Morning in Arizona

Morning in Arizona

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Friday, October 21, 2016

Wallonia World

Financial Review

Wallonia World

DOW – 16 = 18,145
SPX – 0.18 = 2141
NAS + 15 = 5257
10 Y – .01 = 1.74
OIL + .57 = 51.00
GOLD + .50 = 1266.70

The Dow and S&P 500 ended well off their lows of the session, while the Nasdaq rallied and all three indexes ended a string of back-to-back weekly declines. For the week, the Dow advanced 0.04%, the S&P gained 0.38% and the Nasdaq picked up 0.83%.

And we are seeing higher oil prices even as the dollar continues to strengthen, back to the highest level since February; the Dollar Index topped 98. A higher dollar should affect commodity prices as well as US exports. The US is likely to embark on raising interest rates in December while others such as England and the EU are still discussing easing monetary policies. The CME FedWatch Page now puts the odds of a rate hike in December at slightly over 74%.

There are no economic reports on today’s calendar but we do have speeches from a couple of Federal Reserve officials; Fed Governor Daniel Tarullo is kind of the Fed’s point person on regulation; he spoke today at the Columbia Law School and said the Fed may introduce new more measures to test big banks’ capital and liquidity levels are strong enough to safeguard the financial system.

San Francisco Federal Reserve Bank President John Williams called for gradual rate hikes “sooner than later,” saying that waiting too long to do so could end up forcing sharp rate hikes that could choke economic growth. Williams is not a voting member of the FOMC this year. For Williams, raising rates soon and gradually has the best chance of keeping the economy growing without letting inflation get out of control, a circumstance that would require aggressive rate increases that could tip the economy into recession.

Last week Fed Chair Janet Yellen suggested that running a “high pressure economy” may be the best way to reverse damage from the financial crisis. That phrase was taken to mean a willingness to overshoot on the Fed’s inflation and employment goals for some time.

British American Tobacco has offered to acquire the 58% in Reynolds American it doesn’t already own for $47 billion in cash and shares. BAT’s proposal is worth $56.50 a share, or 20% above Reynold’s closing price of $47.17 yesterday. The deal would bring together Newport, Kent and Pall Mall cigarettes under one umbrella and create the world’s largest publicly traded tobacco company.

Qualcomm might finally put its cash to work. CNBC reports they have agreed in a handshake deal that Qualcomm will pay $110 a share for NXP Semiconductors, in a deal that would be close to $40 billion. Qualcomm has about $30 billion in cash, most of which is overseas, so acquiring a foreign company is attractive. NXP works on chips for cars, security and the internet of things, all emerging business for Qualcomm, which specializes in wireless technology like mobile phones.

AT&T and Time Warner are reportedly discussing a merger. The two sides held informal talks to discuss potential business opportunities, including a merger. Time Warner has a stock market value of nearly $73 billion. AT&T is much larger, with a market value of $231 billion. There seems to be a theme for wireless carriers to diversify by acquiring companies that offer content. And if you are experiencing a little déjà vu right now, it means you are probably old enough to remember the last time that Time Warner was one-half of a massive merger, a catastrophically ill-fated marriage to AOL 16 years ago.

At the time, AOL was an Internet juggernaut at the peak of the dot-com bubble, with a market cap of $224 billion and an aggressive appetite for growth. The deal made a certain sort of sense: Buying Time Warner would give AOL access to the old media company’s deep well of movies, TV programming and news, while Time Warner would be vaulted into the future of online distribution. “Synergy” was the buzzword. The deal went wrong; very, very wrong. AOL Time Warner had to write off $99 billion in goodwill. Just sayin.

Yesterday we told you the Wall Street Journal was planning major revisions to the newspaper, including combining sections. Today, word the paper is telling all news employees worldwide they are eligible for an “enhanced voluntary severance benefit” – that’s the first step; the next step is “involuntary layoffs”.

The earnings season is picking up pace as investors gauge the strength of corporations amid uneven economic growth. More than 80 percent of the S&P 500 Index’s companies that have released third-quarter results so far beat expectations, but it might not be enough to avoid another quarter of declining earnings.

Schlumberger reported earnings that beat estimates, but 82 percent lower than a year ago. The oilfield services company’s revenue fell slightly short of analyst forecasts. Schlumberger said there were early signs of recovery in most parts of the world, following a two-year slump in oil prices that put the brakes on global drilling activity.

