Financial Review

A Long Week

Sinclair Noe — August 11, 2017

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

DOW + 14 = 21,858
SPX + 3 = 2441
NAS + 39 = 6256
RUT + 1 = 1374
10 Y – .02 = 2.19%
OIL + .16 = 48.75
GOLD + 2.90 = 1289.70
BITCOIN + 0.39% = 3693.86 USD
ETHEREUM + 3.87% = 312.44

The tweets continued today.

Trump says the US military is “locked and loaded”. In Guam, they are telling the schoolkids to duck and cover. China published an editorial in a state-run newspaper, basically saying that the first one to throw a punch loses. If North Korea launches a missile first, threatening U.S. territories and triggering retaliation, China will remain neutral.

A pre-emptive strike against Pyongyang, however, would provoke a Chinese response and they would counter reunification of the peninsula. Russian Foreign Minister Sergei Lavrov said “Unfortunately, the rhetoric in Washington and Pyongyang is now starting to go over the top. We still hope and believe that common sense will prevail.”

Wall Street is betting nothing will happen, which is a smart bet in an otherwise insane news cycle. Fire and Fury. Locked and Loaded. Duck and cover. Dumb and Dumber… It’s been a long week.

And, if nobody does something incredibly stupid, we get back to business as usual, sort of. 200 S&P 500 components, or 40 percent, are in correction territory. A stock or an asset class enters a correction when it falls at least 10 percent from its 52-week high. Among the stocks in a correction were e-commerce giant Amazon.com, Goldman Sachs, Exxon Mobil, Starbucks and Netflix.

After a calm and pleasant summer, we can probably expect more volatility. August is when traders take vacation and drama hits the markets. September and October are typically volatile months; and typically trade lower. The past may be prologue or irrelevant, which is what makes stock markets so interesting.

Traders are digesting second quarter earnings and trying to decide if recent record highs are justified. In Washington, the politicians will pull up their socks and get to work on the debt ceiling, plus tax reform at some point, and maybe eventually infrastructure, and there is still work to do on healthcare – repeal has failed, so now they need to fix what they have.

Meanwhile the Fed wants to normalize and tighten, which sends shivers down the jellied spines of Wall Street traders. So, there is still plenty of stuff that could blow up. For individual investors, the key is now and will remain – discipline.

You wouldn’t know it from today, but it’s been just about the worst week all year. For the week, the S&P fell 1.4 percent and the Dow lost 1.1 percent – their largest weekly drops since the week ending March 24 – the Nasdaq was off 1.5 percent and the Russell 2000 index lost 2.7% for the week.

European stocks fell and U.S. junk bonds had the biggest drop since March. Nearly $1 trillion has been wiped out from global equity markets since Trump’s vow on Tuesday to unleash “fire and fury” on North Korea if it threatens the United States.

The VIX briefly topped 16.

Consumer prices remained soft for the fifth straight month in July. The consumer price index rose a seasonally adjusted 0.1% in July. Food prices rose 0.2% in July while energy prices slipped 0.1%.

The core CPI, which excludes volatile food and energy costs, also rose 0.1%. Consumer prices have risen an unadjusted 1.7% over the past 12 months, up slightly from 1.6% in June.

But on a core basis, which is watched more closely by Fed officials, consumer prices remained at a 1.7% annual rate, the same rate as in May and June. The core rate was held down by a sharp decline in new vehicle prices, which fell 0.5%, the biggest decline since August 2009.

The cost of cell phones continued to decline, falling 0.3%. The index of used cars fell 0.5%, its seventh consecutive decline. The price of a car may be lower but the rent is still too damn high.

The cost of rent was up 3.8% compared to a year ago, according to the Labor Department. That’s down a tick from the 3.9% annual pace it notched in June. And it’s not as high as the 4.3% annual pace it averaged in the year before the Great Recession started.

It’s not just renters who are feeling the squeeze. The inflation category called “Owner’s equivalent rent,” which tries to quantify how much homeowners would pay for their housing if they rented it, was 3.2% higher in July than a year ago. Still, it’s growing a lot faster than wages.

Muted inflation in the July consumer price data is not something the Federal Reserve is going to be happy to see. But the central bank will have four more reports to review before it needs to decide late year whether to raise short-term interest rates again, as had been previously projected.

Shares of Snap ended down 14 percent after hitting another record low following a miss on revenue and daily active users. At least 12 brokerages cut their price targets on the stock. Valuation is disappearing faster than its messages.

Blue Apron’s stock “performance” makes one wonder why the company ever wanted to go public and why anyone agreed to underwrite it. The recipe-in-a-box startup failed to show adequate signs of life in its first quarter and even reported a very nettlesome operations problem.

