Financial Review

Makes You Want to Holler

Sinclair Noe — March 16, 2017

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DOW – 15 = 20,934
SPX – 3 = 2381
NAS + 0.71 = 5900
RUT + 3 = 1386
10 Y + .01 = 2.52%
OIL – .07 = 48.79
GOLD + 6.10 = 1226.80

President Trump will ask the Congress for cuts to many federal programs, and more money to bulk up defense spending. Trump’s budget outline is a blueprint covering just “discretionary” spending for the 2018 fiscal year starting on October 1.

It boosts spending for defense, homeland security and veterans’ affairs; the Defense Department budget would increase by $54 billion, which will raise defense spending to $639 billion for fiscal year 2018.

The Environmental Protection Agency faces cuts of 31% and the Department of Agriculture would see funding cuts more than 20; State Department 28%; Health and Human Services would be cut 16%; Education faces cuts of 14%.

Trump’s budget proposes eliminating discretionary funding altogether for at least 19 agencies and 61 other programs. Plans for new NASA missions, climate change research, aid for low-income families, funding for commercial flights to rural airports, public broadcasting, and Meals on Wheels would all be on the chopping block.

The spending cuts that Trump proposes come from those agencies that fund education programs, social services, environmental protection, health research, housing and food assistance, national parks, land management, and countless other endeavors. As it is, spending on non-defense discretionary programs is already historically low.

As a share of the economy it’s at its lowest level since 1998 and is well below where it was 50 years ago, per data from the Congressional Budget Office. The net effect is no change in the national deficit. The budget proposal is the first volley in what is expected to be an intense battle over spending in coming months in Congress.

President Trump’s second travel ban was blocked by a federal court in Hawaii hours before it was to go into effect. A federal judge in Maryland also ruled against the ban on the day it was supposed to take effect. The administration has promised to appeal the rulings.

The speaker of the House, Paul Ryan, the Senate Intelligence Committee chairman and the ranking Democrat on the committee all said that they’ve seen no evidence of President Donald Trump’s accusation that he was wiretapped last year by his predecessor.

Senate Intelligence Committee chair Richard Burr and ranking member Mark Warner issued a statement, saying “based on the information available to us, we see no indications that Trump Tower was the subject of surveillance by any element of the United States government either before or after Election Day 2016.”

House Speaker Paul Ryan said that “no such wiretap existed,” citing intelligence reports to House leaders. “We don’t have any evidence,” says the top Republican on the House Intelligence Committee. “No evidence,” says his Democratic counterpart.

The statement from the leaders of the Senate Intelligence Committee marks the clearest and strongest refutation of Trump’s allegations since the President first made them two weeks ago. The senators statement also addresses Trump’s more recent statement that he was not merely speaking about wiretapping specifically.

The leaders of the House Intelligence Committee have said they have yet to see any evidence of wiretapping, but have yet to flatly rule out all surveillance. House Intelligence Chairman Devin Nunes said Wednesday that it was possible that Trump aides were surveilled via “incidental” collection.

Dutch Prime Minister Mark Rutte defeated far-rightist Geert Wilders in the first of a series of European elections this year in which populist insurgent parties are hoping to rock the establishment. The center-right prime minister had trailed in opinion polls for much of the campaign but emerged the clear victor of Wednesday’s election, albeit with fewer seats than before.

It’s rare for a Dutch election to attract international attention, but the performance of Wilders is being seen as a bellwether for the ascent of populism around Europe, particularly with the National Front’s Marine Le Pen set to reach the run-off in the French presidential election late next month. Germans will vote later in the year.

The Bank of Japan is sticking with its ultra-loose monetary policy even as the Federal Reserve tightens. Japan’s economy is recovering with the help of a weaker yen but growth and inflation remain low. The Bank of Japan to keep its target for 10-year Japanese government bond yields at around zero, a policy it calls “yield-curve control.” It left the short-term interest rate on some yen deposits held by commercial banks at minus 0.1%.

The Bank of England held interest rates at the record low level of 0.25 percent and maintained asset purchases at £435 billion. The UK economy has shown strength since last June’s Brexit referendum and the government revised its forecasts for domestic growth in 2017 sharply higher. That might be wishful thinking.

The UK has not yet felt the full impact of Brexit, but that doesn’t mean they won’t. The big question is whether London’s financial institutions will lose access to the single market of the Euro Union after the UK leaves the EU.

The main argument is as follows: since London plays a key financial role in Europe, any disruption would endanger the financing of the EU economy and would ultimately pose a threat to financial stability in the bloc.

My guess is that argument plays better in London than Brussels. That’s not just speculation. The number of new available jobs listed in the UK’s financial center fell 17% in February year-on-year to 6,945.  Or simply, Brexit is Brexit.

Yesterday, the Federal Open Market Committee voted to raise the range of the federal funds rate to 0.75% and 1.00%, citing progress in labor market growth, business fixed investment and inflation. The Fed indicated they are still looking at 2 more rate hikes in 2017, which matches the guidance they provided in December.

In a press conference yesterday, Fed Chair Janet Yellen said, “The simple message is, the economy is doing well. We have confidence in the robustness of the economy and its resilience to shocks.”

The labor market has been a strong part of the economic recovery. In the last monthly jobs report, the unemployment rate dropped to 4.7%, but one weak spot was wages, which have flatlined. Once again, adjusted for inflation, there has likely been no growth whatsoever in real wages YoY.

For wages to increase, workers need job mobility, the ability to take a new job for more pay. Each month the Labor Department publishes the JOLT survey, or Job Openings and Labor Turnover; and in January, the number of Americans quitting their jobs rose to a seasonally-adjusted total of 3.22 million, the highest number since February 2001. The quits rate rose in January to 2.2%.

People quitting their jobs in droves is a sign of confidence among workers, as folks are unlikely to quit a job unless they are confident they can get another one. Openings totaled 5.63 million in January, above the prior month’s reading of 5.5 million.

The Labor Department said initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 241,000 for the week ended March 11. It was the 106th straight week that claims remained below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970, when the labor market was much smaller.

US home-building jumped in February as unseasonably warm weather helped boost the construction of single-family houses to near a 9-1/2-year high. Housing starts increased 3% to a seasonally adjusted annual rate of 1.29 million units last month.

Home-building was up 6.2 percent compared to February 2016. Single-family home-building, which accounts for the largest share of the residential housing market, surged 6.5%. Starts for the volatile multi-family housing segment fell 3.7%.

The Arizona Supreme Court has upheld the constitutionality of Arizona’s minimum wage increase to $10 an hour. Voters approved the increase in November, and the challenge was brought by the Arizona Chamber of Commerce and Industry and other business groups.

The state Supreme Court unanimously rejected the challenge. Proposition 206 raised the state’s minimum wage to $10 an hour in January 2017. Incremental increases continue until 2020, when it will increase to $12.

Four people have been indicted in a 2014 cyber-attack on Yahoo email accounts. The indictment charges two officers of the FSB, Russia’s Federal Security Service, and two hackers who allegedly worked together with them to crack 500 million Yahoo user accounts.

Cyber security specialists have long said the Kremlin employs criminal hackers for its geostrategic purposes. They say the arrangement offers deniability to Moscow and freedom from legal troubles for the hackers.

3M said it would buy Johnson Controls’ safety gear business, Scott Safety, in deal valued at $2 billion. Scott Safety makes respiratory and protective equipment and other safety products for firefighters, industrial workers, police squads and the US military.