McDonald’s reported third-quarter results that beat estimates. Global same-restaurant sales increased 3.5%, and same-restaurant sales in the U.S. grew 1.3%.

General Electric posted worse-than-expected revenue growth in its latest quarter. GE’s power, aviation and renewable energy segments drove industrial revenue growth, as transportation and oil and gas continued to post declines. GE said it would increase its stock-buyback program by $4 billion.

Two weeks ago, Honeywell lowered its sales and profit outlooks and preannounced the third-quarter results, saying an unexpectedly weak September and lackluster performance in the aerospace segment hurt profit. This morning, they reported results that matched the lowered expectations. For the fourth quarter, Honeywell expects sales to fall 7% to 9% due to weakness in the business jets, defense and space areas.

SAP SE climbed as it boosted its earnings and sales estimates.

Daimler AG fell amid a lower revenue forecast.

Ericsson AB slid after posting a loss.

Dyn is one of a number of outfits that host the Domain Name System, or DNS, which functions as a switchboard for the internet. The DNS translates user-friendly web addresses into numerical addresses that allow computers to speak to one another. Without the DNS servers operated by internet service providers, the internet could not operate.

And today, the internet stopped operating, at least for a while, mainly along the east coast. Dyn was attacked, a distributed denial of service attack where hackers flood the servers that run a target’s site with too much internet traffic, until the site collapses. In this case, the attack was aimed at the Dyn infrastructure that supports internet connections.

The result is that millions of internet users temporarily lost access to some of the world’s most popular websites, including: Twitter, Spotify, Reddit, CNN, Etsy and PayPal. It was a big attack, but it is too early to determine who was behind the attacks, but they appear to be precisely calibrated and on a very large scale.

It’s not just Samsung products that are overheating — Apple now has a problem, but with counterfeits. Apple said it has been buying accessories on Amazon bearing the Apple name and found that a whopping 90 percent of those are counterfeit. Even more troubling, Apple said, the phony products “pose an immediate threat to consumer safety,” because they haven’t been put through the rigorous industry standard testing Apple uses. Apple filed a lawsuit in U.S. District Court in San Francisco against Mobile Star, the company selling many of the products Apple bought on Amazon.
Will Japan ever escape deflation?
 This should come as no surprise to anyone, but Bank of Japan Governor Haruhiko Kuroda says the Bank of Japan may once again push back its 2% inflation target, which currently sits somewhere in fiscal 2017. Kuroda started his job in early 2013 and began his turbo-charged asset-purchase policy that continues to this day; he originally hoped that inflation would hit 2% by late 2014 or 2015. Almost four years later, inflation has disappeared after an initial rise.

U.K. Prime Minister Theresa May marks her first 100 days in office today, a term that has thus far been completely dominated by the Brexit debate. Prime Minister May clashed with her European counterparts in her first EU summit, where she was only allowed to give a brief update on Brexit over dinner. Though British diplomats have been calling for preparatory talks, EU leaders have remained united that no negotiations will occur until Article 50 of the EU’s treaty, which begins the official process to leave the EU, is triggered.

Have you ever heard of Wallonia? It is not some fictional country from a Marx Brothers movie, rather it is a province in Belgium, and it is the unlikely cog in the wheel of a trade deal between Canada and The Euro Union.

The fate of the trade pact with Canada — the Comprehensive Economic and Trade Agreement, or CETA — has become a symbol of how the European Union’s ability to act decisively on the world stage is losing out to parochial concerns and rising discontent with globalization. Belgium’s prime minister can only sign off on the trade pact if all provinces approve. Wallonia’s prime minister opposes the deal because he says the accord could undermine public services and industries like farming.

MetLife decided earlier this year to cut most of its U.S. life-insurance business. Now it is cutting ties with Snoopy. The 148-year-old company first used the Peanuts’ cartoon character in advertising 31 years ago as it tried to connect with U.S. consumers.

Snoopy, created by cartoonist Charles Schulz, now appears on everything from MetLife blimps to the company’s marketing and sales materials. But that need to reach consumers will shrink when MetLife spins off the bulk of its U.S. life-insurance business in the first half of 2017. Afterward MetLife will sell mostly to corporate clients in the U.S.

