Financial Review

A Quiet Friday in August

Sinclair Noe — August 25, 2017

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DOW + 30 = 21,813
SPX + 4 = 2443
NAS – 5 = 6265
RUT + 3 = 1377
10 Y – .02 = 2.17%
OIL + .43 = 47.86
GOLD + 5.00 = 1291.80
BITCOIN – 1.09% = 4360.42 USD
ETHEREUM – 0.90% = 328.87

For the week, the Dow rose 0.65 percent, the S&P 500 gained 0.72 percent and the Nasdaq climbed 0.79 percent. The weekly gains for equities snapped a two-week skid of declines for the Dow and S&P 500 and a four-week drop for the Nasdaq.

Hurricane Harvey projected to make landfall around Corpus Christi, Texas between 10 PM and midnight but it is now hitting the Texas coast with heavy wind and rain. The storm is more accurately stretched along a wide swath of the coast, with heavy rains as far east as New Orleans and inland beyond San Antonio.

Harvey is now a Category 3 storm, meaning the government now classifies it as a “major” hurricane with 120-mph winds and gusts over 150-mph. Harvey, the strongest storm to hit the U.S. since Wilma in 2005, is forecast to inundate Houston, Corpus Christi and Galveston, cities with more than 2.6 million people combined, with drenching rain and dangerous flooding. Texas Governor Greg Abbott declared a state of disaster for 30 counties. The storm may generate $1.9 billion of economic losses and $1.3 billion in insured losses.

The problem with this hurricane is they don’t see it trailing off in any direction so it’s just going to hover Harvey could deliver a one-two punch that could also spell trouble for the Houston Ship Channel. One forecast model shows the storm returning to the Gulf of Mexico before making a second landfall closer to Galveston, sending a storm surge into the channel, which carries more than 163 million tons of cargo per year.

The surge, coupled with the rains, could bring about water levels higher than ever recorded in the Houston metropolitan area. A storm surge of up to 12 feet may occur near the Padre Island National Seashore. Storm surges account for close to half of all hurricane deaths. It is going to be an issue for the ship channels.

Harvey may dump as much as 35 inches of rain on areas of Texas over the next week. Usually, you don’t get peak rainfall and peak surge at the same time. If the forecast holds for Houston, rainwater would be running down streams and rivers while ocean water is surging up to meet it. In other words, that unprecedented amount of rain will have nowhere to go.

A large metro area like Houston is also particularly vulnerable to flooding. Large swathes of the city are concrete and asphalt, which prevents rainwater from properly draining. It doesn’t help that Houston is naturally a low-lying city with clay soil that doesn’t drain well anyway. Sewage drainage will probably be a problem and clean water may also be affected. And not just humans are affected – all sorts of wildlife will be moving to higher ground.

The Federal Emergency Management Agency is sending staff and supplies to the region. Flooding will probably close roads and inundate power plants, while strong winds may disrupt utilities’ systems and knock out power to hundreds of thousands of homes and businesses. Anadarko Petroleum, Exxon Mobil and Royal Dutch Shell are among the energy explorers that have shut platforms in the Gulf of Mexico.

Midstream LP shut natural gas capacity in south-central Texas; and Enbridge evacuated non-essential workers from some platforms. BNSF was halting traffic from Galveston Island late Thursday and holding Galveston-bound trains until further notice. Cameron LNG begins evacuating workers ahead of Hurricane Harvey.

Gasoline futures hit a 4-month high in intraday trade. It is estimated the hurricane will push gas prices up by about 10-cents per gallon in the short-term. One of the worst things that can happen to a wind farm is too much wind. The storm could knock out between 2.1 and 3.6 gigawatts of power near the Texas coast.

The weather is fine in Jackson Hole, Wyoming. It’s a nice place to go fly fishing. This morning, Janet Yellen delivered what is probably her final speech to the Jackson Hole Economic Summit, an annual gathering of central bankers.

Yellen defended the government’s response to the 2008 financial-market meltdown while outlining some areas that regulators could review to improve efficiency in the financial system. Yellen focused on financial regulation and veered away from monetary policy. Yellen said reforms put in place after the 2007 to 2009 crisis have strengthened the financial system without impeding economic growth and any changes to these rules should remain modest.

That pretty much signals that she is not expecting to be re-nominated when her term expires in February.

European Central Bank president Mario Draghi also spoke at Jackson Hole. Draghi said he still is not seeing much inflation in the Eurozone and “a significant degree of monetary accommodation is still warranted.” Draghi said protectionist policies pose a “serious risk” for growth in the global economy.

Gary Cohn, who was president of Goldman Sachs before accepting a position in the Trump administration as head of the White House national economic council, is considered the front-runner to replace Yellen as the next Chair of the Federal Reserve.

Today Cohn said he had come under “enormous pressure” to resign after Trump equivocated in his denunciation of white supremacist groups, saying there had been “very fine people on both sides” at the demonstrations. The economic adviser said he had considered stand down but decided to stay on after discussions with the president. The New York Times reported he had gone as far as drafting a letter of resignation.

Treasury Secretary Steven Mnuchin said on Friday the nation’s debt ceiling will be raised in September and that after talks with congressional leaders from both parties everyone is “on the same page.” Mnuchin says he’s hopeful about getting a tax-code overhaul done by the end of this year after flatly stating he was “wrong” about finishing a deal by August.

Investors are fleeing U.S. stocks in a way they haven’t since 2004. According to a new Bank of America Merrill Lynch, for 10 straight weeks a total of $30 billion has left U.S. stocks, marking the longest streak of outflows since 2004.

Investors turned instead to emerging markets and European and Japanese stocks, which saw $36 billion in inflows over the last 10 weeks. The 10-week outflow from U.S. stocks comes despite the S&P 500’s nearly 1 percent gain this quarter and a record high on Aug. 8.

Some of the top sectors of the year have seen significant outflows, including tech, financials, and the consumer sectors. The only sector that has seen inflows – defense stocks. By investing style, investors withdrew $1.6 billion from U.S. growth stock funds and $1.1 billion from U.S. value stock funds

A South Korean court found Lee Jae-yong, heir to the Samsung empire and its de facto leader, guilty on charges of bribery and embezzlement, and other crimes. The court sentenced Lee to five years in prison. That’s less than the 12-year term prosecutors were hoping for. But it’s long enough to ensure that he will spend time behind bars.

Lee’s father, Lee Kun-hee, himself was once convicted for tax evasion, but he never served prison time because sentences of up to three years can be suspended. The ruling puts a cap on months of proceedings that tied the country’s single most important company to a corruption scandal revolving around former president Park Geun-hye. Park was impeached in March and is herself separately on trial.

The court found Lee guilty of providing $6.3 million in bribes to Park’s personal confidante, to secure approval for a merger between two Samsung subsidiary companies that gave Lee more power at the expense of other shareholders. Lee will appeal the conviction.

The conviction also marks a win for Koreans hoping to hold accountable the country’s chaebol—the country’s family-run conglomerates, which the public has increasingly resented for their corruption and grip on the economy. Newly-elected president Moon Jae-in made chaebol reform a key part of his campaign platform.

From exploding phones to execs charged with embezzlement, it has been an eventful year for Samsung, and none of those problems seem to matter. Samsung shares have gained 40% over the past year, a rise worth some $85 billion in market cap.

YouTube has expanded the internet-delivered YouTube TV subscription service into 14 new U.S. markets, which makes it available to half of all U.S. households. YouTube added the Phoenix market in July. According to Google, YouTube TV now offers the most markets with live local broadcast feeds from the four major broadcasters — ABC, CBS, Fox and NBC — than any over-the-top competitor.

Rivals in the space include AT&T’s DirecTV Now, Dish Network’s Sling TV, Hulu, Sony’s PlayStation Vue and FuboTV. However, the YouTube TV “skinny bundle” is missing big chunks of the cable dial. Unavailable on the service: networks from Turner, including CNN, TBS and TNT; Viacom; Discovery Communications; and Scripps Networks Interactive. HBO also isn’t available as an option, but Showtime is.