Oracle’s cloud business had a huge quarter. The business-software maker announced better-than-expected adjusted revenue and profit, helped by sales at its cloud business surging 62% to $1.19 billion

Adobe Systems stock jumped after the company delivered earnings and revenue that beat expectations.

Cold weather luxury apparel retailer Canada Goose’s stock rocketed 25 percent in its first day of trading. The stock trades under the ticker GOOS.

Amazon is ready to do to the local liquor store what it did to the local book store. It is rolling out free beer and wine 2-hour delivery and $7.99 1-hour delivery for Prime Now members, starting in Cincinnati and Columbus, Ohio.

Financial Review

The Wisdom of Solomon

Sinclair Noe — January 31, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 107 = 19,864
SPX – 2 = 2278
NAS + 1 = 5614
RUT + 10 = 1362
10 Y – .03 = 2.45%
OIL + .19 = 52.82
GOLD + 14.70 = 1211.00

Economic growth for the Eurozone rose 1.7% last year, growing at a faster rate than the U.S. managed when averaged across the whole of 2016. That’s the first time that happened since 2008. The region’s jobless rate also fell to 9.6%, the lowest figure since May 2009, while inflation of 1.8% is now near the ECB’s target of “close to, but below 2%.”

Following a two-day board meeting, the Bank of Japan kept its monetary policy on hold, but policymakers were more bullish on the economy, raising its 2017 real gross-domestic-product growth forecast to 1.5%, up from its previous forecast of 1.3% offered last November.

The Federal Reserve Federal Open Market Committee is beginning 2 days of meetings to determine monetary policy. Most analysts predict the FOMC will leave interest rates unchanged when Chair Janet Yellen makes the announcement tomorrow. The Fed last met in mid-December and hiked interest rates for only the second time in almost a decade.

Since that meeting, officials stressed they intend to move rates up gradually, the main reason the market doesn’t expect a rate hike this week. Using federal funds rate futures prices, the CME Group says there is a 96 percent probability of no change.

U.S. home prices rose slightly in November from the previous month. The S&P/Case-Shiller U.S. National Home Price Index, which measures all nine U.S. census divisions, was up 5.6 percent on an annual basis in November. Phoenix posted a 0.3% gain from October to November, and a 5.2% increase for the 12 months through November.

The Conference Board’s consumer confidence index fell to a reading of 111.8 in January after hitting a 15-year high of 113.3 in December. Consumers’ appraisal of the present improved, to a reading of 129.7 from 123.5, but the expectations index fell to 99.8 from 106.4. The proportion expecting more jobs in the months ahead decreased from 21.7% to 19.8%, and the percentage of consumers expecting their incomes to increase declined from 21.5% to 18%.

The amount of money it costs businesses to employ workers rose a touch slower in the fourth quarter owing to the smallest increase in benefits in a year and a half. The employment cost index rose 0.5% in the final three months of 2016, below the 0.6% gains in each of the past three quarters. The index grew a slightly faster 2.2% in 2016 after a 2% gain in 2015.

In the fourth quarter, wages advanced 0.5% but benefits only rose 0.4%. Part of the reason: Companies may have passed more of the costs of health care onto workers in the form of higher premiums and deductibles, among other things.

Deutsche Bank has agreed to pay $630 million to end investigations by UK and New York regulators into Russian equity trades that transferred $10 billion out of that country in violation of anti-money-laundering laws. Regulators say Deutsche Bank executed more than 2,400 pairs of so-called mirror trades between April 2012 and October 2014.

The scheme involved buying stock with Russian rubles at Deutsche Bank’s Moscow office and then selling the identical stock – same quantity, same price – at the London office of Deutsche Bank and being paid for the shares with US dollars in London. UK and New York regulators cited repeated shortcomings in Deutsche Bank’s controls to vet clients, including failing to determine their identities and sources of wealth, and to detect suspicious trades.

After the closing bell Apple reported it sold 78.2 million iPhones in the last quarter. That’s a beat. Profit of $3.38 per share; another beat. Revenue of $78.4 billion; another beat. Services revenue of $7.17 billion; another beat. All time revenue records for iPhone, Services, Mac, and Apple Watch. But guidance is on the weak side. Apple shares pop in after hours. Some poor schmuck bet his life savings on Apple puts and now he’s crying on his live stream.

Exxon Mobil  missed earnings forecasts this morning as it took a $2 billion impairment charge, mostly due to the company lowering the value of some of its U.S. gas assets. Persistently low oil prices and weaker profit margins in Exxon’s refining business also weighed on earnings for the full year. Exxon reported fourth-quarter earnings of $1.7 billion, or 41 cents a share.

In the period a year ago, the oil giant reported earnings of $2.8 billion, or 67 cents a share. Revenues for the quarter were $61.01 billion. The impairment resulted from the company’s review of its reserves. Exxon determined that some of its U.S. assets’ future cash flows no longer exceeded their carrying value.

Under Armour reported lower-than-expected quarterly sales and announced that Chief Financial Officer Chip Molloy will step down. The company said net income fell to $104.9 million in the fourth quarter ended Dec. 31 from $105.6 million a year earlier. The company’s net revenue rose about 12 percent to $1.3 billion, its slowest sales growth in eight years.

MasterCard posted fourth-quarter earnings per share of 86 cents on revenue of $2.76 billion. MasterCard missed revenue estimates but beat earnings estimates by a penny per share. MasterCard, which processes more than 65,000 transactions every minute, said its gross dollar volumes — the total value of transactions made by customers — rose 9 percent to $1.2 trillion worldwide.

United Parcel Service reported quarterly earnings and revenue that missed Wall Street’s expectations. UPS also posted a 2017 outlook below expectations. During the holiday season UPS delivered more than 712 million packages, a 16 percent increase over the year-ago quarter. The company said it delivered 1.4 billion packages last year, up 7.1 percent. E-commerce has been growing at double-digit rates for years and the 2016 holiday season was no exception: online sales surged 13 percent and UPS saw a surge in business to consumer shipments, which are not as efficient or profitable as B2B.

Aetna’s net profit fell to $139 million, or 39 cents per share, in the fourth quarter ended Dec. 31, from $321 million, or 91 cents per share, a year earlier. Aetna said its total health care medical benefit ratio — the percent of premiums spent on claims — rose to 82.1 percent from 81.9 percent, a year earlier, mainly due to higher medical costs in its individual commercial products.

Aetna and Humana have said they will consider all available options for their proposed merger after a court ruled against the $34 billion deal last week, saying it would lower competition.

Insulin makers are being accused of price fixing. Lilly, Novo Nordisk, and Sanofi are accused of taking part in an “organized scheme to drive up prices at the expense of patients who need insulin drugs to live,” per a complaint filed in the US District Court of Massachusetts.

Pfizer reported a lower-than-expected profit, hit by lower demand for its flagship vaccine Prevnar and higher expenses. Global Prevnar sales fell 23 percent to $1.42 billion, underwhelming consensus estimates. Pfizer closed its $14 billion acquisition of Medivation in September.

Today, President Trump met with executives of several major drug makers and called for lower drug prices while also promising to speed up approval times for new medicines. In an interview with The Associated Press, Pfizer CEO Ian Read stuck to his position that the problem isn’t soaring drug prices but insurers pushing more costs onto patients. He said Pfizer won’t pledge that it will limit annual price increases, as a few rivals recently did. Pfizer typically raises the list price on all its drugs about 10 percent twice each year, though wholesalers and other middlemen get much of those increases.

Rep. Tom Price, the Georgia congressman and nominee for Secretary of Health and Human Services testified in his Senate confirmation hearings on Jan. 18 and 24 that the discounted shares he bought in Innate Immunotherapeutics, an Australian medical biotechnology company, “were available to every single individual that was an investor at the time.”

