Financial Review

Good to be King

Sinclair Noe — December 8, 2015

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DOW – 162 = 17,568
SPX – 13 = 2063
NAS – 3 = 5098
10 YR YLD + .02 = 2.24%
OIL – .08 = 37.57
GOLD + 3.40 = 1075.60

Back to back triple digit losses for the Dow and much of the carnage can be traced to the energy sector and the drop in oil prices. The problem is not just that many energy related companies might suffer losses, but that many of those companies carry big debt loads. Oil prices actually closed above the lows for the day. There was probably profit-taking by some of the shorts and bargain-hunting by those that think we’re going to rise for at least a little bit. Short-term gains in no way negate the bearish implications from this weekend’s OPEC meeting.

OPEC had a collective target of 30 million barrels a day since 2012 but they have been cheating on quotas and producing about 5% more. The important point is that OPEC is no longer the only game on the planet. Most of the global market doesn’t have any ceiling on production. Americans don’t have any ceiling. Russians don’t have any ceiling. Iran has been partially locked out of the global markets and they look to come back with a boatload of supply next month. And the Saudis are fighting a war in Yemen and their national budget is almost entirely based on oil revenue. Unilateral price cuts just won’t cut it.

Intensifying concerns about the world’s second-largest economy, China’s November exports dropped 6.8% for a fifth consecutive month, while imports fell 8.7% over the same period, marking a decline for every month over the past year. The figures leave the country with a trade surplus of $54 billion.

Japan isn’t in a recession. A revision to Japan’s third-quarter gross-domestic-product report has allowed the country’s economy to escape recession. Initially, the Japanese economy was said to have contracted by 0.2% during the quarter, but Tuesday’s revision shows it actually expanded at a 0.3% clip. Annually, Japan’s economy grew a seasonally adjusted 1.0%.  The latest report shows more business investment and consumer spending.

Eurozone growth in the third quarter was boosted by rising inventories and higher household spending as exports suffered from a slowdown in global trade. GDP in the 19-nation bloc rose 0.3% in the three months through September after expanding 0.4% in the prior quarter. The data comes less than a week after the ECB cut one of its main interest rates to a record low and expanded its asset-purchase program for an extra 6 months.

The US budget legislation was supposed to be a done deal, the final act of outgoing Speaker of the House John Boehner; however, the devil is in the details. Days from a Friday midnight deadline, progress has proven elusive for negotiators who also are trying to hammer out a separate measure to renew dozens of expired tax breaks. While the GOP is seeking concessions from the Obama administration and Democrats on the environment, Republicans have dropped demands to cut off federal funds for Planned Parenthood and for implementing Obama’s marquee health care law.

One casualty might be REIT spinoffs, a popular technique that lets companies spin off their property holdings into tax-advantaged real-estate investment trusts. The Internal Revenue Service has raised warnings about some spinoffs and said in September that it was considering new rules. The proposal would prevent the technique and prevent spun-off companies from converting into REITs for 10 years.

The Federal Reserve reports consumer credit growth eased in October as consumers cut back on credit card use. Consumer credit increased 5.5% in October, or by a seasonally adjusted annual rate of $15.9 billion. This is a sharp deceleration from September’s gain of $28.6 billion, or 9.9%, which was the fastest pace since April 2014. Total consumer borrowing, which does not include mortgage debt, now totals $3.5 trillion.

The Labor Department reports there were fewer job openings in October.  The Job Openings and Labor Turnover Survey, also known as JOLTS, shows job openings declined 2.7% in October, to 5.38 million. The number of openings hit an all-time high of 5.67 million in July. If employers continued to search for workers even as so many people were working part-time while wanting full-time jobs, or were counted among the long-term unemployed, or had even left the workforce, perhaps employers needed to sweeten the pot.

It might also signal that workers are willing to demand higher wages before accepting a new job. Meanwhile, October was the third-strongest month for hires since the recession ended in 2009. So October’s data showing a pickup in hiring alongside a slight retreat in openings might be evidence that hiring is hitting its stride.

