Morning in Arizona

Morning in Arizona

The Headline Animator

Thursday, October 13, 2016

Times Are Changing

Financial Review

Times Are Changing


DOW – 45 = 18.098
SPX – 6 = 2132
NAS – 25 = 5213
10 Y – .04 = 1.74%
OIL + .37 = 50.55
GOLD + 2.90 = 1258.80

Today’s trading started with a sharp dive, followed by a slow drift higher (still finishing in negative territory). At one point, the Dow dropped to 17,959, or a 185-point decline. The S&P 500 index dropped as low as 2114, taking out the lows set in early September. And that is where some support came in. The question is whether support can hold.

With the holidays coming up, bears would need to strike during the next couple of weeks. Otherwise, we’ll go into the low-volume year-end mode and the window for a correction would close until the New Year.

Minutes from the September FOMC meeting…
 Many members thought raising rates would be warranted “relatively soon” if the U.S. economy continued to strengthen, but internal divisions remained over the timing of the next move. Relatively soon probably means a December rate hike. Some Fed hawks thought that waiting too long to hike could lead to a recession, I guess maybe they think more people with more jobs is problematic?

China’s exports tumbled 10% in September, causing China’s trade surplus to narrow to $42 billion, the smallest since March; imports also declined. The disappointing trade figures pointed to weaker demand both at home and aboard, and deepened concerns over the latest depreciation in China’s yuan currency, which hit a fresh six-year low against a firming US dollar. Asian stocks tumbled to three-week lows.

The number of people who applied for unemployment benefits was flat at 246,000 in the first week of October. Initial jobless claims have been under 270,000 for 15 straight weeks. The last time claims were that low for that long was in 1973.

Yesterday we reported on the JOLT survey, the Job Opening and Labor Turnover report which offers extra detail about the labor market. One interesting stat emerged from breaking down the quits rate. Quits are linked with a tight labor market and the thinking being that if someone quits their job it means they feel confident about finding another one.

The rate of workers quitting government jobs is near an all-time high. As wage pressures build up in the private sector and lead to pay raises, many government workers may be feeling more secure about leaving a job in the public sector and going after higher wages and a greater possibility of raises in the future.

The US Energy Information Administration reported that domestic crude supplies rose by 4.9 million barrels in the week ended Oct. 7. This was the first weekly rise in crude supplies in 6 weeks. The American Petroleum Institute late Wednesday reported a rise of 2.7 million barrels.

And while that was happening…The U.S. military launched cruise missile strikes overnight on three coastal radar sites in rebel-controlled areas of Yemen, retaliating after failed missile attacks this week on a U.S. Navy destroyer. The strikes represent a potentially significant step for the U.S. in Yemen, where a bloody civil war has pitted Iranian-backed Houthi rebels against a Saudi-led coalition supported by the US.

There is a strong bond between Iran and the Houthi uprising working to overthrow the government in Yemen. Houthi leaders go to Iran for ideological and religious education, and Iranian and Hezbollah leaders have been spotted on the ground advising the Houthi troops. It is fairly likely that Iranian advisers are responsible for training the Houthis to use the type of sophisticated guided missiles fired at the US Navy.

For Iran, supporting the revolt in Yemen is a good way to bleed the Saudis, Iran’s regional and ideological rival. For the most part, the US has avoided direct involvement in the fight, until last night; and even then, the US limited its response; as much as cruise missile strikes can be considered limited.

Insured property losses for both residential and commercial properties from Hurricane Matthew are estimated to be between $4 billion and $6 billion from wind and storm surge damage according to analysis from Corelogic; 90% of the insurance claims are expected to be related to wind and 10% is expected to be related to storm surge – this does not include insured losses related to flooding. And it does not include uninsured losses and economic disruption.

With all of that considered, Moody’s analytics reportedly predicts the total economic cost could rival the $70 billion worth of damage caused by Superstorm Sandy. And the worst is yet to come, at least in North Carolina.

Flooding after a hurricane can be a slow-moving, if predictable, affair. Rainwater collects into streams that feed into tributaries that feed into rivers, and several days later, all the rainfall over hundreds of square miles is flowing down one swollen river. Post-Matthew, rivers in North Carolina are not expected to crest until as late as Friday or Saturday. And to make it even worse, North Carolina is the second largest pork producer in the country, with lots of industrial scale pig farms that dispose of waste in open-pit lagoons.