Not exactly. In fact, the cabinet nominee was one of fewer than 20 U.S. investors who were invited last year to buy discounted shares of the company – an opportunity that, for Price, arose from an invitation from a company director and fellow congressmen.

Senate Democrats today boycotted scheduled votes in the Senate Finance Committee on Steven Mnuchin, the nominee to head the Treasury Department, and Rep. Tom Price to be health secretary. The committee needs at least one Democrat to proceed.

Mnuchin has come under fire for telling the Senate Finance Committee that OneWest, the bank he led as CEO from 2009 to 2015, did not engage in the robo-signing of foreclosure and bankruptcy documents. Court filings have shown that the bank did. Meanwhile, Betsy Devos’ nomination as Secretary of Education cleared Senate Committee today.

The Senate Judiciary Committee delayed voting this morning on the nomination of Sen. Jeff Sessions as attorney general, a pick that’s receiving even more scrutiny in the wake of President Donald Trump’s executive orders on immigration. Last night Trump fired the acting attorney general Sally Yates after she took the rare step of defying the White House and refused to defend new travel restrictions targeting seven Muslim-majority nations.

Dana Boente, (pronounced Ben-tay) U.S. Attorney for the Eastern District of Virginia, was sworn in last night as acting U.S. attorney general until Sessions is approved. The recent news out of Washington has hit Wall Street like a bag of rocks to the gut.

Following Trump’s executive order on immigration last week, federal judges across the country responded to lawsuits stemming from the travel ban by ordering the Department of Homeland Security to immediately stop enforcing various aspects of the executive order.

By Sunday, reports started coming out that some federal agents from Customs and Border Protection were disregarding the court orders, and continuing to enforce Trump’s travel ban in a way that violated instructions they’d been given by judges. And this sets up a very interesting scenario: What happens when the federal government or its agents refuse to honor a court order handed down by a federal judge? If there is escalation, it will likely be reflected on the scoreboard at Wall Street.

Later this evening, President Trump is expected to announce his nominee to succeed the late Justice Antonin Scalia on the Supreme Court. Whoever he is, let’s hope he has the wisdom of Solomon.

Financial Review

Relatively Soon

Sinclair Noe — November 17, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 35 = 18,903
SPX + 10 = 2187
NAS + 39 = 5333
10 Y + .05 = 2.28%
OIL – .58 = 45.52
GOLD – 2.40 = 1,215

The S&P 500 is close to a record high of 2190. Not today, but close.

The Labor Department reports the Consumer Price Index increased 0.4 percent last month, the biggest increase in six months. In the 12 months through October, the CPI advanced 1.6 percent.

Gasoline prices jumped 7 percent last month and rents increased 0.4 percent; food prices were unchanged. Underlying inflation, however, remained moderate. The core CPI, which strips out food and energy costs, climbed 0.1 percent last month after a similar gain in September. That slowed the year-on-year increase in the core CPI to 2.1 percent.

The number of people who applied for unemployment benefits last week dropped by 19,000 to 235,000, a 43-year low. Initial claims have been under the key 300,000 threshold for 89 straight weeks. Companies have ramped up hiring over the past five years, and many complain they cannot find enough skilled workers to quickly fill open positions.

Arizona’s seasonally adjusted unemployment rate decreased three-tenths of a percentage point from 5.5% in September to 5.2% in October. The national unemployment rate stands at 4.9%. Arizona gained 28,000 Nonfarm jobs in October. Arizona Nonfarm employment grew by 1.8% (49,600 jobs) over the year in October.

Federal Reserve Chair Janet Yellen spoke to the Joint Economic Committee this morning, saying a rate hike is coming “relatively soon.” Yellen said progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year.

The Fed chair warned of the risks attached to waiting too long before raising rates, saying: “Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both committee’s longer-run policy goals. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”

So, the Fed will hike rates in December, absent some catastrophe. Also, in testimony, Yellen pledged to serve out her term despite criticism from Donald Trump during his presidential campaign and she defended the Dodd-Frank Act.

Meanwhile, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis in January, says the big banks are still too big to fail even after the passage of the 2010 Dodd-Frank Act. And he has a proposal, called the Minneapolis Plan, to reduce the risks that these banks pose.

In a speech to the Economic Club of New York, Kashkari said his plan would require banks with $250 billion or more in assets to issue common equity of 23.5 percent, up from 13 percent required under current rules. Long-term debt would not be allowed to be counted as part of that cushion because history showed it was not a foolproof buffer to losses.

The plan would likely prompt banks to break apart because of the high cost of holding so much capital. In other words, the risk of another financial calamity outweighed the costs of increased regulation.

What makes this interesting is that President-elect Trump has called for repealing Dodd-Frank, although we don’t know what he would replace it with. At the same time, the Republican Party platform calls for breaking up the large banks by restoring the New Deal-era Glass-Steagall Act. Kashkari said the Minneapolis Plan would greatly reduce the risks of another financial meltdown.

Kashkari also said he traced some of the nation’s current political anger and polarization to how the government responded to the financial crisis — which allowed large banks to survive while thousands of Americans struggled to keep their homes and find new jobs, saying: “The bailouts violated a core belief that has been handed down from generation to generation in our society that if you take a risk you bear the rewards and consequences of that risk.”

The Bank of Mexico just hiked rates by 50 basis points, to 5.25% up from 4.75%.The Mexican peso fell to a record low against the dollar on election night as rolling results increasingly pointed to a Trump victory. It continued tumbling over the course of last week, but has since retraced some of its losses. The point of a rate rise is not to stem the peso’s fall but to anchor inflation expectations and deter capital flight; still, a rate hike could slow economic growth.  Mexico faces the threat of a rating agency downgrade, and analysts have been trimming their growth forecasts for next year.

President-elect Donald Trump is expected to meet with Japanese Prime Minister Shinzo Abe today. But Japanese officials don’t know where or when it will take place, nor do they know who will be attending. The Bank of Japan has been on the defensive, buying Japanese Government Bonds in a bid to offset rising treasury yields. Governor Haruhiko Kuroda said he would not allow market pressure from the U.S. to interfere with Japanese monetary policy and does not need to move in tandem with the Federal Reserve, and so the Bank of Japan will buy unlimited bonds – keep in mind they carry a negative interest rate.

Walmart reported earnings and revenue that slightly missed estimates. Wal-Mart said it earned 98 cents a share during the fiscal third quarter, slightly lower than 99 cents a share in the prior-year period. It raked in sales of $118 billion, a 0.7 percent increase over the prior-year period but below estimates.

Cisco Systems, another Dow stock, reported late Wednesday earnings and revenue above forecasts.  But Cisco warned on outlook for the current quarter, as the company’s traditional business of switches and routers continues to struggle with sluggish demand.

Best Buy, the electronics retailer, posted third quarter earnings of 62 cents per share, topping estimates of 42 cents. Revenue also beat. Comparable store sales were up 1.8% from the same quarter last year. Guidance for the fourth quarter came in strong.

After five months of wrangling and two different recommendations from proxy advisory firms, shareholders approved the $2.6 billion merger between Tesla and SolarCity.

Documents filed with the FCC show SpaceX plans to deploy 4,425 satellites to create a super-fast global internet network. That’s more than three times the 1,419 operational satellites that are currently in orbit, according to the Union of Concerned Scientists. The initiative was first floated by Elon Musk in early 2015, when he estimated the project would take at least five years and cost around $10 billion.