How much traction YouTube TV has gained to date isn’t fully clear; Google hasn’t released any subscriber numbers. But the service, and the other OTT contenders, are clearly appealing to a consumer segment that’s looking for a cheaper alternative to cable, satellite and telco TV — and traditional pay-TV customers are continuing to dwindle.

After weeks of relative slumber, gold traders were rudely awoken to a surge in volume and volatility. In a span of one minute, gold futures contracts equaling more than 2 million ounces traded. Prices spike, then dropped just as fast, and gold settled slightly higher for the session.

We don’t know who or why. But so much for a quiet Friday in late August.

Financial Review

Non-Freak

Sinclair Noe — August 24, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW – 28 = 21,783
SPX – 5 = 2438
NAS – 7 = 6271
RUT + 4 = 1373
10 Y + .02 = 2.19%
OIL + .24 = 47.64
GOLD – 4.50 = 1286.80
BITCOIN + 0.99% = 4405.76 USD
ETHEREUM + 0.10% = 326.24

Stocks drifted in an aimless manner today, meandering from positive to negative and back and forth again. The good news is that the market has made it through most of August without freaking out – and there have been a few opportunities for a freak. But the markets have been well behaved and orderly, with a slight downward bias.

Soon, August will end and Congress will return and they will have a plate full of issues including the debt ceiling and tax reform. Trump picked a new fight today with fellow Republicans over the debt ceiling, blaming congressional leaders for not including funding for veterans’ affairs as part of the debt ceiling package. Trump tweeted that debt ceiling approval is now a mess.

Earlier in the week, Senate Majority Leader McConnell said the debt ceiling would be raised. Today at a town hall meeting in Washington state, House Speaker Paul Ryan confirmed debt ceiling legislation would be passed in time. And it probably will. It is not complicated. Write a clean bill, no amendments, and it will pass. It should be easy, but…

On the tax reform side, Republican congressional leaders don’t expect to release a joint tax plan with the White House next month, and they’ll rely instead on House and Senate tax-writing committees to solve the big tax questions that remain unanswered.

White House officials and congressional leaders involved in tax negotiations, jointly released a two-page statement in July that outlined a broad set of agreed-upon tax principles.That statement was short on specifics, including such basic matters as where to set the corporate tax rate and how to set up individual tax brackets.

Back in March, White House press secretary Sean Spicer’s said the Trump administration would be “driving the train” on efforts to rewrite the tax code. So far, the train hasn’t left the station. Chief economic advisor Gary Cohn had said previously that a tax framework would be released after Labor Day. More recently, he indicated the White House was pushing tax efforts back to the hill.

House Ways and Means Chair Kevin Brady has said he expects hearings and markups on tax legislation this fall. The Senate Finance Committee is planning to do the same. It might be possible to get tax reform this year but don’t hold your breath.

Tomorrow, Janet Yellen will be giving what could be her last speech Friday as Fed chair at the annual gathering in Jackson Hole, Wyoming. Yellen’s term as Fed chair expires in February and Trump does not seem inclined to re-appoint her.

Yellen has brushed aside questions about her future. She professes to be focused on the job at hand, which is a significant one — namely, guiding the Fed from a path of the ultra-accommodative crisis-era policies to a more normalized stance. That includes higher – though still low – rates and the first steps toward unwinding the $4.5 trillion balance sheet of bonds the Fed accrued during its economic stimulus efforts.

With all that in play, Fed watchers expect Yellen’s speech to be less a valedictory look at the past and more a course-charting path for her successor. Yellen’s speech comes nearly a full decade after the Fed began cutting its benchmark funds rate, in September 2007 in the face of the unfolding financial crisis that threatened the nation’s banking system and ultimately pulled the economy into recession.

By December 2008, the funds rate had been sliced to near zero and the Fed began buying bonds to generate liquidity and keep interest rates low to spur the housing industry. By the time Yellen took over in February 2014, the Fed was still at zero but had pumped up its balance sheet with trillions of bonds.

Stocks were on their way to the second-longest bull market in history, but the rest of the economy remained in question. The Yellen Fed has begun the process of normalization, raising rates 4 times, even though the inflation rate remains stubbornly south of 2%.

In the next few years, the Fed will continue dealing with the low-interest-rate world the financial crisis ushered in, plus the unwinding of the balance sheet, plus a raft of economic challenges to economic growth. Maybe Yellen will offer some advice tomorrow.

Yellen’s remarks are entitled “Financial Stability,” and therefore could skirt direct discussion of monetary policy. But given the nature of the forum and its high-profile audience — academic economists, top central bankers, and a handful of market participants — that is unlikely.

Rather than focusing on monetary policy directly, Yellen is likely to discuss how the Fed is supposed to manage its mandate of maintaining a stable financial system even as it stimulates economic growth to a level that is strong but does not generate undue inflation — or credit bubbles.

In a way, market expectations that the Fed will leave interest rates on hold at its next meeting in September, waiting until at least December to make another move, provide Yellen some breathing room.

Look for Yellen to maintain a slightly dovish tone, but mainly look for her to say nothing that would freak the markets. Nothing to rock the boat. She only must keep the markets and the economy steady and calm for 6 more months, and then it’s someone else’s problem.

Hurricane Harvey is headed for Texas. The hurricane has been gaining strength in the Gulf of Mexico. Only a few oil and natural gas platforms in the storm’s path have been shut, so they are still producing but rainfall threatens to flood refineries in Corpus Christi and Houston. Winds up to 75 mph and as much as 15 inches of rain were forecast. Flooding will be a big problem as the storm hits the Texas coast.

The National Association of Realtors reports sales of previously-owned homes slid to their lowest level of the year in July as the familiar dynamics of tight supply and strong demand continue to strain the housing market.

Existing-home sales ran at a seasonally adjusted annual rate of 5.44 million in July. That was down 1.3% from a downwardly-revised June pace. While July’s pace was 2.1% higher than a year ago, it was the lowest since last August.

Inventory dropped 9% from year ago levels. Strong demand meant listings went into contract in under 30 days. It also pushed prices higher. The median sales price in July was $258,300, a 6.2% increase compared to a year ago.

Amazon.com’s acquisition of Whole Foods will close on Monday, and they are going to make changes from Day One. The biggest of the changes seemed aimed at changing the store’s reputation as “Whole Paycheck” — a seller of food that might be wholesome for customers but also devastating to their pocket books.

No more. Amazon said it would offer lower prices on a “selection of best-selling staples across its stores, with much more to come.” Amazon also said that its Prime membership program, which costs $99 a year, will eventually become Whole Foods’ customer rewards program, providing members with further savings in stores. It did not provide any other details about those plans.

Shares of some of the country’s biggest grocery companies fell sharply after Amazon’s announcement. Kroger fell more than 6.5 percent, and Walmart, the nation’s biggest grocer, fell about 2 percent.

The collateral damage among grocers is just the latest example of Amazon imposing its will on an entire industry with a simple corporate announcement, leaving billions of dollars of erased market value in its wake. And there’s nothing to suggest this dynamic will slow down anytime soon. Retailers are being forced into a new reality where the specter of Amazon lurks at every turn.

Abercrombie & Fitch posted a smaller-than-expected loss in the second quarter, thanks to strength from its Hollister brand. The teen retailer said same-store sales fell 1%, better than the expected drop of 2.1%.

Revenue topped analysts’ forecasts at $779.3 million. The adjusted loss of 16 cents a share was better than forecasts for a loss of 33 cents. Sales at its Hollister brand rose 5% during the quarter.

Abercrombie shares jumped by 17% today, which seems like an over-reaction.

Sears recorded a smaller-than-expected loss in the second quarter while its revenue beat Wall Street expectations. Sears recorded an adjusted loss of $1.16 a share on revenue of $4.3 billion. Analysts were expecting a loss of $2.48 a share and sales of $4.2 billion.

Even though the department store topped expectations, it’s still struggling to lure shoppers through its doors. Sears announced it plans to close 28 more Kmart stores this year, which is in addition to the 150 Sears and Kmart stores it’s closing by the end of the current quarter.

Sears shares have fallen 39% over the past year.

Tiffany reported revenue of $959.7 million, boosted by growth in its fashion and design jewelry, and its profit topped expectations at 92 cents a share.