JOLTS data only goes back to December 2000, and quits averaged 3.22 million per month until the Internet bubble burst in April 2001. Post-financial crisis, workers are a lot more wary; quits have averaged 2.19 million per month since the recession ended, for a larger population than in 2000-2001. That makes October’s number, 2.78 million, the second-best of the recovery, and may foreshadow more job market churn ahead.

The latest survey data from the National Federation of Independent Business saw optimism fall, small-business owners turned less confident about their economic prospects last month, pointing to slower sales and growing inventories as consumers spend more cautiously. The National Federation of Independent Business’s small-business optimism index, based on a survey of about 600 owners, slipped to 94.8 in November from 96.1 in October, but various signs continue to point to rising wages for American workers. The November NFIB report showed that 23% of firms reported an increase in compensation, up two points from October and near an expansion high.

This number has been trending upward since the financial crisis. Moreover, a seasonally-adjusted net 20% of small businesses plan to raise compensation in the coming months, 3 points up from October.  In the wake of the financial crisis, sales were by far the single most important concern for small businesses, but that has seen a huge drop in the last couple of years with the economy improving. Now, there is a larger percentage of firms whose single most important problem is “labor quality” than those whose biggest problem is “sales.”

The U.S. Export-Import Bank may have been reauthorized on Friday, but the fight is still not over for the government’s embattled export credit agency. With three empty seats on its five-member board, the bank lacks a quorum. This means that until President Obama nominates members, and the Senate confirms them, Ex-Im Bank can only approve small export deals, not the big orders for aircraft, satellites and major manufacturing equipment.

The proposed $110 billion merger between AB InBev and SABMiller will get tested before Congress today, with CEOs from AB InBev and Molson Coors testifying before the Senate Judiciary Committee. The panel is reviewing how the merger of the world’s two biggest beer producers would affect competitors and consumers. The combined entity could soon hold the No. 1 or No. 2 positions in 24 of the world’s 30 largest beer markets.  As part of the deal, AB InBev plans to sell SABMiller’s 58% stake in MillerCoors to Molson, and is exploring the sale of European brands Grolsch and Peroni.

The U.S. Federal Trade Commission has filed a complaint aimed at stopping Staples, the nation’s largest office supply store, from buying its top rival, Office Depot. The FTC issued a statement saying, “The commission has reason to believe that the proposed merger between Staples and Office Depot is likely to eliminate beneficial competition.”  Canada’s Competition Bureau also said it would challenge the proposed transaction.

Iron ore prices dropped below $40 a ton. Prices of the raw material have lost 45 percent this year and have plunged 80 percent from their peak in 2011. It is estimated that breakeven prices are between $28 and $39 a ton for the largest producers.

Anglo American, the fifth largest mining company in the world, has announced several restructuring steps that will cut 85,000 jobs. The plan includes asset sales, large cost cuts and a suspension of dividend payments. U.K.-based Anglo, the world’s fifth-largest mining company by market value, said it plans to reduce its portfolio of assets by 60% to focus on a smaller pool of assets that are able to generate cash flow through the commodity price cycle.

Canadian Pacific is expected to revise terms of its $28.4 billion bid for rival Norfolk Southern, with a complex plan that aims to put cash in shareholders’ hands ahead of a regulatory review of the deal. Last week, Norfolk rejected the takeover offer saying the bid would face regulatory hurdles “at any offer price”.

Yahoo will scrap its long-planned spinoff of its stake in Alibaba, a response to mounting pressure from investors who have grown tired of waiting for a turnaround in the Web portal’s main businesses. CNBC reports the company will consider a sale of its Web businesses instead.

Chipotle Mexican Grill said it has temporarily closed a Boston restaurant while it investigates reports that diners fell ill. Thirty Boston College students reported gastrointestinal symptoms after eating at a Chipotle restaurant over the weekend. The incident renews fears about food poisoning at the restaurant chain, which is trying to bounce back from a spate of E. coli illnesses in nine states that sickened at least 47 customers. On Friday, Chipotle said it expected sales to drop between 8-11% in the fourth quarter, marking the first time the figure fell since the company went public in 2006.