Citigroup’s Australian arm is going cashless, telling customers that it will no longer handle notes and coins as of Nov. 24, because fewer than 4% of customers have used them in the last year. While Citi is a small force in Australian retail banking, the move is a sign of how banks are being forced to reinvent branches in the face of a boom in digital transactions and contactless payments.

Following a nearly three-year investigation, JPMorgan has agreed to pay more than $264 million to settle bribery allegations that it hired children of well-connected Chinese decision-makers to win business. JPMorgan may take another hit; Fox Business is reporting that CEO Jamie Dimon might be named Treasury Secretary in the new Trump administration.

Wells Fargo said retail customers opened 44 percent fewer new accounts in October compared with the same period a year earlier following the bank’s settlement with regulators over its cross-selling scandal. New credit-card applications dropped by half to 200,000 in October, the first full month since the lender disclosed the settlement.

Andy Davenport, the CEO of Philidor, the secret pharmacy whose discovery led to a crisis at Valeant Pharmaceuticals, has been arrested and charged with “engaging in a multimillion-dollar fraud and kickback scheme.” Gary Tanner, a former Valeant executive who went on to work for Philidor, was also arrested. US prosecutors are separately investigating former Valeant CEO Michael Pearson and CFO Howard Schiller but they have not been charged at this time.

Philidor is at the heart of the scandal that erased 90% of Valeant Pharmaceuticals’ market value. Valeant hadn’t told investors about the pharmacy, which Valeant had an option to acquire and which accounted for at least 5% of the company’s sales. After the pharmacy’s existence came to light, and accusations that it was using fraudulent tactics to push Valeant’s drugs quickly followed, the company was quick to break off the relationship.

Toyota is getting serious about electric cars. The world’s biggest car company is setting up a separate in-house division to focus purely on developing an electric-car strategy to meet ever-tightening global emissions regulations. Until now, Toyota has been investing mainly in the development of hydrogen-fuel-cell cars.

Ford’s new EcoSport is set to become the smallest SUV in the Detroit automaker’s line-up, but it could also fuel the big debate over automotive trade. That’s because the model will roll off a Ford assembly line in India. Ford has also made plans to move all its small car production to Mexico.

Financial Review

Break Down

Sinclair Noe — November 1, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 105 = 18,037
SPX – 14 = 2111
NAS – 35 = 5153
10 Y – .02 = 1.84%
OIL – .53 = 46.33
GOLD + 10.80 = 1288.80

Stocks started the session in positive territory but slippage was immediate; slow at first then picking up momentum. The Dow Industrial Average dropped below 18,000 for the fourth time since September 12, at one point posting a 200-point loss.

The S&P 500 took out the lows of September at the 2120 level. We had talked about 2020 being a level of support, which has now been broken. The next levels of support are 2080 (representing the 200-day moving average) and 2040 (representing lows from April and May). The point here is that today’s trading did some serious technical damage; the other point is to remind you to keep an eye on the charts; they are very effective at cutting through the chatter and the clutter.

The Fed began its 2-day FOMC meeting.  Treasury yields climbed early toward the highest since May on speculation the Federal Reserve will raise interest rates this year as the global economy improves. The Atlanta Federal Reserve’s GDP Now forecast model shows the economy is on track to grow at a 2.3 percent annualized pace in the fourth quarter; that is a downward revision from just yesterday, when the GDP Now forecast was for 2.7 percent fourth quarter growth.

Investors will be scouring the accompanying statement for clues on how determined the Fed is to raise rates in December. As things stand, the markets are taking policymakers such as Bill Dudley of the New York Fed at their word when they say a move is likely before the year is out if growth stays on track. Fed funds futures data compiled by Bloomberg shows the market is pricing in a 16% chance of a November interest-rate hike and a 71% chance of a rate hike before the end of the year.

The Bank of Japan kept policy on hold. Japan’s central bank voted 7-2 to keep its key interest rate at negative -0.1%, and target for the 10-year Japanese bond yield at 0%, warning that risks to growth and inflation were “skewed to the downside.”

Australia’s central bank held rates steady at 1.50%, as expected, and said “the Bank’s forecasts for output growth and inflation are little changed from those of three months ago.”

American manufacturers grew slightly faster in October and even put more people to work for the first in four months. The Institute for Supply Management said its manufacturing index rose to 51.9%, the highest in three months, from 51.5% in September. Readings over 50% indicate more companies are expanding instead of shrinking.

A measure of factory employment jumped 3.2 percentage points to a reading of 52.9. But a gauge of new orders slipped to a reading of 52.1 from 55.1 in September, suggesting any future gains in manufacturing activity would be modest.

The Affordable Care Act Open Enrollment starts today. Arizonans will find in most counties only one insurer selling exchange plans for 2017. Premiums for some plans will be more than double this year, some of the biggest increases in the nation. Only last-minute maneuvering prevented one Arizona county from becoming the first in the nation to have no exchange insurers at all.

Outlays for U.S. construction projects fell 0.4% in September. Spending on private outlays fell 0.2%. Residential spending rose 0.5% but spending on nonresidential projects sank 1%. For overall public construction projects, spending fell 0.9%. Outlays for the first nine months of the year are 4.4% higher compared with the same period in 2015.

CoreLogic reports home prices nationwide, including distressed sales, increased year over year by 6.3 percent in September 2016 compared with September 2015 and increased month over month by 1.1 percent in September 2016 compared with August 2016. Arizona is still 22% below peak prices. Arizona home prices were up 0.6% for the month and 5.6% year-over-year.

Sales of new cars and trucks were expected to fall in October. Auto sales have been strong but there are limits and it looks like car makers hit those limits last month. General Motors’ sales fell 2 percent from last October, while Toyota’s sales fell 9 percent. Honda’s sales were down 4 percent and Nissan’s fell 2 percent. Fiat Chrysler’s sales were down 10 percent. Volkswagen’s sales fell 18 percent. Ford will report later in the week due to a fire at their headquarters.

Sales fell even though automakers increased average discounts per vehicle by 12 percent from last October to $3,726 per vehicle. But the average sales price still was expected to set an October record at $31,383. Prices are rising because more high-priced trucks and SUVs are being sold.

Gasoline is surging, despite a recent drop in crude oil prices. An explosion of a Colonial pipeline in Alabama killed one person and injured 5 other; it is also causing gasoline futures to skyrocket higher. Futures for December delivery jumped 10.8% to $1.57 a gallon. Colonial Pipeline said it hopes to restart its major gasoline pipeline between Gulf Coast refiners and customers in the East and Southeast by noon Saturday; that news pushed prices down, but futures are still up about 4% at $1.48.

Meanwhile, crude oil has not been able to mount any kind of rally despite a weaker dollar. Following last week’s inventory draws across the entire energy complex, API was expected to report a seasonally normal 1.5 million barrel build but instead printed a massive 9.3 million build.

Royal Dutch Shell and BP both reporting higher than expected earnings by making further deep cuts in spending. Shell announced higher quarterly earnings than Exxon Mobil, the world’s largest listed oil company by output and market capitalization. At $2.8 billion in the third quarter, Shell’s net income was above Exxon’s third quarter net income of $2.65 billion. Both Shell and BP maintained their dividends unchanged as expected.

Mortgage provider Freddie Mac reported a profit of $2.3 billion in the third quarter, as interest rates turned in its favor, credit quality improved, and mortgage volumes surged. Freddie has operated under federal conservatorship since the 2008 financial crisis, when it received $71 billion in bailout funds. In December, the enterprise will remit $2.3 billion to the U.S. Treasury, bringing its total paid post-crisis to $101 billion.