But it wasn’t all good news for Tiffany, same-store sales fell for the seventh quarter in a row, down 2% worldwide, which is a bigger drop than the 1% decline analysts were expecting.

Tiffany shares have jumped nearly 14% since the start of the year.

Dollar Tree advanced 5.6 as one of the best performers on the S&P 500 after the retailer’s profit and comparable sales beat estimates.

Signet Jewelers surged 16.7 percent after the company issued results and said it would buy an online jeweler.

Financial Review

Insert Clever Eclipse Headline

Sinclair Noe — August 21, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 29 = 21,703
SPX + 2 = 2428
NAS – 3 = 6213
RUT – 0.89 = 1356
10 Y – .01 = 2.18%
OIL – 1.11 = 47.40
GOLD + 7.10 = 1292.30
BITCOIN – 2.81% = 3940.88 USD
ETHEREUM – 2.52% = 315.65

Since August 7, the Dow Industrials have given back 397 points or 1.7%. The S&P 500 has slipped 0.08%, and the technology-weighted Nasdaq has led the way lower with a 2.6% move. Second-quarter results from S&P 500 reporting companies have been solid with 65% beating expectations. Guidance has largely also been quite positive.

The recent price action in equities has left the uptrend under pressure but at this point it doesn’t look like anything more than a pause – at least for the big Blue-Chip names. Small caps are having a tougher time. The Russell 2000 index of small and mid-cap companies moved into negative territory year-to-date.

Most recent economic data suggest the US economy is on better footing that it was in the first half of the year; which seems to be part of a trend for the past few years. This week, the markets are waiting to hear from Fed chair Janet Yellen; she delivers a speech at the Jackson Hole Economic Summit on Friday.

We know that the Fed has been raising rates and plans to trim holdings on its balance sheet, but last week’s minutes paint a picture of a cautious Fed. European Central Bank President Mario Draghi will also speak Friday. Don’t expect any big news on central bank policy.

The central bankers will be talking about economic growth and there will be plenty of discussions about low inflation. US inflation fell to 1.4 percent in June, based on the Fed’s preferred gauge, and consumer prices in the euro area – currently at 1.3 percent – have wavered since the start of the year.

Today, the Federal Reserve published a new survey providing extra detail on the labor market. The survey will be published 3 times a year. Survey says, workers see little hope for higher paychecks, and while they are increasingly searching for new jobs, they expect fewer offers to fall into their laps.

Survey respondents on average said in July that the lowest annual salary they would accept in a new job would be $57,960, down from $59,660 only four months earlier. This measure has declined since November, with most of the changes coming from older and higher-income Americans.

Asked what salary they expected in job offers over the next four months, the average response declined to $50,790 from $54,590 when the last survey was taken in March. The survey, conducted since early 2014 but published for the first time on today, also showed 22.7 percent of respondents searched for a job in the last four weeks, up from 19.4 percent in the previous report. Young people accounted for most of the increase.

The respondents saw a 22 percent likelihood of receiving at least one job offer in the next four months, down from an average response of 25 percent eight months ago.

Trump will speak this evening at 6 p.m. about “the path forward” for US strategy in Afghanistan and South Asia. He is expected to authorize about 4,000 more U.S. troops for counter-terrorism missions as part of a new military strategy in Afghanistan. After 16 years of stuttering war in Afghanistan, the Taliban has returned to its strongest level since 2001.

His plan comes just days after he fired his chief strategist, Steve Bannon, a vehement voice against sending more troops to Afghanistan, and the architect of Trump’s “America First” policy of limiting foreign engagement to situations where the US can benefit directly.

Tomorrow, Trump travels to Phoenix for a campaign rally at the Civic Center. Trump has said he is seriously considering a pardon for former Maricopa County Sheriff Joe Arpaio, who was found guilty of criminal contempt for defying a judge’s order in a racial profiling case.

Even without an announcement of a pardon, the visit could roil grievances and rallying cries after a week of protests in major cities across the country. Both Trump supporters and opponents are planning to demonstrate outside the rally, fueling police concerns about potential clashes.

The Washington Post reports the Trump administration has decided to disband the federal advisory panel for the National Climate Assessment, a group aimed at helping policy makers and private-sector officials incorporate the government’s climate analysis into long-term planning.

The Post said the charter for the 15-person Advisory Committee for the Sustained National Climate Assessment was due to expire Sunday. On Friday, National Oceanic and Atmospheric Administration acting administrator informed the committee’s leader that the agency wouldn’t renew the panel. The next National Climate Assessment is due for release next year.

A bit of hopeful news out of Washington today. Senate Majority Leader Mitch McConnell insisted the government will raise the debt ceiling and avoid defaulting on its debt. Treasury Secretary Steven Mnuchin has called for Congress to pass a bill to increase the borrowing limit by the end of September.

By then, the Treasury will have exhausted its so-called extraordinary measures to continue its borrowing authority and risks defaulting on its debt. The Treasury secretary has called for a “clean” debt-ceiling increase, meaning lawmakers would not attach spending cuts or other provisions to it.

Some conservatives, particularly in the House, have previously tried to pair measures to raise the debt ceiling with spending cuts. Mnuchin said the debt ceiling was his top priority when lawmakers return from recess next month.

Sempra Energy has placed a bid to buy Oncor for $9.45 billion in cash after majority owner Energy Future Holdings abandoned a deal to sell the Texas-based power transmission company to Warren Buffett’s Berkshire Hathaway. This represents a rare blow to Buffett, who avoids bidding wars for companies and had swooped in two months ago to buy Oncor after Texas regulators blocked two previous attempts by Energy Future to sell it.

Energy Future, which has been in bankruptcy since 2014, had initially planned to seek court approval today for the sale of Oncor to Berkshire for $9 billion over opposition from its biggest creditor, hedge fund Elliott Management. Instead, Energy Future will go with Sempra because of the value of the bid, a lower break-up fee and, most importantly, support from Elliott.

San Diego-based Sempra said it expected to own about 60 percent of a reorganized Oncor after it completes the transaction, which is valued at $18.8 billion, including debt. Energy Future owns 80 percent, but Sempra plans to sell some of that equity to other outside investors. A hearing on the revised reorganization plan and creditor support agreement was set for Sept. 6.

Total is buying Maersk’s oil and gas business in a $7.45 billion deal which the French energy major said would strengthen its operations in the North Sea and boost earnings and cash flow. For Danish company A.P. Moller Maersk, the sale of Maersk Oil, with reserves equivalent to around 1 billion barrels of oil, fits with a strategy of focusing on its shipping business.

Fiat Chrysler shares jumped almost 7% today after Great Wall Motors confirmed that it is interested in acquiring at least part of the company. The interest focuses on Fiat’s Jeep and Ram brands of off-road vehicles and trucks. Reports surfaced recently that a Chinese automaker was interested in placing a bid for the brands. Fiat Chrysler said in a statement it has not yet been approached by the Chinese automaker.

Johnson & Johnson was ordered by a California jury to pay $417 million to a woman who claimed she developed ovarian cancer after using the company’s talc-based Baby Powder. The Los Angeles Superior Court jury’s verdict is the largest to date in lawsuits alleging J&J failed to adequately warn consumers about the cancer risks of talc-based products.

The verdict included $70 million in compensatory damages and $347 million in punitive damages. It followed 5 trials in Missouri state court; Johnson and Johnson lost 4 of those trials, resulting in more than $300 million in verdicts against J&J. The company says it will appeal today’s verdict.

Today was the big solar eclipse. And it was probably a grand experience for people in the path of totality. Not such a big deal in Arizona, where we just had a partial eclipse. Hopefully, you did not try to look directly at the sun, unless you had special eyewear.

The pictures of the eclipse were great. My favorite is a picture taken in Wyoming, showing the moon covering about half the sun, and if you look closely, perfectly timed images show a tiny International Space Station passing in front of the sun. That must be one of the all-time great photobombs.

Many people did try to take pictures. And you may have noticed something strange. Your photos probably show the sun blown out in a blaze of light — not the crescent shape of a partial eclipse. But in some photos, a crescent did appear; it was just far from the actual sun and maybe looked blue. The effect is called a “lens flare,” which happens when a camera is exposed to a bright light.

