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Monday, September 26, 2016

Your Money and Your Life

Financial Review

Your Money and Your Life

DOW – 166 = 18,094
SPX – 18 = 2146
NAS – 48 = 5257
10 Y – .03 = 1.59%
OIL + 1.14 = 45.62
GOLD + .80 = 1338.90

We are less than 2 hours from the beginning of the debate. More than 100 million Americans are expected to tune in to the presidential debate between Clinton and Trump. It is expected to run 90 minutes, no commercials. Beyond that, it is hard to say what will happen. Listen closely tonight. It’s your money and your life.

The International Energy Forum, which includes representatives of producing and consuming countries, is meeting this week in Algiers. Oil ministers from OPEC, the Organization of the Petroleum Exporting Countries, and other crucial oil-producing countries, including Russia, may use the forum to work on a deal aimed at propping up oil prices.

Since OPEC announced the meeting back in August, Brent oil prices have seesawed between $45 and $50, largely driven by comments by different oil ministers and leaders. Reaching an agreement will probably require overcoming tensions between the two big OPEC powers: Saudi Arabia and Iran. The Saudis quashed a freeze deal in April, when the Iranians refused to participate.

Expectations are low that the informal talks will lead to a freeze in oil production. Even if agreement on a freeze is reached, several smaller oil producing nations might not stick to a deal. Libya is set to bring back around 600,000 barrels per day (although those claims are questionable), and Nigeria has already returned somewhere between 200,000 and 300,000 barrels per day of interrupted supply.

And the US, not part of the talks, might see shale output ramp up production. The IEA expects global supplies to exceed demand through next year, and inventories to continue to build through 2017. Crude oil and refined product inventories are only slightly down from record levels, and will take a few more years to get worked through. All of that is to say there is a good chance that ample supplies could ensure relatively low oil prices for several years, perhaps as long as towards the end of this decade. Meanwhile, there are alternatives; more and more hybrids and electric vehicles, reducing demand.

Bank of Japan Governor Haruhiko Kuroda reaffirmed his pledge to do whatever it takes to boost growth and inflation, including taking interest rates further into negative territory. The central bank boss expressed concerns over the persistently low level of inflation in Japan and said he’d use all necessary tools to get inflation back to the 2% target. That includes cutting interest rates deeper below zero as well as keeping a target for long-term interest rates.

Forget about Brexit, forget about the U.S. election and forget about the struggling oil market: The biggest risk to the global economy comes from China, where a looming credit bubble is threatening to dramatically slow economic growth, according to Ken Rogoff, the former chief economist of the International Monetary Fund. In an interview with the BBC, Rogoff said a “hard landing” for the world’s second largest economy is imminent and there’s little other countries can do to prepare for it.

European Central Bank President Mario Draghi addressed the Euro Parliament this morning. Draghi said the euro zone economy is coping well with global uncertainty, such as Britain’s vote to leave the European Union, even if the outlook for external demand has worsened.

Sales of newly-constructed homes dropped 7.6% in August but beat forecasts. The Commerce Department reports new home sales ran at a 609,000 seasonally adjusted annual rate; that was 20.6% higher compared to a year ago. The median sales price in August was $284,000, continuing a downward trend. That was the lowest since September 2014 and 5.4% below year-ago levels. There were 4.6 months’ worth of homes available at the current pace of sales in August.

Deutsche Bank is at an all-time low. Shares of the investment bank tumbled below €11-euro after German Chancellor Angela Merkel ruled out a bailout. Merkel also declined to intervene in Deutsche’s legal battle with the U.S. Justice Department, which earlier this month announced it may seek up to $14 billion from the bank to resolve investigations into crisis-era mortgage securities.

Deutsche Bank is a major player in derivatives markets; it is the largest German lender and the fourth largest European bank by assets with $1.9 trillion as of 2015, behind Crédit Agricole, BNP Paribas and HSBC. If Deutsche has to raise cash, and if it has trouble doing so, credit conditions in Germany could tighten. Deutsche Bank responded by saying it did not require assistance from Berlin and had not requested it.

The legal battle with the Department of Justice took a strange turn, just after it was announced. Deutsche said it would not pay $14 billion for mortgage related abuses. Deutsche was a big player in the subprime CDO market – that’s Collateralized Debt Obligations. Essentially they were involved in taking really lousy mortgage debt and bundling it with other, not-so-lousy debt to make the whole package look better; this also allowed them to sell BBB risk at AAA prices.

Deutsche also worked with John Paulson to create really lousy CDO’s, which Paulson shorted, or bet against. Paulson was up front about his intent to create CDOs that would fail. Deutsche apparently had no problem in helping him. Goldman Sachs also worked with Paulson, but Deutsche did not reveal that info to investors. In other words, they were sleazy and they tried to hide it. And Deutsche printed nearly twice as much in collateralized debt obligations than Goldman.

Deutsche has about $6 billion in legal reserves to pay a fine; anything over that amount and they will struggle.  And remember that the Italian banks are struggling with a crisis of their own. If Italian banks are bailed out, or collapse, Deutsche is next in line, either for a bailout or for a collapse.

