Convenience Store News

FEB 2017

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40 Convenience Store News | FEBRUARY 2017 | WWW.CSNEWS.COM EXPERT'S VIEW passes many of the tax and regulatory reforms that are being advocated by President Trump and House Speaker Ryan, and the outlook for faster economic growth quickly materializes. Fed Chairwoman Janet Yellen, in her December press conference announcing the federal-funds rate increase, was unwilling to attribute any of the Fed's more bullish forecasts to Trump's election as President of the United States. She indicated a desire to adopt a more wait-and-see approach to its actual impact on the economy and ultimately, Fed policy. However, the post-election increases in the U.S. stock markets and longer term market interest rates certainly tell a different story. For example, the yield on the 10-year Treasury Note climbed by 84 basis points in the last quarter of 2016, the largest quarterly gain since 1994. Many Fed watchers are wondering out loud if the Fed is still acting too cautiously and running the risk of letting the economy overheat and inflation take off. Keep in mind, the Fed is currently forecasting the federal-funds rate will rise by only 75 basis points in 2017. This forecast is only 25 basis points higher than the Fed's pre-election assumption. Many companies in the C&G industry that com- pleted numerous acquisitions during this period of historically low interest rates may now face the unan- ticipated risk that the cash flow needed to service their current debt payments has been vastly underestimated. This new reality could be especially painful for some of the larger master limited partnerships (MLPs) that are already under market pressure to lower their over- all level of existing debt. NEW REGULATORY ENVIRONMENT President Trump's picks of Oklahoma Attorney General Scott Pruitt to lead the Environmental Protection Agency (EPA) and businessman Andy Puzder, chief executive of CKE Restaurants Holdings Inc., the parent company of the Carl's Jr. and Hardee's burger chains, to be Labor Secretary were positively received by most members of the business community. Puzder has been a vocal advocate for cutting back or eliminating many of the new labor regulations passed during the Obama Administration. He has also argued against raising the federal minimum wage higher than $9 an hour, far less than the $15 an hour most Democratic members of Congress are currently proposing. Since minimum wages will increase in 20 states in 2017, impacting approximately 4.4 million workers across the country, the business community could instead, a buyer of real estate assets would be able to treat the entire cost of acquiring property, exclud- ing land, as a business expense that could be used to reduce taxable income. It is certainly too early to tell how these interrelated revisions to the tax code will impact every industry or company. In addition, companies that recently completed major acquisitions are concerned about how the elimi- nation of depreciation and interest payments would be phased in under any new law. The large C&G consolida- tors that have completed numerous acquisitions during the recent merger mania in the industry may all of a sud- den lose their previously anticipated tax deductions that will certainly increase future taxable income and offset some of the positive benefit of the lower tax rates. How all these tax changes will impact each company and sec- tor of the economy is far from certain. NEW INTEREST RATE ENVIRONMENT In December 2016, the Federal Reserve showed increased optimism in the U.S. economy's outlook and raised the federal-funds rate by 25 basis points — only the sec- ond rate increase the Federal Open Market Committee (FOMC) has approved in a decade. Many members of the Fed's board of governors have commented for years that the Fed monetary policy alone could not revive the historical rate of economic growth in the U.S. economy and that major fiscal and regulatory reforms at the fed- eral level were needed to achieve this goal. Until these types of reforms were implemented, most economic experts have assumed that the Fed would move very slowly and cautiously toward removing what has been an unprecedented level of monetary stimulus from the economy since the Great Recession that started in 2007. Numerous economists are now predicting that the Fed may have to raise interest rates faster and higher than currently forecasted if the U.S. Congress quickly

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