In response, the lens captures some of the light as a reflection. Lens flares generally show up as little dots or circles, but during an eclipse they appear as small crescents. If you were hoping to capture what the eclipse looked like from your location, the crescent reflections that come out as lens flares are actually a pretty good representation. They are similar to the projections you might have seen through leaves or pinhole cameras.

And if you missed this eclipse or can’t wait to do it again, don’t worry. The next one is only 2,422 days away, April 8, 2024.

Financial Review

The Case Has Strengthened

Sinclair Noe — August 26, 2016

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

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DOW – 53 = 18,395
SPX – 3 = 2169
NAS + 6 = 5218
10Y + .06 = 1.62%
OIL – .04 = 47.29
GOLD – .90 = 1321.70

Federal Reserve chair Janet Yellen delivered a speech at the Jackson Hole Economic Symposium this morning. Here’s what she said, the key point: “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

Yellen said the Fed expects “moderate growth” in gross domestic product, additional strengthening in the labor market and inflation rising to 2% over the next few years.  She said that any decision on interest rates “always depends on the degree to which incoming data continues to confirm the Fed policy committee’s outlook.” Yellen spent the bulk of her speech discussing the potential need to add new tools to the Fed’s toolkit to combat the next recession given that interest rates remain so low. Yellen said the “U.S. economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability.”

In the past, Yellen has been dovish; in no hurry to raise rates; and she wasn’t exactly pounding the table, and she didn’t give a specific date when the Fed might make a move. And even though Yellen was making a case for action, the markets kind of shrugged it off initially. So, vice-chair Stanley Fischer came along later and removed any ambiguity, saying: “Yellen’s comments are consistent with a possible September hike.”

That is not a guarantee of a rate hike but if the Fed takes action in about 3 weeks, you can’t say you weren’t warned. Stocks, bonds and commodities were all sporting nice gains following Yellen’s speech, then Fischer provided clarification and selling ensued, while at the same time the dollar moved higher and the VIX spike 4.5%.

U.S. economic growth was a bit more sluggish than initially thought in the second quarter as businesses aggressively ran down stocks of unsold goods, offsetting a spurt in consumer spending. Gross domestic product expanded at a 1.1 percent annual rate, down from the 1.2 percent rate reported last month. The revision also reflected more imports than previously estimated as well as weak spending by state and local governments. The economy grew at a 0.8 percent pace in the first quarter. It grew 1.0 percent in the first half of 2016.

The government also reported that after-tax corporate profits fell at a 2.4 percent rate last quarter after increasing at an 8.1 percent pace in the first quarter. Weak profits could limit an anticipated rebound in business spending. With profits declining, an alternative measure of growth, gross domestic income, or GDI, increased at only a 0.2 percent rate in the second quarter, the weakest since the first quarter of 2013.

Masked in the latest quarter is a very strong 4.4 percent annualized growth rate for consumer spending which is 0.2 percent higher than the first estimate. Inventory draw is the quarter’s culprit, pulling down GDP by a very steep 1.3 percentage points. But, in a counter-intuitive twist, lighter inventory in times of slow economic growth is a major positive for future production and employment and is a major plus for the ongoing quarter. The line of thinking is that there’s no pony in here now, but at some future point, there will be a pony, because ponies have always appeared in the past.

The Commerce Department reports the trade gap narrowed to a seasonally adjusted $59.3 billion in July from $64.5 billion in June. Exports rose by $2.9 billion during the month while imports shrank $2.4 billion. A surge in food exports helped cut the nation’s goods gap. Exports of foods, feeds & beverages rose 31 percent in the month though export prices of agricultural goods actually dipped slightly in the month. Other export readings are less favorable including a decline for capital goods, reflecting weak global investment in new equipment, and a small dip for consumer goods.

The University of Michigan’s consumer sentiment index for August slipped to 89.8 from 90.0 in July. The index is 2.3% lower than a year ago.

A very good article by Rex Nutting in Marketwatch asks a key question: Who’s preparing the United States for the 21st century? Nobody, really. Not the 22 million private businesses, not the 118 million households, and not the 90,000 state, local or federal government agencies.

Since the recession, investments have fallen sharply, and they haven’t gotten back up again. It seems that everyone is still scarred by the Great Recession, and by the collapse of asset bubbles in 2000 and 2006. Gross domestic investment totaled about $3.6 trillion in the second quarter of 2016, about 20% of gross domestic product.

That may seem a large sum, but it’s the lowest share of GDP, except during recessions, since 1947. But when you consider depreciation, the actual number is probably closer to $750 billion in the second quarter, or 4% of GDP, about half of the average over the post-war period. In fact, net investment has been running at the lowest rates since the Great Depression of the 1930s.

Business fixed investment has fallen for three quarters in a row, the first time that’s happened outside of a recession or its immediate aftermath since the mid-1980s. Net investment by state and local governments dropped to 0.6% of GDP in the second quarter, about half the average over the post-war period.

We have an economy that’s underperforming, but no one is willing or able to invest the sums needed to build the offices, factories, mines, computers, machinery, roads and airports we’ll need in the future. Business leaders don’t see a quick payoff in long-term investments, and public officials can’t fill the gap because the public thinks austerity now is better than growth tomorrow.

A U.K. sentiment index from YouGov and the Centre for Economics and Business jumped to 109.8 from 106.6 in July. The July print was a three-year low, and the rise in August was the largest in three years. It looks like the panic that gripped the public in the immediate aftermath of the Brexit vote has subsided, but the Centre warns it could all change though as details of the Brexit start to become reality.

If you have an Apple iPhone, you need to fix it. Apple issued a patch to repair a dangerous security flaw in iPhones and iPads after researchers discovered that a prominent United Arab Emirates dissident’s phone had been targeted with a previously unknown method of hacking. The hack is the first known case of software that can remotely take over a fully up-to-date iPhone 6. The researchers said they had alerted Apple a week and a half ago, and the company developed a fix and distributed it as an automatic update to iPhone 6 owners.

Adding another twist to the drama over Herbalife, investment bank Jefferies has been looking for the past month to find buyers for Carl Icahn’s 18% (roughly $1 billion) stake in the company. As if the idea of Herbalife’s largest shareholder exiting wasn’t enough of a story, the report also says Bill Ackman was among a possible group of buyers. Ackman has been shorting the stock for years. 

Icahn’s sale would come just weeks after he expressed renewed confidence in the company following the FTC settlement. Ackman kicked off the fight in 2012 with a widely watched presentation and a $1 billion bet that the stock would collapse. Icahn joined the battle a few months later and soon after got several Herbalife board seats.

Since then, the men have screamed at each other on live television and they and the company have traded legal accusations amid multiple investigations and a feature-length documentary. If Ackman really wanted to crush Herbalife, one way would be to get rid of the largest holder and then sell.

Apollo Global Management said it would buy cloud services provider Rackspace Hosting in a deal valued at $4.3 billion. The $32 per-share-offer represents a premium of 6 percent to Rackspace’s Thursday closing price. It’s also a 38% premium to Rackspace’s closing price on August 3. There was a very large short interest in Rackspace, more than $400 million. Ouch.

This exit from the public market can be laid squarely at the feet of Amazon Web Services. Amazon and Rackspace used to be such fierce competitors in cloud computing that Rackspace spearheaded a project called OpenStack to give itself and other IT vendors a chance to compete with Amazon. And OpenStack was successful, just not as successful as Amazon. It says something that the company went private instead of being bought by its partners, Amazon, Microsoft or any IT firms looking to jump start their cloud revenues; and what it probably says is that Amazon is crushing it in the cloud.

The Surgeon General of the United States, Vivek Murthy, has sent an electronic letter to 2.3 million doctors asking for their help to curb what’s being called an “unprecedented” epidemic of opioid painkiller overdose deaths. It’s the first time in history that a surgeon general has sent a letter directly to American physicians. Despite being home to 5% of the world’s population, America consumes 80% of its opioids. Between 2013 and 2014, deaths from synthetic opioids skyrocketed by 79%, according to a new Centers for Disease Control and Prevention report released Thursday.