Pfizer lowered its earnings outlook for the year and said it was ending the development of a drug in the cholesterol-treatment sector. Pfizer reported a profit of $1.3 billion, or 21 cents a share, down from $2.1 billion, or 34 cents a share a year prior; bottom line missed estimates – revenue matched estimates.

Prosecutors are focusing on Valeant Pharmaceuticals’ former CEO and CFO as they build a fraud case against the company that could yield charges within weeks. Authorities are considering potential accounting fraud charges related to the company’s hidden ties to Philidor Rx Services LLC, a specialty pharmacy company that Valeant secretly controlled.

Federal prosecutors in Manhattan and agents at the Federal Bureau of Investigation in New York have been investigating the company for at least a year. Last October, accusations of accounting malfeasance combined with government scrutiny over the company’s drug price hikes brought the company to its knees. Valeant’s stock price is down around 90% since last year’s peak.

One of the most difficult things Valeant has had to deal with through this entire mess is its over $30 billion debt load, which could be an even bigger problem with a criminal charge. Prosecutors in Boston and Philadelphia are also said to be conducting separate inquiries of Valeant.

Boston’s investigation focuses on Valeant’s payments to charities that then helped patients make co-payments for the soaring cost of Valeant drugs, some of the most expensive on the market. The Philadelphia case is examining Valeant’s billing of government health care programs for the company’s drugs.

And while that all sounds very bad for Valeant, if you pull up a quote today, you will see the stock is up 33%. The reason – Valeant is in talks to sell its Salix unit to Japan’s Takeda for $10 billion, per the Wall Street Journal. The crown jewel of Salix’s product line is Xifaxan, a drug that cures irritable bowel system.

When the company bought Salix, it told investors that Xifaxan would be a $1 billion drug in 2016. So far though, that hasn’t been in case. Valeant acquired Salix for $11 billion in 2015 and took on around $4 billion of its debt, so the company would be taking a loss, but it would show Valeant still has some valuable assets, even in a fire sale.

Sony’s second-quarter profit missed estimates, as a one-time charge and stronger yen weighed on profit from financial services and PlayStation games.

Angie’s List said it has hired financial advisers to review its strategic options as it continues to work on a turnaround and seek new opportunities. The company said it had a net loss of $16.8 million, or 28 cents a share, in the quarter, after breaking even in the year-earlier period – a big miss on top and bottom line estimates.

Gannett (the publisher of USA Today) has dropped its bid to buy Chicago Tribune and Los Angeles Times publisher Tronc. Gannett first made a bid for Tronc in April, then Tronc rejected a sweetened offer in May.

ChemChina has extended its $43 billion cash offer for Syngenta to Jan. 5 while it works to gain regulatory approval for the transaction. On Friday, EU anti-trust regulators opened an in-depth investigation into China’s biggest-ever foreign acquisition, setting a March 15 deadline to complete its review.

In one week and a few hours, the results will pour in. Hang in there.

Markets Gain on Steady Fed

On the Market

Posted: 9/21/2016 4:15 PM ET

Markets Gain on Steady Fed

U.S. equities moved higher after the Federal Open Market Committee decided to leave rates unchanged following its two-day monetary policy meeting, while financials got a morning boost from a change in monetary stance from the Bank of Japan. Crude oil finished solidly higher following a bullish government oil inventory report, while technology issues advanced on an upbeat earnings report from Adobe Systems and after Dow member Microsoft upped its dividend and share repurchase program. Treasuries and gold moved higher following the Fed decision, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) rose 164 points (0.9%) to 18,294, the S&P 500 Index gained 23 points (1.1%) to 2,163, and the Nasdaq Composite increased 54 points (1.0%) to 5,295. In moderate volume, 881 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.29 to $45.34 per barrel, wholesale gasoline gained $0.04 to $1.40 per gallon and the Bloomberg gold spot jumped $18.96 to $1,333.80 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.54.

FedEx Corp. (FDX $174) reported fiscal 1Q earnings-per-share (EPS) ex-items of $2.90, above the $2.78 FactSet estimate, as revenues grew 19.5% year-over-year (y/y) to $14.7 billion, topping the expected $14.6 billion. FDX's full-year profit outlook had a midpoint that exceeded the Street's expectations. FDX finished solidly higher.

Adobe Systems Inc. (ADBE $108) posted 3Q EPS ex-items of $0.75, three cents north of estimates, with revenues rising 20.2% y/y to $1.5 billion, roughly in line with forecasts. ADBE increased its earnings targets for the year. Shares of ADBE were markedly higher. 

CarMax Inc. (KMX $55) reported 2Q earnings ex-items of $0.88 per share, in line with forecasts, as revenues increased 2.9% y/y to $4.0 billion, below the expected $4.1 billion. 2Q same-store sales of used cars rose 3.1% y/y, below the projected 3.5% gain, as store traffic decreased. KMX came under pressure. 

KB Home (KBH $15) announced 3Q profits of $0.42 per share, exceeding the forecasted $0.39, as revenues increased 8.3% y/y to $913 million, below the anticipated $943 million. KBH gained ground.

Dow member Microsoft Corp. (MSFT $58) reported an 8.0% increase of its quarterly dividend to $0.39 per share, while also announcing the approval of a new share repurchase program of up to $40 billion. MSFT was higher.

Fed stays put, but leaves door open for hike this year

At 2:00 p.m. ET, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, where it kept its policy stance unchanged at a targeted range of 0.25%-0.50% for the Fed funds rate. The Committee noted that "the case for an increase in the federal funds rate has strengthened, but decided, for the time being, to wait for further evidence of continued progress toward its objectives. As well, the Committee, judged that "near-term risks to the economic outlook appear roughly balanced," the job market was solid, and that it expects the labor market to "strengthen further." The move was widely expected, as odds of a rate hike at this meeting diminished in the wake of some choppy economic data as of late, though the odds of a December rate increase continue to hover around the 50% mark, per Bloomberg. The Committee also released updated economic projections, slightly decreasing their current year forecasts for inflation and output for this year, while slightly increasing its projection for unemployment for the year. Statistics for years 2017-2019 remained steady.

In her scheduled press conference after the statement, Chairwoman Janet Yellen indicated that she was pleased with how the economy was progressing, noting that household spending is driving the improvement. Yellen also said that while most in the Committee expect a rate increase this year, it was prudent to take a cautious approach to any future rate increases.

Look for analysis on the Fed's decision from Schwab's Chief Fixed Income Strategist Kathy Jones later today at www.schwab.com/marketinsight, while you can also follow Kathy on Twitter: @kathyjones.

The MBA Mortgage Application Index declined 7.3% last week, after gaining 4.2% in the previous week. The decrease came as a 7.6% drop for the Refinance Index was met with a 6.8% fall for the Purchase Index. The average 30-year mortgage rate rose 3 basis points (bps) to 3.70%.

Treasuries finished higher, as the yield on the 2-year note was flat at 0.78%, while the yield on the 10-year note fell 3 bps to 1.65% and the 30-year bond rate lost 5 bps to 2.39%.

Tomorrow, we will get a look at the largest portion of the housing sales market in the form of August existing home sales, with closings on homes expected to increase 1.1% month-over-month (m/m) to an annual rate of 5.45 million units. As noted in the Schwab Market Perspective: Round and Round We Go…, economic data appeared to be perking up in June and July, aided by better housing data. And while the economy still appears to be growing, the recent round of data has thrown some cold water on the hopes for a sustainable uptick in growth. Read more at www.schwab.com/marketinsight, while you can also find more on the housing sector in Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform. Follow Schwab on Twitter: @schwabresearch.