Lebron James has signed a lifetime deal with Nike. Nike signed James after he went pro out of high school in 2003. His first contract spanned seven years and was worth $90 million, with a seven-year extension in 2010. Nike has released at least 13 versions of James’s signature shoes. Terms of the new lifetime contract were not revealed but are estimated in the $400 to $500 million range. It’s good to be king.

Financial Review

Knock On

Sinclair Noe — November 16, 2015

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DOW + 237 = 17,483
SPX + 30 = 2053
NAS + 56 = 4984
10 YR YLD – .01 = 2.27%
OIL + 1.32 = 42.06
GOLD – 1.80 = 1083.10
SILV – .03 = 14.35

World leaders wrapped up G-20 meetings in Turkey with a vow to boost intelligence-sharing, cut off terrorist funding and strengthen border security in Europe, as they sought to show resolve and unity following the deadly terror attacks in Paris. This year’s G-20 agenda also included efforts to hasten global economic growth, with a particular focus on addressing the effects of China’s economic slowdown. French warplanes launched an assault on ISIS targets in Raqqa, Syria. Meanwhile, the authorities in France announced that they had conducted sweeping police raids around the country overnight, detaining two dozen people.

ISIS released a video today saying they will strike Washington. The Department of Homeland Safety said it had no “specific credible information of an attack on the U.S. homeland.” CIA Director John Brennan said he would be surprised if the group doesn’t have additional attacks in preparation.

Markets across the globe are still processing the weekend’s coordinated terrorist attacks in Paris. Asian exchanges traded lower overnight. European shares reversed early losses and closed in positive territory. The euro dropped, as investors scrambled for safe-havens like the U.S. dollar.

French President Hollande declared that France is at war. Hollande urged lawmakers to approve a three-month extension of the nation’s state of emergency, new laws that would allow authorities to strip the citizenship from French-born terrorists, and provisions making it easier to deport suspected terrorists.

The attacks are also likely to hit France’s economy, which has the largest number of tourists in the world. The sector accounts for almost 7.5% of the country’s GDP. The specific wording by President Hollande is of note, because of course it opens up a can of worms about NATO, the EU, and various agreements for open borders in the EU. This means likely restrictions on import-export activity.

It is nearly impossible to calculate the side effects of the Paris attacks. A couple of quick thoughts include an increase in surveillance. UK Prime Minister David Cameron has already announced the Brits will hire 1,900 new spies to deal with ISIS. The CIA is surely going to place a few ads as well. This will drive the tech heads in San Jose even crazier.

Next, think about the role of Russia in Syria and then expand it out to the role of Russian oil and Saudi Arabian oil vying for global market share. The oil market has been bound up with geopolitics and the threat of conflict for a century, and today’s trading in the oil patch is far from the final word on the direction of those markets.

White House officials confirmed Putin and Obama met privately at the G-20 in Turkey and agreed to “a Syrian-led and Syrian-owned political transition.” These are delicate positions in the dangerous dance between Sunni and Shia playing out in the deserts of Syria and Iraq.

The major stock indices in the US started in negative territory, but then rallied. There were some interesting theories bandied about for the recovery. One story talked about the increase in oil stocks as investors looked for safe havens; although the story didn’t go so far as to suggest that increased military action in the Middle East threatens oil supply routes or even that cutting off ISIS black market oil trading removes a small chunk of supply.

Another story mentioned the travel and tourism industry had a bad day, but then explained that previous terror attacks have taught investors that it doesn’t make financial sense to panic. And then the idea that citizens steadfastly refuse to allow terrorists to dictate how we will live our lives because terrorism won’t succeed in the long run.

I missed a good discussion on whether traders felt the terror attacks might push the Fed to pass on a rate hike in December. Nor was there much discussion about the probability of the stock markets’ bullish affection to war. I don’t know why the markets moved higher. Maybe after a lousy week last week, the shorts closed out positions because it was just time for an up day.

The response in the US has been to fly French flags at football games. The NYSE and Nasdaq observed a minute of silence at 9:25 AM Eastern, before the opening bell. And already, nine states (at last count) have said they would shut their doors to Syrian refugees, in direct violation of the Pottery Barn Rule. The governors of Florida, Alabama, North Carolina, Texas, Arkansas, Louisiana, Indiana, Illinois, and Massachusetts all said they would not accept refugees fleeing the Syrian conflict; go ahead and connect the dots.