A 2014 report from the American Academy of Neurology estimates that more than 100,000 Americans have died from prescribed opioids since the late 1990s. Those at highest risk include people between 35 and 54, the report found, and deaths from opioids in this age group have exceeded those from firearms and car crashes.

Stocks off Highs, Up from Lows in Mixed Close

Charles Schwab: On the Market

Posted: 8/26/2016 4:15 PM ET

Stocks off Highs, Up from Lows in Mixed Close

U.S. stocks erased early session gains and finished mixed on the heels of Fed Chair Janet Yellen's highly anticipated speech which was followed by comments from Vice Chair Stanley Fischer to CNBC, alluding to the possibility of two rate hikes before year end. Treasuries, gold and crude oil prices were lower and the U.S. dollar was higher. In economic news, 2Q GDP was revised slightly lower, as expected, while on the equity front, GameStop and Ulta Salon sank in the wake of some disappointing earnings reports.

The Dow Jones Industrial Average (DJIA) declined 53 points (0.3%) to 18,395, the S&P 500 Index lost 3 points (0.2%) to 2,169, and the Nasdaq Composite increased 7 points (0.1%) to 5,219. In moderate volume, 808 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.31 to $47.64 per barrel, wholesale gasoline added $0.01 to $1.43 per gallon and the Bloomberg gold spot price decreased $1.08 to $1,320.90 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% higher at 95.47. Markets were down for the week, as the DJIA ticked 0.9% lower, the S&P 500 Index declined 0.7%, and the Nasdaq decreased 0.4%.

GameStop Corp. (GME $29) reported 2Q earnings-per-share (EPS) ex-items of $0.27, one penny north of the FactSet estimate, as revenues declined 7.4% year-over-year (y/y) to $1.6 billion, below the projected $1.7 billion. 2Q same-store sales fell 10.6% y/y, versus the expected 5.9% decline. GME issued 3Q and full-year guidance that was roughly in line with forecasts. Shares finished solidly lower.

Ulta Salon, Cosmetics & Fragrance Inc. (ULTA $255) posted 2Q EPS of $1.43, above the projected $1.40, as revenues rose 21.9% y/y to $1.1 billion, roughly in line with expectations. Quarterly same-store sales rose 14.4% y/y, above the estimated 12.9% gain. ULTA issued softer-than-expected 3Q earnings guidance, while raising its full-year outlook. ULTA was under solid pressure.

Yellen's speaks, 2Q GDP revised slightly lower as expected

Federal Reserve Chairwoman Janet Yellen spoke at the Central Bank's annual policy symposium in Jackson Hole, Wyoming on the subject of the Fed's monetary policy toolkit. Yellen noted that the U.S. economy is now nearing the Central Bank's goals of maximum employment and price stability. Looking ahead, Yellen noted that the Federal Open Market Committee (FOMC) expects moderate GDP growth, additional strengthening in the labor market and inflation rising to 2.0% over the next few years. In light of this outlook, she believes the case for an increase in the fed funds rate "has strengthened in recent months." She did reiterate that the FOMC's decisions always depend on the degree to which incoming data continues to confirm its outlook, and that the FOMC continues to anticipate that gradual rate increases will be appropriate.

Stocks and Treasuries gained ground on the speech and the U.S. dollar remained lower. However, the markets reversed course as Fed Vice Chairman Stanley Fischer spoke on CNBC after the speech suggesting that a September rate hike may be on the table and next week's August nonfarm payroll report will probably weigh on the decision. Fischer added that Yellen's comments were consistent with the possibility of as many as two rate hikes this year

Yellen's comments are in line with Schwab's Chief Investment Strategist, Liz Ann Sonders' view in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings, that we continue to believe a rate hike is on the table for this year. However, the combination of Fed policy uncertainty and the contentious election season could mean the recent lull in volatility will not persist into the fall. Read more at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

The second look (of three) at 2Q Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 1.1%, revised slightly from the 1.2% expansion reported in the first report. This matched the Bloomberg forecast. 1Q GDP expanded by an unrevised 0.8% rate. Personal consumption came in at a 4.4% gain for 2Q, up from the preliminary estimate of a 4.2% increase, where it was expected to remain. Personal consumption grew by an unrevised 1.6% in 1Q.

On inflation, the GDP Price Index was revised to a 2.3% gain, versus forecasts of an unrevised 2.2% increase, while the core PCE Index, which excludes food and energy, was adjusted at a 1.8% rise, versus expectations of an unadjusted 1.7% increase.

The final August University of Michigan Consumer Sentiment Index (chart) was revised to 89.8 from the preliminary level of 90.4, and compared to expectations of a slight rise to 90.8. The index was down compared to July's level of 90.0. The expectations component of the report was revised lower but remained above July's level, while current conditions were adjusted higher but below the prior month's level. The 1-year inflation outlook held steady at 2.5% but was down from July's 2.7% rate.

Treasuries finished lower , with the yields on the 2-year and 10-year notes rising 5 basis points (bps) to 0.84% and 1.62%, respectively, while the yield on the 30-year bond was 2 bps higher at 2.29%.For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds? Follow Randy on Twitter: @randyafrederick.

Europe higher following Yellen's speech

European equities gained ground amid an initial positive reaction to Fed Chairwoman Janet Yellen's speech that mirrored recent comments from Central Bank officials that the U.S. economy is now nearing goals of maximum employment and price stability, and the case for a rate hike has strengthened in recent months. However, healthcare stocks remained hamstrung by festering concerns about a pricing crackdown following the presidential election in the U.S. France's 2Q GDP growth was up 1.4% y/y as expected and matching 1Q's growth, while 2Q U.K. GDP growth increased 2.2% to match forecasts and following the 2.0% y/y expansion seen in 1Q. The British pound dipped versus the U.S. dollar, following its recent rally that has been fueled by a string of upbeat data suggesting the economy is seeing a limited impact from the late-June vote in the U.K. to leave the European Union, known as a Brexit. For commentary on the Brexit vote fallout, see Schwab's Director of International Research, Michelle Gibley's, CFA, article, Keep Calm and Carry On: The Brexit Shock That Wasn't at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. The euro lost ground on the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed as today's speech by U.S. Fed Chair Yellen kept conviction in check, while some disappointing inflation data out of Japan weighed on sentiment. Japan reported that core consumer inflation for July declined more than expected y/y, exacerbating deflationary concerns and sending equities in the region lower, while the yen reversed to the upside. However, Chinese stocks bucked the trend, rebounding modestly from yesterday's slide that came courtesy of resurfacing liquidity concerns and as reports fostered uneasiness about a government crackdown aimed at cooling the real estate markets. The cautious mood ahead of Yellen's speech resulted in a decline for securities in South Korea and India. Finally, weakness in financials and oil & gas issues helped pull Australian stocks to the downside. Amid the choppiness in the global markets, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers 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 both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks decline after Yellen's speech

U.S. stocks retreated from recent record highs for the week, following Friday's highly-anticipated speech from Federal Reserve Chairwoman Janet Yellen which culminated a week of commentary from Fed officials that raised the prospects for a rate hike this year, but did support the financial sector. Healthcare issues led to the downside amid resurfaced concerns about a crackdown on drug pricing as the U.S. presidential election looms, while the energy sector stumbled as crude oil prices came under pressure amid some bearish oil inventory reports. The U.S. dollar ticked higher and Treasuries were mixed, with rates on the short-end of the curve moving higher, while yields on the mid-to-long end lost ground.

Mixed earnings and economic data likely kept conviction in check. A jump in new home sales was met with a larger-than-expected drop in existing home sales, while durable goods orders showed business spending may be starting to pick up, though a preliminary read on services sector activity from Markit surprisingly declined. Best Buy Co. Inc. (BBY $40) rallied after its upbeat earnings report, while HP Inc. (HPQ $15) offered a disappointing outlook. As noted in the Schwab Market Perspective: The Calm Before the…., a period of peace has reigned in the market over the past month, but the lull in volatility likely won’t last. However, we do believe the secular bull market has further to run. Read the whole perspective at www.schwab.com/marketinsight.