As well, weekly initial jobless claims will be released, forecasted to tick higher to 261,000 from the prior week's 260,000, as well as the Index of Leading Economic Indicators, with economists expecting a flat reading for August following the 0.4% month-over-month increase seen in July. Rounding out the calendar will be regional manufacturing activity reports from the Chicago Fed and the Kansas City Fed.

Europe and Asia higher following Bank of Japan policy decision

European equities moved mostly higher, ahead of today's highly-anticipated monetary policy decision from the Fed. However, with the Fed expected to leave its policy stance unchanged, the Bank of Japan (BoJ) garnered focus after it changed its previous policy stance, which boosted the global financial sector. The BoJ opted to not go further into negative interest rate territory, which has weighed on the outlook for banking sector profitability, deciding to go in a different direction by targeting the yield curve and committing to overshooting its inflation target. The euro ticked higher and the British pound dipped versus the U.S. dollar, while bond yields in the region finished mostly to the upside. The economic calendar remained light, though U.K. public sector net borrowing in August rebounded. Amid the heightened scrutiny on the global monetary policy landscape and continued uncertainty regarding global growth, Schwab's 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 www.schwab.com/oninternational.

Stocks in Asia finished mostly to the upside in the wake of the Bank of Japan's much-awaited monetary policy decision, where it changed its framework and appeared to foster optimism that the central bank was willing to try a different approach to boosting economic activity. The BoJ held off on further reducing rates into negative territory but announced that it will shift from a monetary base focus to targeting the yield curve with its government bond purchases as it also scrapped the average maturity target for its government bond holdings. Moreover, the BoJ abandoned its 2.0% inflation target and committed to overshooting its inflation goal. Japanese stocks rallied on the move, led by financials, while the yen weakened during the session, but reversed higher after the closing bell. Amid the increased volatility as of late, 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 www.schwab.com/oninternational.

Mainland Chinese equities and those listed in Hong Kong rose, as did markets in Australia and South Korea, but cautiousness ahead of the Fed decision hamstrung Indian securities.

Reports slated for tomorrow's international economic calendar include: import prices from Germany, the business climate index from France and Spain's trade balance.

Modest Gains Ahead of Tomorrow's Main Events

Charles Schwab: On the Market

Posted: 9/20/2016 4:15 PM ET

Modest Gains Ahead of Tomorrow's Main Events

U.S. equities finished modestly higher in a somewhat subdued session, as crude oil prices staged a humble rebound, and with the global markets on the edge of their seats ahead of tomorrow's monetary policy decisions from the Fed and Bank of Japan. Treasuries finished higher following a disappointing housing construction report, as did gold and the U.S. dollar. News on the equity front centered around some second-tier earnings results.

The Dow Jones Industrial Average (DJIA) rose 10 points (0.1%) to 18,130, the S&P 500 Index ticked nearly a point higher to 2,140, and the Nasdaq Composite increased 6 points (0.1%) to 5,241. In light-to-moderate volume, 748 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.19 higher to $44.05 per barrel, wholesale gasoline gained $0.01 to $1.43 per gallon and the Bloomberg gold spot rose $1.65 to $1,314.84 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 96.01.

Lennar Corp. (LEN $43) reported fiscal 3Q earnings-per-share (EPS) of $1.01, above the $0.90 FactSet estimate, as revenues rose 13.7% year-over-year (y/y) to $2.8 billion, north of the projected $2.7 billion. However, new orders and gross margins missed expectations. The homebuilder said the housing market's recovery has continued to progress on a slow, steady and sometimes choppy path. LEN was solidly lower.

FedEx Corp. (FDX $164) announced that effective January 2, 2017, it will increase shipping rates for its express, ground and freight services. FDX traded higher.

Steel Dynamics Inc. (STLD $24) issued 3Q EPS guidance that came in below the Street's expectations, as the steel company noted that demand for heavy equipment, agricultural and energy sectors remains challenged, and higher raw material steel costs. STLD also said lower steel shipments are expected to offset some positive margin impact. STLD was lower.

Shares of Ascena Retail Group Inc. (ASNA $6) tumbled after the parent of Ann Taylor and Lane Bryant issued full-year guidance that severely missed analysts' forecasts. The disappointing outlook was given as the company posted 4Q EPS ex-items of $0.08, below the expected $0.16, and a larger-than-expected drop in same-store sales, while revenues of $1.8 billion were roughly in line with forecasts.

Housing construction activity misses

Housing starts (chart) for August declined 5.8% month-over-month (m/m) to an annual pace of 1,142,000 units, below the Bloomberg forecast of a 1,190,000 unit rate. July starts were upwardly revised slightly to an annual pace of 1,212,000. Weakness in single- unit starts out of the Northeast and South weighed on the report, more than offsetting growth in the West and Midwest. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, dipped 0.4% m/m in August to an annual rate of 1,139,000, after July's downwardly revised 1,144,000 rate, and south of the expected annual pace of 1,165,000 units. Midwest and West permits rose, offset by flat single-unit permits in the Northeast and a drop in multi-unit structures in the South.

The softer-than-expected construction activity may have caught some off guard given the recent upbeat housing data, including yesterday's jump in the NAHB's homebuilder sentiment report. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, recommends in his article, Real Estate Sector: Marketperform a marketweight positon for the real estate group, pointing out tailwinds of low interest rates and an improving economy being offset by the potential for rising rates and a changing consumer, along with a possible inflection point facing apartment demand. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Treasuries finished higher, as the yield on the 2-year note was flat at 0.77%, while the yields on the 10-year note and the 30-year bond declined 3 basis points (bps) to 1.69% and 2.43%, respectively.

The attention of the global markets remains on central bank action, ahead of tomorrow's monetary policy decisions from the Bank of Japan (BoJ), hours before the 2:00 p.m. ET decision from the Federal Open Market Committee (FOMC) (economic calendar). Uncertainty regarding if the BoJ will deploy further stimulus measures and/or move further into negative interest rate territory remains, while its comprehensive review of the efficacy of its policy measures thus far will likely garner attention. Moreover, odds of a FOMC rate hike have diminished in the wake of some choppy economic data, though odds of a December FOMC rate hike continue to hover around the 50% mark, per Bloomberg. The markets will also be dissecting its statement, which will be followed by the customary press conference from Chairwoman Janet Yellen and accompanying updated economic projections looking for clues to whether a rate hike this year is in the cards.

For what to look for, see our latest commentary, Fed and Bank of Japan Meetings: What to Watch, at www.schwab.com/insights, where you can also find Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Global Investment Strategist, Jeffrey Kleintop, CFA, video titled  Is the Bear Back: What's Behind the Renewed Volatility? at www.schwab.com/insights and follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.

The only other item on tomorrow's economic calendar is MBA Mortgage Applications.

Europe and Asia mixed as central bank caution continues

European equities pared early gains and finished mixed, with global caution prevailing ahead of tomorrow's monetary policy decision from the Bank of Japan and the Fed. The energy sector was hamstrung by sluggishness in crude oil prices, while financials were bogged down by continued pressure on Italian banks. The Stoxx Europe 600 Index failed to follow up on yesterday's rebound from last week's drop to a six-week low as global monetary policy uncertainty, the late-June vote in the U.K. to leave the European Union—known as a Brexit—and a plethora of mixed global economic data hamstrung conviction. Schwab's Jeffrey Kleintop, CFA, offers his latest analysis for global investors in his article, World Tour: An Around The World Look At the Economic Landscape. Also, with volatility ramping up on the aforementioned headwinds, Jeff 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 all these articles at www.schwab.com/oninternational. The euro dipped and the British pound declined versus the U.S. dollar, while bond yields in the region lost ground. In economic news, Switzerland's trade surplus widened slightly in August.