There has yet to be a single Syrian refugee resettled in Alabama to date, even though there is  a US State Department-approved refugee processing center in Mobile. And it is uncertain whether any governor would have the power to ban refugees from a given country, as resettlement is handled at the federal level. The State Department said this morning that the US still plans to try to admit 10,000 Syrian refugees into the country in the coming year; final destination to be determined.

Marriott International said that it had agreed to buy Starwood Hotels and Resorts Worldwide for $12.2 billion in cash and stock, creating the world’s largest hotel company. The timing of this acquisition was just exquisite. Under the terms of the deal, Marriott will pay $72.08 a share in cash and stock for Starwood, whose brands include Westin, the W, Sheraton and St. Regis. Starwood shareholders would own 37 percent of the combined company. Combined, the companies operate more than 5,500 hotels with 1.1 million rooms worldwide in 30 countries, with 300,000 employees.

For the first time in at least a decade, imports fell in both September and October at the three busiest seaports in the US. The three – Los Angeles, Long Beach, and New York harbor – handle more than half of the goods coming into the country, and saw imports fall just over 10% between August and October; typically known as peak shipping season. The slowdown in imports is likely an adjustment from a sizable inventory build-up earlier this year.

S&P 500 earnings are on track to close their first season of negative growth since 2009, with more than 90% of components having already reported results, S&P 500 earnings are down 0.9 percent in the third quarter. Estimates call for sub-zero growth in the current quarter as well setting up for a bona fide ‘earnings recession’ (two consecutive periods of declines). According to FactSet, this already occurred in the second and third quarters. All this comes as the Fed prepares to hike rates for the first time in almost a decade – a move that could weaken corporate earnings even further.

Japan has unofficially entered recession. Japan just booked two consecutive quarters of negative gross domestic product. GDP contracted at an annualized pace of 0.8% in the third after a 0.7% pace of contraction in second quarter. The Nikkei 225-share index dropped 1 percent.

The average price of crude sold by OPEC fell below $40 a barrel for the first time 2009. The daily OPEC Basket Price fell to $39.21 a barrel on Nov. 13. The basket, an average of export grades from each of the group’s 12 members, typically trades below international oil futures as some OPEC nations pump denser or higher-sulfur crude that’s less profitable to refine. OPEC’s annual revenues may be curbed to $550 billion at current prices from an average of more than $1 trillion in the last five years.

 The number of oil wells in North Dakota that have been drilled but not fracked has topped 1,000 for the first time in September, as producers wait for prices to recover before turning them on. As a result, more than 8% of oil wells in North Dakota are now sitting idle, harming the industry’s ability to grow production; daily output in the state fell 2% in September to about 1.16 million barrels a day.

The nation’s second largest for-profit college, Education Management Corporation, will forgive nearly $103 million worth of student loan debt to settle claims that it violated consumer protection laws; specifically, misleading students about the benefits of a degree from its schools, and misrepresenting job placement numbers.

In a separate action, the company agreed to pay an additional $95 million to settle four whistleblower lawsuits that claimed it misled the government about its recruiting strategy. EDMC operates a network of 110 under the names: Art Institute, Argosy University, Brown Mackie College, and South University. EDMC did not admit to any wrongdoing.

Constellation Brands, the maker of Robert Mondavi wines and Svedka vodka, agreed to acquire Ballast Point Brewing & Spirits for $1 billion to add to its beer portfolio. The deal is expected to be completed this year and will be financed with cash and debt.

Ericsson said it has not engaged in any merger talks with Cisco Systems, despite rumors Cisco was actively pursuing the Swedish maker of networking equipment.

Blackstone  has reportedly agreed to sell its facility management group GCA Services unit for about $1 billion to Goldman Sachs  and Thomas H. Lee Partners.

Canadian Pacific CEO Hunter Harrison met with Norfolk Southern CEO James Squires, proposing a possible merger, which was coolly received by the Norfolk boss.