Shares of APRN have fallen as far as 20% since the results came out yesterday morning and now even Blue Apron’s underwriters are admitting that they might have missed something during the IPO journey. Goldman Sachs led the underwriting and they just downgraded the stock. Maybe they can their free Blue Apron subscription to order crow.

Starbucks is now facing some serious competition. From other Starbucks. The old joke about a Starbucks on every corner may be coming true. The coffee chain’s relentless pursuit of ubiquity is becoming one of its own foils, according to analysts at BMO Capital Markets, saying the company has saturated the American market so much that it’s now losing sales competing with itself.

Market watchers have an all-too appropriate term for this phenomenon: cannibalization. On average, for every one Starbucks location in the US, there are now about four others within a one-mile radius to compete against. Over all in 2017, more than 62% of Starbucks now compete with at least one other Starbucks coffeeshop.

More than 100 Applebee’s locations and around 20 IHOPs will shutter this year. DineEquity, the parent company of both brands, is focusing on shuttering under-performing locations. An earnings report released yesterday shows sales fell by more than six percent at Applebee’s and nearly three percent at IHOP in the last quarter; meanwhile, DineEquity’s stock has lost almost half its value this year.

Diners these days tend to go either high, spending money on special, fine-dining experiences, or low, eating at cheaper fast-casual chains, meaning places in the middle are feeling the squeeze. These kinds of chains tend to suffer from bloated menus that try to do everything at once, versus the currently-booming specialty fast-casual spots that focus on doing one or two things and doing them well.

J.C. Penney finished down 16.6 percent after hitting a record low following the retailer’s bigger-than-expected quarterly loss. Its 1.3% drop in same-store sales was slightly worse than anticipated, and it lost $62 million in the quarter. The company has been trying to refocus its business more on home appliances and services and less on apparel, but the efforts evidently haven’t paid off.

Department stores almost across the board are in a period of turmoil as they battle the rise of e-commerce, especially Amazon. and in any case, are contending with shoppers who are heading out to malls and stores less often—and usually looking for deep discounts whenever they do. Many chains have announced widespread store closures, and even more may be necessary to get their businesses to the right size for the current era.

President Trump just got a nasty review of his immigration plans from the alma mater he loves to tout. A new study from the University of Pennsylvania’s Wharton business school found that the proposals he backs would dent growth and cost over 1 million jobs over 10 years.

The president has strongly endorsed a bill introduced by US Sens. Tom Cotton and David Perdue called the Raise Act, which adds to the president’s campaign promise to focus on illegal immigration by going after legal immigrants as well. Its proponents say they want to welcome only “good” immigrants — those with a lot of money and high levels of education.

But the Wharton report finds that the legislation, which is supposedly aimed at boosting economic growth and creating more American jobs, would actually have the opposite effect. According to the Wharton model, the Raise Act would reduce GDP by 0.7% and reduce jobs by 1.3 million, over the next 10 years. The estimates suggest nearly 100,000 jobs would be lost in the first year alone.

Vegetable prices may be going up soon, as a shortage of migrant workers is resulting in lost crops in California. Farmers say they’re having trouble hiring enough people to work during harvest season, causing some crops to rot before they can be picked. Already, the situation has triggered losses of more than $13 million in two California counties alone.

It’s unclear exactly how widespread the labor shortage is for farmers throughout the country, which would have a bigger impact on prices consumers pay. Ultimately, drought and flooding have a more significant impact on farms.

Low oil prices could also offset any impact of the worker shortage. But for farmers, who have seen net farm income fall 50% since 2013, any lost income could be potentially devastating.

Financial Review

DeFAANG

Sinclair Noe — July 27, 2017

Podcast: Play in new window | Download (Duration: 13:05 — 7.5MB)

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DOW + 85 = 21,796
SPX – 2 = 2475
NAS – 40 = 6382
RUT – 8 = 1433
10 Y + .03 = 2.31%
OIL + .08 = 49.12
GOLD – 1.50 = 1259.60
BITCOIN + 0.73% = 2717.16 USD
ETHEREUM – 0.07% = 204.20

The major stock indexes moved to all-time intraday highs, only the Dow held on for a record close. The Dow Jones transportation Average dropped to its lowest level in nearly two months, with UPS offering a weak outlook and FedEx falling in tandem. Volume was heavy today.

The Nasdaq Composite and the Nasdaq 100 or QQQ just fell off a cliff around midday. With a higher high and a lower low than yesterday, we have an outside reversal, a strong bearish move – but it isn’t necessarily conclusive.

Tech has been leading the markets, and now the FAANG stocks have all reported earnings; so, it might be nothing more than buy the rumor, sell the news. A JPMorgan derivatives strategist thinks it might be more; claims low volatility has led to more leverage; recommends buying S&P 500 puts as a kind of portfolio insurance. For anybody old enough to remember 1987, portfolio insurance has nasty connotations.