Stocks Finish Friday Flat, While Wielding Weekly Gains

Charles Schwab: On the Market
Posted: 10/21/2016 4:15 PM ET

Stocks Finish Friday Flat, While Wielding Weekly Gains

U.S. stocks finished the regular trading session near the unchanged mark as corporate earnings reports were in focus with the domestic economic front void of any major releases. Technology issues moved higher as Dow member Microsoft easily bested expectations, while fellow Dow component General Electric reported revenues that fell short of forecasts. Global monetary policy and political uncertainty continued to elicit concerns. Treasuries were mixed, while gold, the U.S. dollar and crude oil prices gained ground.

The Dow Jones Industrial Average (DJIA) lost 17 points (0.1%) to 18,146, the S&P 500 Index was unchanged at 2,141 and the Nasdaq Composite gained 16 points (0.3%) to 5,257. In moderate volume, 851 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.22 to $50.85 per barrel, wholesale gasoline gained $0.04 to $1.53 per gallon and the Bloomberg gold spot price added $1.27 to $1,267.03 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 98.66. Markets were mostly higher for the week, as the DJIA gained nearly 0.1%, the S&P 500 Index increased 0.4% and the Nasdaq Composite was 0.8% higher.

Dow member Microsoft Corp. (MSFT $60) reported fiscal 1Q earnings-per-share (EPS) ex-items of $0.76, above the $0.68 FactSet estimate, as revenues rose 3.1% year-over-year (y/y) to $22.3 billion, versus the expected $21.7 billion. The company said its 1Q results showed continued demand for its cloud-based services. MSFT rallied.

Dow component General Electric Co. (GE $29) posted 3Q profits ex-items of $0.32 per share, north of the estimated $0.30, with revenues increasing 4.0% y/y to $29.3 billion, below the forecasted $29.6 billion. GE noted a more challenging environment for oil & gas and related markets, while it narrowed its full-year operating earnings guidance and boosted its share buyback program by $4.0 billion. Shares closed lower.

Dow member McDonald's Corp. (MCD $114) announced 3Q EPS of $1.50, exceeding the projected $1.48, as revenues declined 3.0% y/y to $6.4 billion, topping the expected $6.3 billion. 3Q worldwide same-store sales grew 3.5% y/y, compared to the expected 1.3% gain, with U.S. sales also exceeding forecasts. MCD is traded nicely higher.

Honeywell International Inc. (HON $109) reported 3Q profits ex-items of $1.67 per share, north of the anticipated $1.60, with revenues increasing 2.0% y/y to $9.8 billion, roughly in line with forecasts. HON issued 4Q EPS guidance with a midpoint above estimates, while it reaffirmed its full-year outlook. Shares rose.

British American Tobacco PLC. (BTI $113) offered a non-binding proposal to acquire the approximate 58.0% of Reynolds American Inc. (RAI $54) that it does not currently own for about $47.0 billion. RAI acknowledged receiving the proposal and said its board will evaluate the offer and respond accordingly. BTI saw solid pressure, while RAI jumped.

Treasuries mixed to close out a busy week 

Treasuries finished mixed, while the economic calendar  was void of any major reports Friday. The yield on the 2-year note ticked 1 basis point (bp) higher at 0.83%, while the yields on the 10-year note and the 30-year bond dipped 2 bps to 1.74% and 2.49%, respectively. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her latest article, Are Bond Yields About to Rise?, at and follow Kathy on Twitter: @kathyjones.

This week, bond yields are modestly giving back some of a recent jump and the U.S. dollar continues to rally as the global markets grapple with Fed rate hike uncertainty and festering political uncertainty as the November U.S. Presidential election looms. This week's economic front was relatively positive, with industrial production ticking higher, the Fed's Beige Book noting continued economic expansion, and consumer price inflation nudging higher, while housing data was mostly positive, headlined by a stronger-than-expected existing home sales report.