The Supreme Court refused to be drawn into the debate over Planned Parenthood, rejecting an appeal by abortion opponents who said they had a right to see some of the group’s internal documents, including its medical-standards manual. The appeal by New Hampshire Right to Life sought the disclosure of information related to a 2011 federal grant made to the Planned Parenthood chapter in northern New England.

FINANCIAL REVIEW

Some Outcomes Are So Predictable

Sinclair Noe — November 18, 2014

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

DOW + 40 = 17,687
SPX + 10 = 2051
NAS + 31 = 4702
10 YR YLD – .02 = 2.32%
OIL – 1.34 = 74.32
GOLD + 9.80 = 1198.00
SILV + .07 = 16.31

Record highs for the Dow Jones Industrial Average (26th of 2014) and the S&P 500 Index (43rd of the year). While there are plenty of reasons for concern, the major stock indices have been climbing a wall of worry. Today, health care stocks pulled the market higher.

Wholesale prices in the US increased in October as higher costs for services and food outweighed a slump in energy. The Producer Price Index was up 0.2% compared to a 0.1% drop in September. Wholesale prices excluding food and energy rose 0.4 percent after no change a month earlier. Compared with 12 months earlier, producer prices rose 1.5% and the core index increased 1.8 percent in the year ended October. Prices for goods dropped 0.4 percent last month, the most since April 2013. Energy costs decreased 3 percent last month, the biggest decline since March 2013. Wholesale food costs climbed 1 percent as prices of vegetables, eggs and meats increased. The cost of services increased 0.5 percent in October, and this is a major reason why the overall index was higher. Now normally services don’t jump that much. What happened?

The nationwide average price of a gallon of regular unleaded gas was $2.89 on Nov. 16, its lowest level since the end of 2010. Oil prices have been falling fast but gas prices, the price at the pump, has not dropped as fast; there was a lag. At gas stations and other retail fuel vendors alone, margins jumped 26.1 percent, the most in more than four years; and that showed up in the inflation report under “cost of services”. It looks fairly clear that if gas stations had passed on lower prices faster, there would have been little of no increase in the PPI.

Gas stations aren’t the only ones who are refusing to pass along savings from lower fuel prices. In the 12-month period ending in September, U.S. airlines burned through nearly 16.2 billion gallons of fuel. They paid an average of $2.97 a gallon, down from $3.07 the prior year. That 10-cent drop saved the industry $1.6 billion. Fuel prices have since fallen further. United Airlines estimates it will pay $2.76 to $2.81 a gallon during the last three months of the year.

Are airfares falling? Well, of course not. The average domestic airline ticket during the 12-month period ending in September rose 3.5 percent to $372. That figure doesn’t include another $56 in taxes and fees that passengers pay. And if you want to check luggage, well, take out a loan. You may remember that when fuel prices were higher, the airlines responded by limiting the number of flights to fall just short of demand, giving them the power to charge higher fares.

What are the airlines doing with their newfound profits? They are buying more planes; 10,000 new orders for more fuel efficient jets in the past 5 years. In the first nine months of this year, US carriers spent $10.2 billion on capital improvements, or a little more than $1 billion a month.

The National Association of Home Builders/Wells Fargo gauge measures homebuilders’ confidence; a reading above 50 indicates confidence. The gauge rose four points to 58 in November. Confidence has not yet resulted in a building boom. Later this week the government will report on new-home construction, and economists expect that the pace of residential starts was just about unchanged in October.

Yesterday, Japan announced its economy contracted 1.65 in the third quarter, officially moving into another recession. Today, Prime Minister Shinzo Abe called an early election and delayed for 18 months a second planned sales-tax increase after the first installment in April led consumer spending to stagnate.

Clearly Japan is still struggling; the Eurozone likewise; and the emerging economies are getting clobbered by a downturn in commodities. China’s economy is still growing but at a much slower pace, and Russia is tumbling toward its own unique catastrophe. Here in the US, the economy looks moderately acceptable and the stock market is hitting record highs. So the big question is whether the US economy can carry the world, or if the world will drag down the US economy, or whether there will be a decoupling.