Labor report set to command attention

On the heels of today's comments from the Fed's Yellen and Fischer, next Friday's August nonfarm payroll report is poised to be a key focus for the global markets as a September rate hike remains a possibility (economic calendar). The report will also be preceded by key reads on personal income and spending, Manufacturing Purchasing Managers Indexes (PMIs) from ISM and Markit, the trade balance, Consumer Confidence, and August vehicle sales.

Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her article, What Does Strong Job Growth Mean for Bond Investors?, recent strong job growth has improved the odds the Fed will raise short-term interest rates in the coming months and this has potentially negative implications for the U.S. bond market, which has put in a strong performance so far this year. The risk of higher rates appears greater than the potential for lower rates. We suggest investors keep the average duration of their portfolios within the short- to intermediate-term bond range to help reduce volatility, and consider holding Treasury Inflation-Protected Securities. Read more at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Along with global manufacturing PMIs, international reports for next week worth noting include: Australia—building approvals and retail sales. China—industrial profits. India—2Q GDP. Japan—household spending, retail sales, and industrial production. Eurozone—consumer price inflation and unemployment rate. U.K.—mortgage approvals, consumer confidence and consumer credit.

Financial Review

Mylan Digs a Deeper Hole

Sinclair Noe — August 25, 2016

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 33 = 18,448
SPX – 2 = 2172
NAS – 5 = 5212
10 Y + .02 = 1.58%
OIL + .61 = 47.38
GOLD – 2.20 = 1322.60

The number of Americans who applied for unemployment benefits last week fell by 1,000 to 261,000 and remained near post-recession lows. Claims fell below the key 300,000 threshold in early 2015 and have remained there for 77 straight weeks, the longest streak since 1970.

Orders for durable or long-lasting goods made in the U.S. surged 4.4% in July to mark the biggest gain since last fall. Higher demand for passenger jets led the way as expected. The Pentagon also put in a bunch of new orders. Stripping out the volatile transportation sector, orders rose a smaller 1.5%. Still, that matches the biggest increase of the year.

Kansas City Fed President Esther George said Thursday she thought it was time to raise interest rates. George, who is a voting member of the Fed’s policy committee this year, said she didn’t know if anything would cause her to change her mind at the Fed’s meeting next month. But she indicated that decision-making remains data-dependent. George has a hawkish track record. Still, she joins Dallas Fed President Robert Kaplan, FOMC Vice Chair Stanley Fischer and New York Fed President William Dudley on the list of Fed officials calling for rate hikes.

Fed chair Janet Yellen delivers a speech at Jackson Hole tomorrow; she is expected to address possible rate hikes. Fed Funds futures are currently predicting only a 53% chance of a rate hike in calendar year 2016, which, of course is only a bit higher than coin flip. So, given the current overbought condition and the complacency seen in many indicators, the bears tell us that stocks are now “set up” for disappointment if Ms. Yellen’s speech takes on a more hawkish tone than expected tomorrow.

Central bankers sit down with their critics. In what is a first for the high-profile policy conference at Jackson Hole, Wyoming, eight central bankers, including William Dudley, president of the New York Fed, will meet with 120 activists from the Fed Up Campaign, which wants to see change at the Federal Reserve.

Mylan is responding to backlash over price increases for its EpiPen emergency allergy treatment by promising to reduce the costs that some patients pay, though the drug maker stopped short of saying it would roll back prices or limit future increases. EpiPen is a lifesaving treatment for millions whose allergies can send them into severe shock, including many schoolchildren who are advised to keep an injector handy at all times. The price has increased 548% since 2007. After widespread criticism recently, Mylan will “double eligibility” for its EpiPen patient assistance program to 400% of the poverty level, saying that a family of four making $97,200 would now pay nothing out of pocket for a prescription.

What the discount does change is how much people with commercial insurance and a high deductible pay. If you were at on the hook for about $600 before, that will now be cut to about $300. For people without insurance, however, the card won’t apply; they’d fall under a separate patient assistance program. It also won’t apply to people under government insurance programs such as Medicare or Medicaid.

Mylan CEO Heather Bresch, who happens to be the daughter of US Senator Joe Manchin, was making the rounds of TV business interviews today, trying to explain that there was nothing she could do about the price increases; she claimed the health care system is broken; she claimed she can’t lower the price because there are many layers, or middlemen, each taking a cut along the supply chain; even if Mylan cut the price, it wouldn’t result in lower prices for consumers. Well, she’s partially correct – the health care system is broken. The rest is pure hogwash.

The cost of a two-pack of EpiPens – shots of epinephrine that relieve symptoms from severe allergies that restrict breathing and can cause death – has risen from $103.50 in 2009 to $608.61 today, despite no changes in the chemical formula. Two vials of the proper dosage of epinephrine and manual syringes would cost only $20; some put the cost of the dosage in each EpiPen at as little as $1.

In 2012, the company behind the EpiPen settled a lawsuit by agreeing to allow a generic competitor into the market in 2015, potentially cutting into a big part of its business. Mylan had already been steadily increasing the price of EpiPen, an injector containing a drug that can save people from life-threatening allergy attacks. After the settlement, it started to raise the price even faster. The increasing price hikes reek of a greedy last grab for profits and an attempt to subvert the court’s ruling.

Bresch can lower the price, just as easily as she raised the price; or for that matter, even easier than the corporate “inversion” merger with Abbott Labs that moved Mylan’s headquarters to the Netherlands last year, so the company could dodge US taxes.

Brazil’s Senate has started the impeachment trial of suspended President Dilma Rousseff for violating budget laws, with the chances strong that she will be removed from office. Brazilian markets have rallied lately over the prospect of the Vice President Michel Temer permanently taking over from the Rouseff, although Temer was recently found guilty of violating campaign finance limits, a case that could make him ineligible to run for office for eight years.

Colombia’s government and the Marxist rebel group the Revolutionary Armed Forces of Colombia (FARC) have reached a peace deal after 52 years of war that has killed over 220,000 people. In return for giving up its arms, FARC members will be allowed to reintegrate into civilian life and stand for elections. The agreement will be put to a referendum in October, when it is expected to pass.

As one war ends…, Turkey has launched its first major ground assault into Syria since the country’s civil war began, sending in tanks and special forces backed by U.S. airstrikes to help Syrian rebels retake a border town from ISIS. The assault marks a dramatic escalation of Turkey’s role in Syria’s war, but there is more to the move than just fighting ISIS in Syria. Turkey is also aiming to contain expansion by Syria’s Kurds, who are also backed by the United States and have used the fight against ISIS and the chaos of the civil war to seize nearly the entire stretch of the border with Turkey in northern Syria.

Phoenix-based ON Semiconductor has won antitrust approval to buy Fairchild Semiconductor International. ON will sell its Ignition IGBT business to Chicago-based manufacturer Littelfuse. ON Semi and its rivals’ power-management circuits are used in everything from aircraft to home appliances and automobiles to computers. The deal was valued at about $2.4 billion. The FTC, in a statement, said that without the sale the merged company would have controlled more than 60 percent of the market for insulated-gate bipolar transistors, or IGBTs – a type of semiconductor used in automotive internal combustion engines’ ignition systems. That likely would have driven up prices and curbed innovation.

HP Inc., the hardware business of the former Hewlett-Packard Co, reported higher-than-expected quarterly revenue and profit as demand recovered for its notebooks. However, HP forecast current-quarter profit below analysts’ estimates, reflecting weak sales of its printers as companies cut costs across industries.

Sears Holdings is in really bad shape as its earnings report shows. The struggling owner of Sears and Kmart reported a staggering second-quarter loss of $2.03 a share. Same-store sales at discounter Kmart fell 3.3%, representing the seventh straight quarterly decline. Same-store sales at discounter Sears fell 7%, representing the eighth straight quarterly decline. And Sears is running out of money to stay afloat. Cash and equivalents declined to $276 million from $1.8 billion a year ago.

The ride-hailing giant Uber Technologies is not a public company, but every three months, dozens of shareholders get on a conference call to hear the latest details on its business performance. Uber’s losses in the first half of 2016 totaled at least $1.27 billion. For a private business to raise as much capital as Uber is unprecedented. It is also tough to find a tech company that can lose this much money this fast.