Former Wells Fargo employees have filed a class action seeking $2.6 billion or more for workers who tried to meet aggressive sales quotas without engaging in fraud and were later demoted, forced to resign or fired. The lawsuit, filed on behalf of people who worked for Wells in California over the past decade, also includes current employees.

Last week, Stumpf testified before a Senate committee. On Thursday, the House Financial Services Committee will hold a hearing on the fake bank accounts created at Wells Fargo. The bank’s chief executive, John Stumpf, has been invited to testify. Maybe they can ask him why those workers were fired for not committing fraud.

Last week, Mylan CEO Heather Bresch testified before the House Oversight Committee about the price hikes on its allergy drug auto injector called EpiPen. It had said it made $100 off each $608 two-pack of the drug it sold. Not exactly. According to The Wall Street Journal Mylan “substantially reduced its calculation of EpiPen profits by applying the statutory US tax rate of 37.5%.” Mylan paid a 7.4% tax rate last year after moving its business to The Netherlands for tax purposes.

Maurice “Hank” Greenberg, the former chief executive of American International Group, is expected to take the witness stand tomorrow in his civil fraud trial, which recently got underway in a New York State court. The 91-year-old Greenberg’ testimony could last several days. He has fought the accusations for more than a decade. Greenberg and another former AIG executive, Howard Smith, face charges that they engineered phony reinsurance transactions intended to make AIG’s numbers look better to Wall Street.

Congress has until midnight on Friday to pass legislation funding the government as the fiscal year draws to a close. Without a budget, the government could shutdown.

The plan to sell Takata to a rescuer, slated by year-end, is likely to extend into 2017 as some bidders want to drag the air bag maker through bankruptcy to wipe out most of its debt. Takata faces about $10 billion in costs to recall inflators worldwide, according to market estimates, and there is also the prospect of legal liabilities related to at least 14 deaths.

Digital map maker HERE will introduce a new set of traffic services this week that allows drivers to see what live road conditions are like miles ahead of them using data from competing automakers, instead of crowd-sourced data. BMW, Daimler and Volkswagen will all contribute to the service, marking their first big collaboration since they bought HERE from Nokia last year.

The union representing Canadian auto workers has won approval for a new four-year contract with General Motors, securing future support for Canada’s auto sector and eventually giving GM more capacity for its pickup trucks in the U.S. The deal, which was ratified by 64.7% of Unifor workers, clears the way for $544 million in local investment, better job security and wage increases, but less favorable pensions than before. The contract might also serve as a template for negotiations with Fiat Chrysler, which faces an October 10 deadline with Unifor.

CBOE Holdings confirmed that it has agreed to buy Bats Global Markets in a cash and stock deal valued at about $3.2 billion. Bats jumped 20 percent Friday on a report that the two companies were in talks. CBOE said it expects to use BATS’ trading technology and will migrate all trading to a single platform.

The world’s largest synthetic rubber maker, Lanxess, has agreed to buy Chemtura for $2.5 billion. Using existing cash and new debt to purchase the specialty chemical maker, Lanxess said it will seek to improve its additives business for lubricants and flame retardants. Both boards have unanimously approved the deal, which is expected to close in mid-2017.

Do you remember Google Glass? Snapchat is getting into the hardware business, unveiling a pair of sunglasses with a built-in wireless video camera. The product, called Spectacles, contains a 115-degree wide view lens, can record clips with a length of up to 10 seconds, and will be priced at $129.99. Snapchat has also renamed itself Snap Inc. and its website says it’s a camera company.

Markets Tumble Ahead of Tonight’s Showdown

Charles Schwab: On the Market
Posted: 9/26/2016 4:15 PM ET

Markets Tumble Ahead of Tonight’s Showdown

U.S. equities finished the first session of the week lower following a broad-based decline overseas, as investors await the Presidential debate and after capital concerns swirled around Deutsche Bank. Treasuries were higher, as new home sales decline and some regional manufacturing data improved, and the U.S. dollar was lower. Meanwhile, gold was little changed and crude oil prices gained solid ground despite uncertainty ahead of this week's OPEC meeting. M&A news dominated the equity front.

The Dow Jones Industrial Average (DJIA) declined 167 points (0.9%) to 18,095, the S&P 500 Index lost 19 points (0.9%) to 2,146, and the Nasdaq Composite fell 48 points (0.9%) to 5,258. In moderate volume, 781 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.45 to $45.93 per barrel, wholesale gasoline was $0.03 higher at $1.39 per gallon and the Bloomberg gold spot price inched $0.98 lower to $1,337.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—decreased 0.2% to 95.31.

CBOE Holdings Inc. (CBOE $67) announced an agreement to acquire BATS Global Markets Inc. (BATS $30) for $32.50 per share in cash and stock, in a transaction valued at about $3.2 billion. Under the terms of the deal, BATS shareholders will receive $10.00 per share in cash and 0.3201 shares of CBOE Holdings common stock for each share they own. CBOE said the deal is expected to strengthen its global position in innovative tradable products and services and achieve meaningful cost and operational efficiencies. Shares of both companies were lower.