In today’s edition of “Banks Behaving Badly” we feature Bank of Tokyo-Mitsubishi UFJ, a familiar name; you may recall that last year the bank was fined $250 million by the New York Department of Financial Services for hiding information about transactions with Iran, Burma and Myanmar, countries that were under sanctions. The bank “misled” the department in reaching the 2013 settlement, with key information deleted from a supposedly objective report; and so now they face an additional $315 million fine for submitting a whitewashed report. PricewaterhouseCoopers, which produced the 2008 report for the bank, agreed in August to pay $25 million and refrain from certain work in New York for two years after the regulator accused the consulting firm of altering its findings under pressure from bank lawyers and executives.

Now, this is just crazy on several different levels. First, the bank hid information about transactions with countries on the sanction list; then they put together a report which hid information about how they hid information; and to do this, they had to bully their auditor. Then the regulator actually allowed the accused bank to put together a report explaining how they had violated the rules, and then the regulators were apparently shocked that the report whitewashed the bad behavior. This is something like have the crooks fill out the police report and serving as a consultant for the prosecutors. What could go wrong?

If you are wondering how regulators could be such puppets of the banks, we offer the case of JPMorgan. ProPublica reports that the Federal Reserve Bank of New York put a team of regulators in JPMorgan to supervise the nation’s largest bank, and then JPMorgan bankers blocked the investigators from investigating; and when the investigators complained, the Federal Reserve Bank of New York did …, pretty much nothing. And what followed was the London Whale trading scandal resulting in about $7 billion in combined losses and fines. The new report essentially says that if the investigators had been allowed to do their job, things might have turned out different.

A US Senate subcommittee report was more blunt, saying: “[T]he whale trades exposed a bank culture in which risk limit breaches were routinely disregarded, risk metrics were frequently criticized or downplayed, and risk evaluation models were targeted by bank personnel seeking to produce artificially lower capital requirements.”

Remember when JPMorgan’s CEO Jamie Dimon bragged about how clean JPMorgan was compared to all the other banks? Now we know that he really meant JPMorgan was better at hiding its dirt from investigators.

Some outcomes are so predictable.

Fortunately, there are still some great mysteries. And a little, dishwasher sized spacecraft has been trying to unlock the mysteries of the universe. The spacecraft is called the Philae, and it is the landing craft of the Rosetta craft that flew 300 million miles and then launched the Philae onto Comet 67P. The Philae bounced and landed a couple of times in the low gravity conditions, and then it came to rest on the side of a cliff, in darkness; it’s solar powered battery packs were unable to recharge. And you probably thought that was the end of the story. Not exactly. Before the batteries ran out, the Philae detected carbon-based, organic molecules.

It isn’t clear whether they included the complex compounds that make up proteins. One of the key aims of the mission is to discover whether carbon-based compounds, and through them, ultimately, life, were brought to early Earth by comets. Scientists are analyzing the data to see whether the organic compounds detected by Philae are simple ones, such as methane and methanol, or a more complex species such as amino acids, the building blocks for proteins. A drill on Philae also obtained some material from the comet’s hard surface, but data about organic molecules from that experiment have yet to be fully analyzed. The little unmanned spacecraft wrapped up its mission on the comet’s surface on Saturday after radioing back data from a series of experiments and then its battery ran out. And that is probably the last we will ever hear from this historic spacecraft.

The comet is now speeding toward the sun, where it may explode, or maybe the sun’s gravitational pull will slingshot the comet into the far flung reaches of the galaxy. And as the comet hurtles toward the sun, maybe, just maybe some light will hit the solar panel on the Philae, and the battery will recharge, and we will learn something that we never knew before.

FINANCIAL REVIEW

Work Hard and Invest in the Future

Sinclair Noe — November 17, 2014

DOW + 13 = 17,647
SPX + 1 = 2041
NAS – 17 = 4671
10 YR YLD + .02 = 2.34%
OIL – .37 = 75.45
GOLD – 2.00 = 1187.50
SILV – .18 = 16.24

Another day, another record on Wall Street. A record high close for the S&P 500. The Dow did not close above Thursday’s record close of 17,652.