Stocks in Asia finished mixed on the heels of the failed advance in the U.S. yesterday, while global conviction remained stymied ahead of tomorrow's monetary policy decisions from the Fed and BoJ. Japanese equities returned to action following yesterday's holiday break, declining even as the yen moved lower with the markets grappling with the uncertainty regarding the range of actions by the BoJ, along with its much-awaited comprehensive review. For more on Japan's monetary policy, see Schwab's Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter money at www.schwab.com/oninternational. Mainland Chinese stocks, as well as those traded in Hong Kong Seng dipped, while Australian securities rose modestly following yesterday's technical glitch that halted most of the trading session, while the minutes from the Reserve Bank of Australia's unchanged monetary policy decision earlier this month suggested it was consistent with sustainable growth and achieving its inflation target. Elsewhere, Indian stocks declined, and South Korea's markets saw a nice boost.

Even though all eyes will likely be on the monetary policy decisions from Japan and the U.S., there are some economic reports overseas that may garner some attention, including Japan's trade balance, PPI from South Korea, public sector net borrowing from out of the U.K., and industrial orders from Spain.

Financial Review

Waiting on the Fed

Sinclair Noe — September 19, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 3 = 18,120
SPX – 0.04 = 2139
NAS – 9 = 5235
10 Y un – 1.70%
OIL + .16 = 43.19
GOLD + 2.80 = 1313.80

The Federal Reserve’s Federal Open Market Committee meets tomorrow and will issue a statement on Wednesday. A string of disappointing results on the U.S. economy in the past several weeks has all but ensured that interest rates will remain ultra-low for consumers and businesses for another few months.

That doesn’t mean the economy is in horrible shape, just more of the slow, consistent, sluggish, steady growth that we’ve seen for quite some time. Is it enough to move the Fed? Wall Street investors only see somewhere between a 9% to 15% chance that the Fed will hike rates. Still, the Fed could hike rates; they have certainly said a hike is on the table. Of course we won’t know for sure until the Fed makes its announcement.

The major stock indices started the day in positive territory. The Dow had an early gain of 100 points. Last week, the bulls and the bears faced off. As much as the bulls tried last week, they could never get the market back above a key hurdle. The threat of a September rate hike just continued to circulate, and never gave the buyers a chance to get traction. Then again, the bears didn’t make any progress either. As well as the S&P 500 held up last week, we’re still closer to a technical breakdown than a breakout.

Most likely, traders will not place big bets before Wednesday’s interest rate decision. After the Fed statement comes out, look for traders to trade, probably with enough commitment to break either support or resistance; a sizeable movement to finish out the week.

The Bank of Japan is also holding a meeting this week and they will issue their monetary policy a few hours before the Fed. The BOJ remains the most aggressive major central bank when it comes to quantitative easing—its program of bond and other asset purchases as well as negative interest rates that are designed to reflate Japan’s stubbornly sluggish economy.

Negative rates have failed to weaken the Japanese yen.  Year to date, the yen is up nearly 18% versus the dollar and 15% versus the euro. There is speculation the Bank of Japan may try to flatten the yield curve by buying long-term debt and selling short term debt. (Which sounds a lot like “Operation Twist”.)

Excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years, according to the Bank of International Settlements’ quarterly review. The central bank of central bankers also called the recent equity rally “more stick than carrot,” but stopped short of warning of a bubble, with policy makers questioning whether market prices fully reflect potential risks.

Global bond issuance is running at its fastest pace in nearly a decade as companies, countries and U.S. agencies such as Fannie Mae and Freddie Mac binge on debt. According to Dealogic, a total of $4.88 trillion of debt has been sold since the year began as issuers take advantage of rock-bottom borrowing costs. The figure is a hair below that of 2007, when $4.91 trillion of bonds were issued during the same period.

It seems more likely that London will lose its “passporting rights” with a hard Brexit. Some leading Conservative party members are currently pushing for a so-called hard Brexit option, which would end free movement between the U.K. and the EU and cut trading ties with the remaining 27 member states. But Jens Weidmann, the president of Germany’s central bank says if the U.K. exits the single market, the passport rights for London-based financial firms “would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area.” Passporting allows British banks, including insurers and funds to sell their services seamlessly in any EU member state, without having to obtain a local license.

Losing the right means any financial institution using London as their EU headquarter would have to move to another country and “passport” their services into the rest of the union from there. They could also stay based in the U.K, and instead apply for regulatory approval in each country it wishes to continue to do business. In any case, the industry has warned it will cost billions of pounds in office relocations, staff transfers, added paperwork and new capital requirements. There are also concerns jobs will be lost to other European financial hot spots, such as Frankfurt, Paris, Dublin and Luxembourg.

Venezuelan President Nicolas Maduro said that OPEC and non-OPEC countries are close to an agreement to stabilize markets ahead of an informal meeting in Algiers next week. The uncertainty ahead of that meeting has seen oil investors head for the sidelines, cutting wagers on both falling and rising crude prices.

The National Association of Home Builders index on builder confidence regarding newly built, single-family homes climbed to 65 points in September from a downwardly revised 59 in August. As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers.

Contract negotiations between Canada’s Unifor union and General Motors are continuing around the clock, with the two sides divided over new investment, ahead of a looming strike deadline that could see 3,900 workers walk off the job by midnight tonight. A strike would halt powertrain and vehicle production in at least two Canadian plants and potentially start a ripple effect for GM production in the U.S. that relies on those parts.

Although approval had been expected by the end of August, Iran has been told the U.S. will issue export licenses for the purchase of more than 200 Boeing and Airbus aircraft by the end of September. The US Treasury can veto sales of modern aircraft to Iran, including non-U.S. aircraft, due to the high proportion of US parts.

Sarepta Therapeutics shares jumped up as much as 82% in early morning trade after the Food and Drug Administration granted its Duchenne muscular dystrophy drug accelerated approval. The drug – the first treatment for the degenerative disease – has had a long and controversial history with the FDA. The agency voted against approval, then delayed review.

Duchenne muscular dystrophy, which mostly affects boys, typically kills patients before the age of 30. Patients and their families were particularly outspoken advocates for the approval of the drug, pushing back against the agency’s concerns at meetings open to the public. Sarepta shares are up about 160% over the last three months.

Salesforce is embedding artificial intelligence into its software, making it the latest firm to enhance workplace tools with human-like abilities. Called Einstein, the new offering is a set of online A.I. services designed to automate tasks, predict behavior and spotlight relevant information. Salesforce will demonstrate the software at its annual user conference next month in San Francisco.

The announcement also allowed Salesforce to pre-empt an announcement from Oracle, which also is holding its annual customer event in San Francisco. High on Oracle’s list of new features: real-time analysis of enormous amounts of data. Oracle calls its product Oracle A.I. Elsewhere, General Electric is pushing its A.I. business, called Predix.

IBM has ads featuring its Watson computer talking to various celebrities. More than 30 private companies working to advance artificial intelligence have been acquired in the past five years, and Salesforce has been among the most active buyers along with Alphabet, Intel and Apple.

And it’s all kind of cool and exciting and maybe a little creepy. So, what’s really happening?