A milestone was passed this week when one-month Treasury bill rates rose above 1 percent for the first time since 2008. That may not seem like much until you consider that the rate averaged a paltry 0.07 percent between 2008 and 2016.

With nearly half the S&P 500 having reported, second-quarter earnings are expected to have climbed 10.7 percent, compared to an 8-percent rise expected at the start of the month.

Amazon is the world’s biggest online retailer but they don’t earn much profit. Net income fell to $197 million, or 40 cents per share, in the second quarter, from $857 million, or $1.78 per share, a year earlier. Net sales rose 24.8 percent to $37.96 billion. Instead of booking profit, Amazon plows the money back into the business.

Amazon has stepped up spending to expand globally, to build warehouses and on new areas. The company also plans to create more than 130,000 full-time and part-time jobs by mid-2018 to speed up delivery. And they are in the process of buying Whole Foods Market.

Amazon Web Services public cloud generated $916 million in operating income on $4.10 billion in revenue in the second quarter of this year. The results and forecast show the world’s biggest online retailer is preparing for stepped up competition from Wal-Mart, and cloud-computing challengers Microsoft and Alphabet.

Spending is always a concern with Amazon, but investors eventually give Amazon a pass because Amazon invests in growth opportunities. Amazon shares dropped about 2% in after-hours trade, but still hanging in above $1,000, with market cap right at $500 billion.

For a while today, Amazon shares were up, and Jeff Bezos was the richest man in the world for a while, at $92.3 billion –  briefly passing Bill Gates at $90.8 billion. Bezos holds about 17% of Amazon, and Amazon has grown to be the 1800-pound gorilla of online retail. Gates and his colleagues at Microsoft can tell Bezos a thing or two about how an antitrust probe or two can slow progress down and consume years and millions of dollars in resources.

Intel, the world’s largest chipmaker, reported a 9.1 percent rise in quarterly revenue, helped by strength in its data center and personal computer businesses. Net income for the quarter rose to $2.8 billion, or 58 cents per share, from $1.3 billion, or 27 cents per share, a year earlier. Revenue rose to $14.7 billion from $12.5 billion.

In 144 characters or less: Twitter 2Q net loss widens. Revenue down. Flat user growth. Guidance lower. Shares down 14%.

Starbucks reported quarterly profit that matched analysts’ estimates, tempered expectations for the current quarter and said it would close all 379 of its Teavana stores. Net income fell to $691 million, or 47 cents per share, down from $754 million, or 51 cents per share, a year ago. Same cafe sales rose 5% in the quarter.

Electronics manufacturing giant Foxconn unveiled plans to build a massive factory in Wisconsin to make flat-screen displays. Foxconn plans to invest $10 billion in Wisconsin. Wisconsin will invest $3 billion in Foxconn in tax breaks, to be passed and provided by the state government.

Those kinds of tax incentives can get a manufacturer to plant a factory in a given location—but generally at a significant cost to the state budget, and without doing much to help the economy overall.

The company said it planned to hire 3,000 workers over four years, whereas the state said the new facility would create 13,000 jobs with an average salary of nearly $54,000, along with 10,000 temporary construction gigs and an eventual 22,000 “indirect and induced jobs,” from firms supplying goods and services to Foxconn and its workers. (To give a sense of scale, Wisconsin currently has around 472,000 manufacturing workers.)

Wisconsin reported beat out six states in a hush-hush bidding war to attract the plant. Whether it is 3,000 jobs or 13,000, the state is spending a lot to win Foxconn’s investment. The Washington Post estimates that the breaks could cost the state as much as $230,700 per job created.

To its credit, Wisconsin has tied its breaks to the number of jobs that Foxconn creates and has vowed to claw back money if “the jobs and investment are not kept in Wisconsin.” And as of now, nothing has been built. Foxconn made a splashy and lavishly praised promise to build a new, high-tech factory in central Pennsylvania a few years ago. It never followed through.

Shipments of key U.S.-made capital goods increased in June for a fifth straight month, suggesting that business spending on equipment helped to boost economic growth in the second quarter. The increase in equipment spending has mostly been driven by the energy sector, where oil and gas drilling has increased significantly.

The trade deficit narrowed in June. The bullish reports came on the eve of the government’s advance second-quarter gross domestic product estimate due out tomorrow. The economy grew at a 1.4 percent pace in the first quarter. Estimates for second quarter GDP are running from around 2.5% to as high as 3.5%

Senate Republicans have tried to repeal and replace Obamacare. That failed. Then they tried repeal only. That failed. Now they are trying to repeal bits and pieces, including the mandate that Americans must obtain health insurance or face a fine, as well as a partial repeal of the mandate that employers with more than 50 employees provide healthcare coverage.