The Dow Transports were down today, but Transportation stocks are the best performing names on the market over the past month. Since the market bottomed out on October 13th, the Dow Jones Transportation Average has soared an incredible 18%. So if you thought the S&P’s furious 11% rally has been a sight to behold, you clearly weren’t paying attention to the soaring plane, train and trucks.

Another Merger Monday; Halliburton agreed to buy Baker Hughes for about $34 billion. Actavis agreed to buy Allergan for $66 billion.

The Halliburton acquisition of Baker Hughes will unite 2 major oilfield services companies. Halliburton and Baker Hughes began discussions in mid-October; an interesting time as oil prices were falling, raising questions about the viability of expanding oil and gas exploration and development. The acquisition was on again, off again, and briefly turned hostile last week. The deal could still face regulatory scrutiny, even though Schlumberger is still the largest oilfield services company, bigger than a combined Halliburton/Baker Hughes. Halliburton has agreed to sell off businesses that generate up to $7.5 billion in revenue to appease the federal government.

Low oil prices tend to trigger consolidation, mainly because the big oil companies do not believe low oil prices will last, so they consider acquisitions as value plays. Buyers with cash to spend aren’t going to let the cheapest valuations in years pass them by and targets threatened by lower prices may become more willing sellers. So, the speculation ramped up with today’s announcement. Possible deals include General Electric going after National Oilwell Varco, and there is even speculation that someone might target BP. Some potential smaller targets include Oasis Petroleum, Pioneer Natural Resources, and Laredo Petroleum.

Allergan has agreed to sell to Actavis. The $66 billion deal, or $219 per share in cash and stock, ends months of speculation about a possible hostile takeover led by activist investor Bill Ackman, who had been working with Valeant Pharmaceuticals to court the Botox manufacturer. So, the Actavis deal would be the largest of the year; bigger than the $45 billion proposed acquisition of Time Warner Cable by Comcast; bigger than AT&T’s $48 billion purchase of DirecTV; and the third largest health care deal ever in the US. Combining Actavis and Allergan will create one of the 10 largest global drug makers, with about $23 billion in revenues expected next year.

Actavis was until recently based in Parsippany, N.J. But last year it agreed to acquire an Irish drug maker, Warner Chilcott, and relocate its headquarters abroad, striking one of the first big tax inversions. Actavis’s deal to move abroad and reduce its tax bill caught the attention of other drug companies, and set off a rush of similar deals. In September, the Treasury passed new rules to make it harder for companies to use inversions to skip town on taxes. But Actavis is like the cow that got out before the barn door was closed; Actavis completed its move overseas and is exempt from new inversion rules.

In economic news, industrial production fell a seasonally adjusted 0.1% in October, a bigger than expected drop and the second drop in the last three months. In October, manufacturing output rose 0.2%, but mining output dropped 0.9% and utilities output fell 0.7%. Capacity utilization fell to 78.9%. Oil and gas well drilling fell 0.8% in October, the first decline since February. Despite the drop, industrial production is up 4% over the last 12 months. Based on the recent weakness in manufacturing it is estimated that fourth quarter GDP may be running at about a 2% annual pace, down from 3.5% in the third quarter.
Separately, the Federal Reserve Bank of New York reported its Empire State manufacturing index rebounded a bit to 10.2 in November from 6.2 in October. The index had been up to 27.5 in September, so the readings over the last two months indicate a downshift in activity.

Last week was light on economic data; this week the big story will be Wednesday as the Federal Reserve FOMC releases minutes of the October 28-29 FOMC meeting, which was the meeting that ended Quantitative Easing 3. The minutes will be parsed for clues on labor markets, global weakness, a stronger dollar, and the inflation-deflation debate.

This week’s economic calendar will also include reports on homebuilders’ sentiment and home sales. Tomorrow we’ll look at inflation on the wholesale level with the Producer Price index. Lower oil prices will likely play a big role in tomorrow’s report. Wholesale gasoline prices were down 11% in October, which could knock 0.6 to 0.8 percentage points from the headline inflation number. In September, weakness in miscellaneous service prices drove a 0.1% decline. The Consumer Price Index, which measures inflation at the retail level, will be released on Thursday, and again energy prices will be an important component. Best guess is that inflation is running at a 1.8% annualized rate according to the CPI.