The first driverless taxi began work today in a limited public trial on the streets of Singapore. Developer nuTonomy invited a select group of people to download their app and ride for free in its “robo-taxi” in a western Singapore hi-tech business district, hoping to get feedback ahead of a planned full launch of the service in 2018. The trial rides took place in a Mitsubishi i-MiEv electric vehicle, with an engineer sitting behind the steering wheel to monitor the system and take control if necessary.

Over 300 Airbnb hosts have opened up their homes for free to people wracked by earthquakes, floods and fires in central Italy, Louisiana and California. Homes in central Italy, hit by a 6.2 magnitude earthquake Aug. 23, are on free offer on the website’s urgent accommodation page between Aug. 23 and Sept. 11. Airbnb accommodation could serve as an alternative to temporary relief camps for the 1,000 residents, whose homes were destroyed. Accommodation is also available to those affected by floods in Louisiana and prolonged wildfires threatening two Californian counties.

Financial Review

Wake Me When It’s Over

Sinclair Noe — August 24, 2016

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 65 = 18,481
SPX – 11 = 2175
NAS – 42 = 5217
10 Y + .02 = 1.56%
OIL – 1.30 = 46.80
GOLD – 13.10 = 1324.80

Today’s marks the first anniversary of a chaotic day in the markets. The S&P 500 lost 77.7 points, or 3.9%, and China’s Shanghai Composite crashed more than 8%, less than a week after the People’s Bank of China announced it was devaluing its currency.

Investors are turning their attention to Fed chair Janet Yellen to see whether she will endorse recent comments from other central-bank officials that indicated rates could rise as early as next month. Yellen is scheduled to speak at the Jackson Hole Wyoming economic symposium on Friday. Recent economic news in the US has been pretty good. Several Fed policymakers have made some hawkish comments in the past few days suggesting the Fed will hike rates in September.

Predictably the idea that the Fed is contemplating a rate rise while all the other major central banks are looking to provide more stimulus led to a stronger US dollar and weaker commodity prices. Odds of an increase in September have climbed to 28 percent, from 10 percent a month ago, while bets on a December hike have risen to 51 percent from 36 percent at the end of July.

With earnings season almost complete, stocks have barely budged in the past 32 trading sessions, but yesterday the S&P 500 and the Nasdaq hit intra-day record highs. The S&P 500 index rose almost 20% since reaching a 22-month low in February, and trades near its highest valuation in more than decade, based on estimated income.

Meanwhile, the CBOE Volatility Index (or VIX) is close to a two-year low. At a mean level around 12 this month, the measure of market turbulence known as the VIX is the lowest for any August since 1994, and has been below 15 for 35 days, the longest stretch of calm since July 2014.

The National Association of Realtors says sales of existing homes fell 3.2% last month to a seasonally adjusted annual rate of 5.39 million. The decline marks a reversal from rising demand that pushed sales in June to their highest level since February 2007. Fewer homes are coming onto the market, putting a cap on sales growth. The number of listings dropped 5.8% from a year ago to 2.13 million, and so it is tougher to find the right property. The median home sales price was $244,100 in July, up 5.3% from a year ago.

The American Petroleum Institute (API), a trade group, reported on Tuesday that U.S. crude inventories rose 4.5 million barrels in the week ending Aug. 19 versus market expectations for a draw of around 500,000 barrels. Crude inventories climbed by 2.5 million barrels in the week ended Aug. 19, according to an Energy Information Administration report. Crude oil dropped about 3% today.

Better-than-expected demand for Samsung’s new Galaxy Note7 has caused the South Korean company to delay the launch of the premium smartphone in some markets. The demand for the large-screen “phablet” (that’s a combination of phone and tablet) follows good reviews since it was launched last Friday in the U.S., South Korea and other countries.

The European Commission is expected to levy a judgment against Apple in the next few months that could total in the billions of euros. The Financial Times reports Apple could be on the hook for as much as$19 billion. The commission is accusing Apple of striking a sweetheart tax deal with Ireland, in which the Apple would move its profits to wholly owned Irish subsidiaries to reduce its corporate taxes. Congress investigated Apple’s tax arrangements in 2013, which led to CEO Tim Cook testifying before the US Senate.

Apple has billions of dollars held offshore that it would love to bring back to the US, but Cook has said that he thinks the system is unfair. And yes, it is legal. In a white paper commissioned by US Treasury secretary Jack Lew, the US warned that the Euro Union was overstepping its powers and becoming a “supranational tax authority”.

The white paper warned that, “The US Treasury Department continues to consider potential responses should the Commission continue its present course. A strongly preferred and mutually beneficial outcome would be a return to the system and practice of international tax cooperation that has long fostered cross-border investment between the United States and EU member states.”

So, why is the US Treasury backing Apple in what looks like a somewhat sleazy, if technically legal, tax dodge? The US Treasury warned that American taxpayers could end up footing the bill if the commission goes ahead and demands back taxes from Apple and other US companies as the firms may be able to offset the EU-demand taxes against US tax payments. It described this potential outcome as “deeply troubling, as it would effectively constitute a transfer of revenue to the EU from the US government and its taxpayers”.

So, the basic controversy at the root of this is, people really aren’t arguing that Apple should pay more taxes. They’re arguing about who they should be paid to. And so there’s a tug of war going on between the countries of how you allocate profits.

Tesla’s new versions of the Model S and Model X will come with improved acceleration and battery packs. The new battery improves the driving range on both models to over 300 miles, with the extra power cutting the 0-60 mph time on a Tesla Model S to 2.5 seconds. We told you about that yesterday. Electric cars can be very, very fast. But the cool part is that Tesla extended the range from about 200 miles per charge to 315 miles without increasing the size of the battery packs.

Instead of changing the external pack shape or size or cell chemistry for the 100 kilowatt-hour battery pack, Tesla created a whole new battery cell cooling system and rearranged the battery cell architecture and electronics. It is likely Tesla added in more battery cells to the same shape pack, but it was able to still place the cells in a position where they could be adequately cooled while charging and discharging. Still, it’s quite a breakthrough. No other company is producing electric cars on a production basis with a 315-mile range.

The world’s largest aircraft, the Airlander 10 airship, has crashed and suffered damage on its second test flight. Today the prototype Airlander 10 undertook its second test flight and flew for 100 minutes, completing all the planned tasks but crashed when it tried to land. Both pilots and ground crew are “safe and well”. The Airlander 10, which looks like a couple of giant blimps tied together, is vying to become a leader in an industry that could be worth $50 billion over the next 20 years, according to the companies building the aircraft.

The inflated flying structures are making a comeback with big players and new challengers promising to develop airships for anything from luxury travel to transporting cargo to remote parts of the world. Hybrid Air Vehicles’ blimp costs around $40 million to buy. As a comparison the cheapest Airbus, the A318 has an average list price of $75.1 million.

The US government is buying 11 million pounds of cheese because no one else will. The US Department of Agriculture is buying $20 million worth of cheese to help alleviate a surplus that is at a 30-year high. The US cheese market has had a significant oversupply problem for most of the year because foreign buyers have looked elsewhere for their dairy products as a result of the strong dollar.

Before this slowdown in exports, many farmers had ramped up their production because of record-high prices. It’s not just a matter of government intervention in the free market for cheese; the surplus will be distributed to food banks across the country and they will get the high-protein food to the tables of those most in need.

A World Bank arbitration tribunal has ordered Venezuela to pay Canada’s Rusoro Mining over $1.2 billion after ruling that the government unlawfully expropriated the company’s gold mines in 2011. It is far from clear whether Venezuela will comply with the order; while Gold Reserve said this month that it had reached a settlement in a similar case, Venezuela has said it will fight an order that it pay $1.4 billion to Crystallex International over similar claims.

In June, a California man filed a proposed class action suit alleging that customers ordering cold beverages from Starbucks received less liquid than advertised as ice could take up as much space as 10 ounces in the cup. Since the lawsuit was first filed, Starbucks has insisted that ice is an “essential component of any ‘ice’ beverage”.

The company also reiterated that any customer unhappy with their beverage could alert their barista and get a new one. Customers are also welcome to ask for light ice or extra ice when placing their order. A judge has issued a ruling, writing in his decision that the cups are clear and customers can see how much ice they are getting, and that even children understand that if you add ice, you have less room for the liquid. Case dismissed. And you thought the justice system was broken.