Wells Fargo CEO John Stumpf has resigned, effective immediately; Stumpf does not leave empty-handed, his retirement comes with a golden parachute totaling $137 million. COO Tim Sloan has been named the new CEO and he has an immediate test – Wells Fargo reports third-quarter results tomorrow. Sloan will surely try to sell the idea that Wells has put the problems of the past behind it.

However, one of the themes of the recent Congressional hearings was that Wells was systemically flawed, its corporate culture was rotten through and through. And Stumpf’s failure to recognize and act on problems was confirmation of the disease. After all, opening fake accounts to meet unrealistic sales quotas was not the first wrongdoing at the bank. And Stumpf’s replacement, Tim Sloan was in the chain of command that could have dealt with the problem – but didn’t.

Other big banks reporting tomorrow include JPMorgan Chase and Citigroup.

Deutsche Bank is implementing a company-wide hiring freeze as CEO John Cryan seeks to lower costs and shore up investor confidence. The bank is struggling to reverse a slide in shares that eroded almost half of its market value this year, amid concerns about mounting legal costs after the DOJ requested $14 billion to settle a probe into faulty securities.

HP Inc. expects 3,000 to 4,000 employees to exit between fiscal 2017 and fiscal 2019. The company’s board said the restructuring plan is expected to save $200 million to $300 million beginning in fiscal 2020.

Delta Air Lines reported adjusted quarterly profit of $1.70 per share, beating estimates by 5 cents. However, revenue was below forecasts. Delta also said an August outage cost the airline $100 million.

CSX reported quarterly profit of 48 cents per share, 3 cents above estimates. Revenue also beat. The railroad operator’s results were hurt by a drop in freight volumes, which were still able to exceed estimates.

Pfizer lost its appeal in a patent case over its pain drug Lyrica in a U.K. court, but said it would seek a further appeal.

Although sales of high-end virtual reality headsets have been slow, Sony released a virtual reality “add-on” for its Playstation 4, priced at $399. Best Buy and GameStop opened doors early to meet the high demand. Amazon was already selling out.

Facebook and Alphabet are working with a Chinese company, Pacific Light Cable, to lay an ultrafast internet cable between Los Angeles and Hong Kong. The 12,800-kilometer cable will use new fiber-optic technology.  Facebook, Microsoft, and Alphabet have invested hundreds of millions of dollars in the underwater cables that carry most of the world’s internet traffic, an effort by the technology companies to ensure they have enough network capacity to cheaply shuttle information between their data centers. The investments have pushed aside the telephone companies that have dominated the capital-intensive market for more than a century.

Amazon is hiring more than 120,000 seasonal employees across its fulfillment centers, sortation centers and customer service sites in the United States for the upcoming holiday season. More than 14,000 seasonal positions were transitioned to regular, full-time roles after the holidays last year, and Amazon expects to increase that number in 2016.

The bankruptcy court handling Hanjin Shipping’s insolvency proceedings plans to put the firm’s Asia-U.S. operations up for sale as early as tomorrow, in an effort to raise funds and help rehabilitate the indebted company. The sale would reportedly involve the employees, customers and some of the assets, including vessels, in Hanjin’s trans-Pacific network. Hanjin shares closed up 30% on the news.

Uber’s business model of classifying workers as independent contractors may have received a blow from New York State regulators, who ruled that two former drivers are eligible for unemployment payments. Unlike contractors, employees are entitled to a variety of rights and protections, including a minimum wage and workers’ compensation insurance, and are typically costlier for companies to rely on.

The decision could make it more difficult for Uber, its rival Lyft and other new businesses operating in what is known as the gig economy by raising their costs and challenging their business model. The rulings by the New York State Department of Labor were sent to the two Uber drivers (one also worked for Lyft) in August and September but have not previously been reported.

Bob Dylan has won the Nobel Prize for Literature in a surprise decision that made him the only singer-songwriter to win the award. (Clearly, the times are a changing.) The Swedish Academy recognized Dylan for “having created new poetic expressions within the great American song tradition.” More than 50 years on, Dylan is still writing songs and is often on tour.

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