The general feeling seems to be that oil prices will rise. OPEC holds a meeting November 27 in Austria, and there will certainly be discussion about cutting production and supply. A decrease in global demand and the boom in US shale have pushed prices down more than 25% since June, but OPEC’s 12 member countries are not unanimous on production cuts. Last week, Kuwait’s oil minister said he didn’t think there would be a reduction in output. Over the weekend, Kuwait’s cabinet and Supreme Petroleum Council held a meeting to consider options to halt the slide in prices. It’s a sign the nation is becoming increasingly concerned. The Saudis have said they could live with lower prices, and they don’t want to lose market share if they do agree to a cut, so they won’t try to cut back production on their own, but if other nations agree to a production cut, the Saudis will probably go along.

Another question OPEC will have to consider is global demand, specifically in light of the economic weakness in Europe, announced last week and the news from Japan today. Japan Is In Recession. Unexpectedly poor GDP data confirmed Japan has been in recession, with a 1.6% rate of contraction in the third quarter when a 2.2% rate of growth was expected; this followed a 7.3% rate of decline in second quarter.

The Central Bank of Japan and Prime Minister Shinzo Abe has thrown everything but the kitchen sink at the Japanese economy. The problem is that certain parts of the government got worried, and decided they could not live with the debt, and they needed to raise taxes, which turned out to be a terrible idea. Japan was expected to hike tax rates for the second time this year. Given that the first tax hike has been blamed for this year’s economic woes that second hike is likely to be delayed. And it is now recognized that a Valued Added Tax, or VAT increase was the cause of the recession. Japan also tipped into a recession after a 1997 consumption-levy rise, leading to the fall of the government of the day. Today’s report comes two days before the Bank of Japan’s next policy meeting. Governor Haruhiko Kuroda last month led a divided board to expand what was already an unprecedentedly large monetary-stimulus program.

The unexpected shrinkage of the Japanese economy sent Japan’s major stock index, the Nikkei, tumbling 2.9%. The yen tumbled to a 117.05 per dollar, the lowest level since October 2007. Markets were down in Europe, and it was expected US markets would tumble on the news, but it didn’t really happen.

This is the sixth time in the past 20 years that Japan has dropped into recession and you might think there are a few things we could learn from the Japanese experiment. First, Japan’s famously stagnant economy may not be all that unique, and if it can happen to Japan, it can happen anywhere.

When the asset-price bubble first burst in Japan in the early 1990s, they did not pursue an aggressive fiscal stimulus program and they did not force banks to quickly recognize losses and recapitalize. Instead, Japan’s ill-timed effort to balance its budget with a consumption-tax increase in 1997 sent the economy into recession, and a paralyzed banking sector contributed to an extended period of stagnation that has done much more to worsen the debt burden than well-targeted government spending would have.

Japan’s problems in the 1990s look a lot like the problems facing the Eurozone today: undercapitalized banks, lethargic business lending, and rolling recessions that turn into extended periods of stagnation.

By the way, the 2-day summit of the G-20 wrapped up in Australia, and like most G-20 meetings, it was not very productive. It will likely be remembered for Vlad Putin’s boorish behavior, but there were a few things that might count as accomplishments. The G-20 managed to sign off on anti-tax-evasion measures and on anti-corruption guidelines. One of the biggest accomplishments might be agreement by leaders to boost their economies by a collective $2 trillion by 2018. IMF Managing Director Christine Lagarde told the leaders that in order to avoid the “new mediocre” of low growth, low inflation, high unemployment and high debt, all tools should be used at all levels.

The G-20 plan to boost global growth is long on ambition but short on specifics. The mostly structural policy commitments spelled out in each country’s individual growth strategy include China’s plan to accelerate construction of 4G mobile communications networks, a $417 million industry skills fund in Australia and 165,000 affordable homes in the U.K. over four years. So the plan to avoid stagnant economies is to invest in housing, education, and infrastructure. Now, whether any of this comes to pass remains to be seen, but really this economics stuff is pretty simple. Work hard and invest in the future.