And the answer is that it is probably too soon to say for certain. For Salesforce the idea is to provide its customers sales tools. Who are the best prospects to call this week? Which leads are most likely to become prospective clients? Why am I getting outsold by my competitors in certain markets? How long will it take a deal to close?

We don’t know what value A.I. can provide because people are still trying to figure out how to use it. At its core, A.I. is just a series of advanced statistics-based exercises that review the past to indicate the likely future, or look at current customer choices to figure out where to put more or less energy. People are going to have to experiment, most likely first on pain points like security and product marketing.

Technology matures when we don’t pay much attention to it, or only notice when it fails; think of electricity in your house, or your phone (which has enough computing power to fly a rocket to the moon). Of course, by the time A.I. becomes ubiquitous and fades into the fabric of everyday life, we’ll have some new technology to worry about.

Nearly one-third of Hanjin Shipping container ships that have been waiting to dock at ports around the world have offloaded their cargo, raising hopes that the disruption in the global supply chain will ease ahead of the year-end holiday season. Meanwhile, a South Korean judge has ruled that all Hanjin vessels that have unloaded must cancel their charter agreements and return the ship to their owners.

After rolling out a similar hub in the US, UPS is expanding its 3D printing services to Asia with a new facility in Singapore run by its partner Fast Radius. The company sees 3D printing as a potential threat to its warehousing business – where it stores parts for manufacturers – so it has looked to incorporate the technology into its business model.

As it grapples with a massive global smartphone recall that is estimated to cost more than $1 billion, Samsung Electronics is moving swiftly to sell stakes in other tech companies to raise cash. The firm said Sunday it disposed of shares in ASML, Seagate, Rambus and Sharp. Total proceeds from the sales were nearly $900 million.

Early Gains Fall Flat

Charles Schwab: On the Market

Posted: 9/19/2016 4:15 PM ET

Early Gains Fall Flat

U.S. equities finished mixed and near the unchanged mark, as early strength amid a rebound in crude oil prices lost steam along with the commodity, while global conviction continued, and will likely remain hamstrung, ahead of the mid-week monetary policy decisions from the Fed and Bank of Japan. News on the equity front again surrounded M&A activity, while shares of Sarepta Therapeutic surged after an FDA approval of its muscular dystrophy drug. Treasuries were nearly flat, despite a jump in home builder sentiment, and gold gained ground, while the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) fell 4 points to 18,120, the S&P 500 Index was unchanged at 2,139, and the Nasdaq Composite declined 10 points (0.2%) to 5,235. In moderate volume, 764 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.24 higher to $43.62 per barrel, wholesale gasoline lost $0.04 to $1.42 per gallon and the Bloomberg gold spot rose $2.92 to $1,313.27 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 95.84.

Tech Data Corp. (TECD $85) announced an agreement to acquire the technology solutions unit of Avnet Inc. (AVT $42) for stock and cash valued at about $2.6 billion. Under the terms of the deal, AVT will receive $2.4 billion in cash and 2.8 million shares of TECD. TECD rallied over 20% and shares of AVT gained solid ground.

Isle of Capri Casinos Inc. (ISLE $22) announced an agreement to be acquired by Eldorado Resorts Inc. (ERI $14) for $23.00 per share in cash, in a deal with a total consideration of about $1.7 billion, including debt. The deal will create a combined company that owns and operates 20 regional gaming facilities in 10 states. ERI closed slightly lower, while ISLE was up nearly 30%.

Sarepta Therapeutics Inc. (SRPT $49) surged nearly 75% after the U.S. Food & Drug Administration (FDA) granted accelerated approval of its drug to treat Duchenne muscular dystrophy.

Homebuilder sentiment jumps

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month jumped to 65 from August's downwardly revised 59 figure, and versus the Bloomberg estimate of 60. Builder confidence moved further above the key 50 mark, which separates good and poor conditions, reaching the highest level since October 2015. The NAHB said as household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers, a positive sign that the housing market continues to move forward.

Today's report kicks off an economic week that will bring a plethora of key reports to digest tilted toward the housing sector, headlined by the releases of August housing starts and building permits and existing home sales. Tomorrow, housing starts are projected to decline 1.7% month-over-month (m/m) to an annual rate of 1,190,000 units, while building permits are expected to rise 1.8% to an annual rate of 1,165,000 units. For a look at investing in the housing market, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform at www.schwab.com/marketinsight.

However, the attention of the global markets will likely be undivided as the Bank of Japan (BoJ) will deliver its monetary policy decision early Wednesday, hours before the Federal Open Market Committee (FOMC) will announce their policy stance. Uncertainty regarding if the BoJ will deploy further stimulus measures and/or move further into negative interest rate territory remains, while odds of a FOMC rate hike have diminished in the wake of the aforementioned economic data. However, odds of a December FOMC rate hike remain near 50%, per Bloomberg, and the markets will be dissecting its statement, which will be followed by the customary press conference from Chairwoman Janet Yellen and accompanying updated economic projections looking for clues to whether a rate hike this year is in the cards.

As noted in the Schwab Market Perspective: Round and Round We Go…, after August’s all-time highs followed by a stall, stocks were once again jolted into action by mixed messages from the Federal Reserve (Fed). We continue to believe the bull market is intact but near term risks are elevated. Economic data continues to have a groundhog day quality to it—perking up some before then pulling back again. The Fed isn’t the only game in town and other global central banks have added to the uncertainty, with many catalysts this fall potentially adding to the monetary mashup. Read the whole perspective at www.schwab.com/marketinsight.

Treasuries finished nearly unchanged, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.78%, while the yields on the 10-year note and the 30-year bond were flat at 1.70% and 2.45%, respectively. For a timely discussion of the recent ramp up in market volatility see the video from Schwab's Vice President of Trading and Derivatives, Randy Frederick and Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Is the Bear Back: What's Behind the Renewed Volatility? at www.schwab.com/insights and follow Randy and Jeff on Twitter: @randyafrederick and @jeffreykleintop.

Europe rebounds as energy and miners rally, Asia mostly higher 

European equities traded higher, with the Stoxx Europe 600 Index recovering from recent weakness as oil & gas issues gained solid ground amid a rebound in crude oil prices, while a rally in mining stocks boosted the basic materials sector. However, the political landscape garnered attention following weekend elections in Germany and Russia, while global caution remained ahead of this week's key monetary policy decisions in the U.S. and Japan. Amid the backdrop of heightened global volatility as of late, 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 at www.schwab.com/oninternational. The euro and the British pound gained ground on the U.S. dollar, while bond yields in the region finished mixed. In economic news, eurozone construction output rebounded in July.

Stocks in Asia finished mostly to the upside, with markets in China and South Korea returning to action following last week's holiday, while volume was muted as Japanese markets took the day off for a holiday and Australian markets were halted for the day due to a technical glitch that disrupted the trading session. The yen has shown some strength as the global markets await this week's monetary policy decision, which will precede the policy announcement from the Fed. Uncertainty remains regarding what the BoJ will announce, while the central bank is expected to release its comprehensive review of the efficacy of its policy measures thus far. For more on Japan's monetary policy, see Schwab's Jeffrey Kleintop's, CFA, article, What investors need to know about helicopter moneyat www.schwab.com/oninternational. Mainland Chinese stocks and those listed in Hong Kong advanced amid ramped up mainland buying of Hong Kong shares via the trading link between the two exchanges, while a read on August property prices rose the most in more than six years, per Bloomberg. Meanwhile equities traded in South Korea and India finished to the upside.

Economic news abroad will be sparse tomorrow, with the only reports of note being housing prices from Australia and PPI from Germany.