s new rulers may end up selling their bauxite to Indonesian firms—with China’s help, of course. More

Longtime market bull Tom Lee is predicting a profitable period for investors in September.
According to Lee, the S&P 500 is positioned to surge more than 100 points this month. However, he warns the positive momentum has an expiration date.

“We could have a really strong rally in September,” the Fundstrat Global Advisors’ co-founder and head of research told CNBC’s “Trading Nation” on Friday. “We didn’t think there was a window for a 10% correction for most of 2021. The window where we think you could start to have potentially a 10% pullback is October.”
Lee attributes the vulnerability to growing fiscal and monetary policy risks — as well as uncertainty surrounding the pandemic and flu season.
“We get that much closer to tapering,” the CNBC contributor said. “That’s really when the debt ceiling rhetoric comes back, and if there are going to be concerns about the debt ceiling, the bond market could panic.”
When there’s upheaval in the bond market, it typically spills to stocks. But in the meantime, Lee indicates he would be a buyer.
He sees uncertainty regarding Covid-19 delta cases and its economic impact pushing the Federal Reserve to stay dovish for longer. According to Lee, it’s a recipe for new market highs.

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“The U.S. is still in an underlying expansion. This is a risk on formula,” said Lee, who ran equity strategy for JPMorgan Chase from 2007 until 2014.
He cites a crude oil price comeback and bitcoin’s return above $50,000 as evidence.
Lee’s top market picks still involve trades most tied to the economic recovery. He particularly likes energy, and materials. He also sees opportunities in FAANG stocks, otherwise known as Facebook, Amazon, Apple, Netflix and Alphabet.
“My guess is that quite a number of investors thought we’d have a 10% correction in August,” Lee said. “So, money was taken off the table. Usually when people re-risk they start buying cyclical and epicenter ideas.”
Lee believes the S&P 500 could exceed 4,650 in September — 50 points above his year-end target. On Friday, the index closed at 4,535.43 and is about a quarter of a percent below its record high.
Disclosure: Tom Lee owns bitcoin.
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