Financial Review

Let’s Do the Limbo

Sinclair Noe — August 22, 2016

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

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DOW – 23 = 18,529
SPX – 1 = 2182
NAS + 6 = 5244
10 Y – .04 = 1.54%
OIL – 1.71 = 46.81
GOLD – 2.50 = 1339.60

At the open this morning, the S&P 500 dipped and the VIX spiked, which had many market observers hoping that we’d finally see some volatility, some sign of movement. Of course that didn’t happen. For the past 32 days of trading, the S&P 500 index has not had a day where prices moved more than 1% up or down.  Back in 2007 we reached 38 days, then in July 2014 we reached a 20-year record of 62 days. A little bit of a pause in the market can be a good thing, and the markets respond positively; the market catches its breath and keeps on running.

However, when this kind of tight trading range extends beyond 20 days, (typically a month’s worth of trading sessions) the subsequent returns get worse; and after two months’ worth of trading, the following month is likely to show a decline. An extended tight trading range might indicate that the bulls just don’t have the power to push the market higher. We’re not there yet, but eventually this market is going to have to make a move; until then the markets are in limbo. One thing that might move the markets is the Fed.

Federal Reserve Vice Chairman Stanley Fischer helped the dollar to begin the week trading stronger against all of its major peers, after he said US economic conditions are close to hitting the central bank’s targets in a speech in Aspen on Sunday. This upbeat assessment pushed the currency to a one-week high, as traders beef up bets that a rate hike may happen this year. The Federal Reserve’s annual Jackson Hole symposium begins on Thursday. This year’s theme is “designing resilient monetary policy frameworks for the future.” Janet Yellen speaks there on Friday.

What she says will be combed for clues about whether the Federal Open Market Committee will raise interest rates at its next meeting, in September. Goldman Sachs economists, writing in a research note to clients, said: “We currently see a subjective 30 percent probability that the next move is a hike at the September meeting, and a 45 percent probability that it is a hike in December, for a 75 percent cumulative probability of at least one rate increase this year.”

Pfizer has agreed to acquire Medivation for $14 billion, Pfizer, which is the second-largest bio-pharmaceutical company with a market cap of $212 billion, would pay about a one-third premium to the drug maker’s Friday closing price of $67.16. This is a notable premium to the $9.3 billion offer the pharma giant Sanofi had made earlier this year. By acquiring Medivation, Pfizer would gain a blockbuster prostate-cancer treatment that’s already approved for sale in the U.S. and elsewhere, and that analysts project will generate $1.33 billion in annual sales by 2020.

Medivation also comes with two experimental products: a drug for breast cancer and another for the blood cancer lymphoma. Still, it seems like a larger price to pay for a company with only one approved drug. Of course Medivation charges a high price for that one drug, Xtandi costs $129,000 – 4 times more than in other countries. Xtandi was developed at the University of California, Los Angeles, through taxpayer-supported research grants from the U.S. Army and the National Institute for Health. Reuters had reported that several other players, including Gilead and Merck considered buying Medivation, so presumably, these suitors will seek other targets now that Pfizer has sealed the deal here.

The global gas-station operator that controls Circle K outlets reached a deal to acquire San Antonio, Texas-based gas station and convenience store chain CST Brands for about $4.4 billion. Quebec-based Alimentation Couche-Tard said it would pay $48.53 per share for CST, which operates more than 2,000 stores in North America; that represents a 42% premium above the price at which CST shares were trading before the company announced March 3 that it was considering a sale. Couche-Tard’s approximately 12,000 stores worldwide includes nearly 7,900 in North America operating under the Couche-Tard, Circle K and Ingo brands. It has about 80,000 employees at its stores, fuel businesses and administrative offices in North America.

One of the country’s largest newspaper chains is offering buyouts to its employees and said most of those workers would have their last day in mid-September. GateHouse Media, which is based near Rochester, N.Y., and publishes 125 daily newspapers and more than 600 weekly and business papers in 35 states, made the announcement last week in a memo to employees. In Arizona, GateHouse publishes the Arizona Capitol Times – no immediate word on the fate of that publication.

Meanwhile, the Arizona Capitol Times reports a judge has thrown out a bid to keep voters from deciding whether to legalize the recreational use of marijuana. The measure would permit any adult to have up to one ounce of the drug or six plants without fear of prosecution under state law. It also sets up a new state agency to regulate sales, imposes new taxes and enacts various provisions.

In a ruling Friday, Maricopa County Superior Court Judge Jo Lynn Gentry said when state lawmakers altered the election code last year they eliminated — perhaps inadvertently — the ability of individual citizens to sue to keep initiative measures off the ballot. And she said lawmakers failed to restore that right anywhere else. Gentry wrote, “whether wittingly or not, the legislatures eliminated a means by which initiative petitions can be challenged.”

The parent company for Arizona Public Service, Pinnacle West Capital, in its latest filing with the SEC, reported it had received two subpoenas over the summer as part of federal investigations into the 2014 elections. The FBI and federal prosecutors are investigating campaign donations and financing of the 2014 Arizona Secretary of State’s race and Arizona Corporation Commission contests. The subpoenas related to those campaigns and Arizona and Pinnacle West/APS executives’ communications. APS has been at the center of debates over solar energy policies, and critics contend the utility has funneled undisclosed, so-called “dark money” to some Corporation Commission candidates.

You’ve heard the stories about high rents in Silicon Valley, well it might be good news for Arizona. The New York Times reports at the end of last year in the Bay Area mega-region — including both the San Francisco and San Jose metropolitan areas — there were 530,000 tech and engineering jobs, a 7 percent increase from a year earlier. Phoenix has about one-fifth as many tech jobs, but the total grew 8 percent from a year ago, and many of those jobs are coming from the Bay area.

Wages, taxes and energy cost about 25 percent less in Phoenix than they do in San Francisco. Housing is much cheaper. The median home price in the Phoenix metropolitan area is $221,000, according to Zillow. In San Francisco, it is $812,000. A few examples of recent transplants include Weebly, Double Dutch, Allbound and Gainsight.

Of course, these aren’t the first companies to migrate from San Francisco to the desert; Intel has been here for quite some time. Still, it bodes well for the local economy. Chris Camacho, chief executive of the Greater Phoenix Economic Council, says better-paying jobs will follow, since companies prefer to expand in cities where they already have offices.

The leaders of Germany, France and Italy were due to meet on an island off the coast of Naples today to discuss how to keep the European project together in the second set of talks between the Eurozone’s three largest economies since Britain’s vote to leave the EU. Merkel wants to cement “a better Europe” rather than forge ahead with “more Europe,” Renzi wants Italy to have a strong voice in how the bloc’s future is shaped post-Brexit, and Hollande wants an EU-wide investment plan to be doubled.

The Bank of Japan will not rule out lowering negative interest rates even lower. The BOJ introduced negative rates in February and the controversial policy has failed to spur inflation or economic growth. “The degree of negative rates introduced by European central banks is bigger than Japan. Technically there definitely is room for a further cut,” Governor Haruhiko Kuroda told the Sankei newspaper.

Iraq, OPEC’s second-largest oil producer, plans to boost exports 5%, or 150,000 barrels a day, in the next few days following a deal to restart shipments from three fields in Kirkuk. Exports were suspended in March due to a payment dispute with Kurdistan, which controls the relevant pipeline. The news doesn’t quite square with speculation that OPEC is set for discussions about freezing output. Crude prices were lower today.

It’s like the Hatfields swapping recipes with the McCoys. Or ASU and the University of Arizona drawing up plays together. Starting next year, the Chevrolet Camaro will share a transmission with the Ford Mustang. Crosstown collaboration between General Motors and Ford was once unfathomable. But cost-cutting, engineer shortages and increasing regulations made it inevitable.

Last Thursday the Federal Reserve launched its own Facebook page. The Fed said the idea was to increase the accessibility and availability of the Fed. What could go wrong? Even though the Fed Facebook page picked up almost 10,000 likes, hundreds upon hundreds of rants piled up over the weekend, and perhaps in the spirit of transparency, the Fed has allowed them to remain. For now.