Chemtura Corp. (CHMT $33) announced an agreement to be acquired by German specialty chemicals company Lanxess AG (LNXSF $59) for $33.50 per share in cash, valued at about $2.1 billion. CHMT rallied over 15%, while LNXSF also gain solid ground.

Dow member Pfizer Inc. (PFE $34) saw some pressure after the company announced that after an extensive evaluation, its board has determined to not pursue splitting into two companies at this time.

New home sales decline to kick off economic week

New home sales (chart) decreased 7.6% month-over-month (m/m) in August to an annual rate of 609,000, but above the Bloomberg forecast of 600,000 units. The median home price declined 5.4% year-over-year to $284,000. The supply of new home inventory rose to 4.6 months at the current sales pace as sales tumbled in the Northeast m/m, fell in the South and declined in the Midwest, while sales in the West grew. Compared to last year, sales in all regions were sharply higher, except in the Northeast. New home sales are based on contract signings instead of closings. For a look at investing in the real estate sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform, at and follow Schwab on Twitter: @schwabresearch.

The Dallas Fed Manufacturing Index rose to -3.7 for September, from August's unrevised -6.2 level, with economists forecasting an increase to -3.0. A reading below zero denotes contraction in manufacturing activity.

Treasuries finished higher, as the yield on the 2-year note declined 2 basis points (bps) to 0.73%, while the yields on the 10-year note and the 30-year bond dropped 4 bps to 1.58% and 2.31%, respectively. For a look at the interest rate environment, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Negative Interest Rate Policy: What Is It and Could It Happen Here?, at and follow Kathy on Twitter: @kathyjones.

Tomorrow’s economic calendar will include more manufacturing and housing data, in the form of the S&P CoreLogic Case-Shiller Home Price Index, expected to show housing prices in the 20-city composite were 5.1% higher year-over-year (y/y), but flat on a seasonally-adjusted basis month-over-month (m/m), and the Richmond Fed Manufacturing Index, forecasted to improve to -2 during September from the -11 the month prior, with a reading below zero denoting contraction in manufacturing activity. As well, Markit's preliminary Services PMI Index will be released, with economists forecasting a September reading of 51.2, up slightly from August’s 51.0, while Consumer Confidence will round out the busy day, expected to decline to 99.0 in September from the prior month’s 101.1.

As noted in the Schwab Market Perspective: Round and Round We Go…, volatility has picked up along with global central bank policy uncertainty and a back-up in U.S. and global bond yields. We believe the Fed is likely to hike rates one time this year, probably in December, but that central bank consternation will continue to elevate volatility. The long-running equity bull market should stay intact with modest economic growth continuing; and investors should remain globally diversified. Read more at Also, for timely analysis ahead of tonight’s Presidential debate between Clinton and Trump, see Schwab's Vice President, Legislative and Regulatory Affairs, Michael T. Townsend's latest article, What to Watch for When Clinton, Trump Debate, as part of our election 2016 commentary at

Europe and Asia mostly lower as oil and U.S. politics stymie conviction

European equities traded lower, with financials falling to lead a broad-based decline amid a drop in shares of Deutsche Bank AG (DB $12) as media reports saying the government will not offer any state aid for the German lender fueled capital concerns. The German lender is facing speculation that it may need to raise capital in the wake of a record $14.0 billion fine being sought by the U.S. Department of Justice in relation to DB's alleged practices leading up to the 2008 mortgage crisis. DB said that at no point did it ask the government for assistance and a German government spokesperson said there are no grounds for speculation over state funding for the bank. Also, oil & gas issues saw pressure amid uncertainty regarding if this week's informal OEPC meeting will yield a new production agreement. The negative movement for stocks came even as German business confidence rose solidly in September to the highest level since May 2014. The euro gained ground and the British pound was little changed versus the U.S. dollar, while bond yields in the region dipped. Also, the global markets awaited tonight's first Presidential debate in the U.S., while European Central Bank President Mario Draghi spoke today, reiterating the need for fiscal and structural policies to aid economic growth, per Bloomberg. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest analysis for global investors in his article, World Tour: An Around The World Look At the Economic Landscape at Follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly lower with the global markets pulling back amid focus on tonight's first Presidential debate in the U.S., along with festering uncertainty regarding the Bank of Japan's monetary policy. Moreover, volatility in the energy sector also hamstrung conviction as uncertainty ramped up ahead of this week's OPEC meeting. Japanese equities declined, with the yen showing some strength, while mainland Chinese stocks and those traded in Hong Kong dropped. Meanwhile, India's markets traded lower, as did those in South Korea, while Australian stocks finished flat. Amid the choppiness in the global markets, Schwab's 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

Tomorrow’s international economic calendar will offer consumer inflation data from Japan, industrial orders and sales from Italy, and import prices from Germany.