Schwab's Vice President, Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Where Do the Candidates Stand? Key Issues for Investors, as part of our election 2016 commentary at, where you can also find timely analysis of The Stock Market and Election Cycles. Also, for a look at the election and the potential impact on sectors, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Election Specialat and follow Schwab on Twitter: @schwabresearch. Moreover, for analysis of the potential impact of the election on the muni bond markets, see Schwab's Senior Fixed Income and Planning Research Analyst, Cooper Howard's, CFA, and Director of Income Planning, Rob Williams' latest article,Opposing Views: How the Candidates' Tax Plans Could Affect Muni Bonds, at

Stocks were mostly higher on the week as financials found support from Bank of America Corp. (BAC $17), Dow member Goldman Sachs Group Inc. (GS $175), and Morgan Stanley (MS $33) continuing the trend of upbeat earnings from the sector. Technology issues showed some resiliency in the face of disappointing results from Dow component International Business Machines Corp. (IBM $150) and guidance from Dow member Intel Corp. (INTC $35), aided by Friday's blowout report from Microsoft. Telecom issues fell behind as Dow member Verizon Communications Inc. (VZ $48) posted disappointing revenues. Thus far in earnings season, of the 116 companies that have reported results from the S&P 500, 66.4% have topped revenue forecasts and 81.9% bested profit projections, per data compiled by Bloomberg.

As noted in the recent Schwab Market Perspective: Spinning Our Wheels, U.S. equity indexes are within the summer’s range and we believe a bullish rotation within equities may be taking place. The important third quarter earnings season is just gearing up, with expectations having been downgraded over the past couple of months, setting up the likelihood of a good quarter relative to expectations. However, some improvement in economic data and higher inflation readings leaves the possibility of tighter monetary policy from the Fed and even other central banks. Read more at

Europe mixed, Asia mostly lower

European equities finished mixed, with the euro and British pound seeing some pressure versus the U.S. dollar as the markets grappled with yesterday's unchanged monetary policy decision from the European Central Bank (ECB), which also suggested any changes will be decided on at its December meeting. Also, earnings season continued to ramp up with some mixed reads. Technology issues led to the upside aided by Microsoft's results in the U.S., while healthcare and consumer goods issues moved to the downside. Bond yields in the region finished mixed. In economic news, U.K. public sector net borrowing for September topped expectations.

With the global markets choppy amid a plethora of uncertainty/volatility, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read these articles, at and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly lower to close out the week. Global market conviction may have been stymied by recent mixed earnings and economic reports and yesterday's weakness in crude oil prices, along with festering political and monetary policy uncertainty. Also, Mother Nature had a say on today's trading, with an earthquake hitting Western Japan and a typhoon disrupting markets in Hong Kong. Japanese equities declined, trimming a weekly gain as the yen strengthened late in the day, while markets in Hong Kong were closed due to the storm. Mainland Chinese stocks advanced following a solid rise in September property prices, though the report may have caused concerns about further crackdowns on the real estate sector to resurface. The data is the latest in a string of Chinese economic reads in the past week that have painted a mixed picture. Lending and 3Q GDP releases suggested steady growth in the world's second-largest economy and a miss in September industrial production appeared to stem some of the enthusiasm. For more on China, see Schwab's Director of International Research Michelle Gibley's, CFA, article, 5 Big Risks Posed by China (And Why They Shouldn't Crash Global Markets in 2017) at Meanwhile, securities trading in Australia, India and South Korea decreased.

Economic calendar returns to action on Monday

Next week, the U.S. economic calendar will heat back up with additional housing data in the form of new and pending home sales reports. Also, durable goods orders for September will likely garner some attention, expected to have matched the previous month's 0.1% increase. Schwab's Chief Investment Strategist, Liz Ann Sonders details in her article, Your Time is Gonna Come: Households' Leverage Down, Government Leverage Upthat the private sector has actually done a pretty herculean job of deleveraging since the financial crisis. Liz Ann further discusses how the rub for the economy this time is that households have become significantly more frugal as it relates to the balance between spending and saving. For an economy nearly 70% dependent on consumer spending, this helps explain the slow pace of growth since the recession ended in 2009. Read the whole article at and follow Liz Ann on Twitter: @lizannsonders.

Additional reports set to be released next week include the Consumer Confidence Index, the Richmond and Kansas City Fed Manufacturing Indexes, advance 3Q GDP and the final University of Michigan Consumer Sentiment Index for October.

International reports due out next week include: China—the Leading Index and Industrial profits. Japan—the Leading Index, trade balance, small business confidence, CPI and jobless rate. U.K.—housing loans, advance 3Q GDP and the Index of Services. Germany—Ifo business climate survey, the Import Price Index, GfK consumer confidence and CPI. France—business confidence, PPI, CPI and consumer spending.