A vote is expected later tonight. That would not repeal the entire Affordable Care Act but it would effectively kill it in slow motion. There was also discussion about abolishing a tax on medical device manufacturers, but it was unclear whether that provision would be included. If all or part of the so-called skinny repeal is approved, it would set up a committee of House and Senate lawmakers to meld the two competing versions into a single comprehensive bill that would be wider in scope than the skinny bill.

The skinny repeal would be a nightmare for insurance companies. Making the purchase of coverage compulsory is meant to distribute risk evenly among healthy and sick people and keep overall costs down. But many people, especially, younger and healthy people opt for the less expensive fine instead. Insurers have taken notice.

Many have raised premiums or pulled out of certain markets as healthier people decide to forgo coverage. They warn that overturning the mandate will only create more instability and result in even higher premiums. According to the Congressional Budget Office, a skinny repeal would still leave somewhere close to 16 million more people uninsured over a decade and increase premiums immediately.

Financial Review

A Deluge and an Eclipse

Sinclair Noe — April 27, 2017

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

Subscribe: iTunes | Android | RSS

DOW + 6 = 20,981
SPX + 1 = 2388
NAS + 23 = 6048 (record high close)
RUT – 2 = 1417
10 Y – .02 = 2.29%
OIL – 1.01 = 48.61
GOLD – 5.50 = 1264.50

Today brought a deluge of earnings.

Google parent Alphabet posted a 29 percent rise in quarterly profit, driven by a surge in advertising on mobiles and its popular YouTube video service. Alphabet’s net income rose to $5.43 billion. The company’s consolidated revenue rose 22 percent to $24.75 billion.

Google’s ad revenue, which accounts for a lion’s share of its business, rose 18 percent to $21.4 billion in the first quarter. Revenue from its Google Other unit, which includes Pixel smartphone, Play Store and cloud business, rose 49 percent to $3.10 billion.

Alphabet sales from its moonshots projects like Fiber and Nest also grew to $244 million in the quarter, up from $165 million a year earlier. However, Google’s loss for these ambitious projects ticked up slightly to $855 million. Up 5% in after-hours trade.

Also, after the closing bell, Amazon reported revenue of $35.7 billion, versus Wall Street estimates of $35.3 billion. A nice beat. This compares to $29.1 billion a year ago. EPS of $1.48, versus estimates of $1.13 per share. A big beat.

Analysts were also closely watching the performance of Amazon’s cloud computing unit, Amazon Web Services. AWS reported $3.66 billion in sales, and 43% percent growth, which is not quite as strong as the growth seen in the past 3 quarters but it is still a big beat. Amazon up almost 5% in after-hours trade.

Microsoft net income rose to $4.8 billion, or 61 cents per share, from $3.7 billion, or 47 cents per share, a year earlier. That was an earnings miss. Revenue climbed 6 percent to $23.5 billion, missing estimates.

Microsoft said LinkedIn, which it bought for about $26 billion, contributed $975 million in revenue in the quarter. Revenue from Microsoft’s personal computing unit, its largest by revenue, fell 7.4 percent. Demand for its cloud computing services failed to offset weak growth in its personal computing division. Microsoft down about 2% in after-hours.

Intel reported lower-than-expected revenue for the first quarter. Intel still gets most of its revenue from selling PC chips, a business that returned to growth in 2016 due to stabilizing demand in the second half of the year.

Revenue from Intel’s higher-margin data center business rose 6 percent to $4.2 billion in the quarter, missing analysts’ expectations. Revenue from client computing rose 6 percent to $8 billion. Intel’s net income rose to $2.96 billion, or 61 cents per share, from $2.05 billion, or 42 cents per share, a year earlier. That was a miss of 4 cents per share. Intel dropped about 3.5% after-hours.

Starbucks reported fiscal second-quarter profit of $652 million, or 45 cents per share – in line with estimates. Revenue of $5.29 billion was a slight miss. Comparable-store sales rose 3%, below analysts’ forecast for 3.6%.

United Parcel Service reported a higher-than-expected quarterly net profit as revenue grew across its domestic and international package delivery segments and as well as freight and supply chain operations.

Often seen as a bellwether of US economic activity, UPS said revenue increased to $15.3 billion in the first quarter from $14.4 billion in the year-ago period. Revenue beat estimates. Net income rose 2.4% to $1.15, also beating estimates.  During the quarter, UPS invested to expand its new Saturday deliveries, with $35 million in increased costs.

Ford Motor’s first-quarter profit fell 35% from a year earlier to $1.6 billion, down from $2.5 billion in 2016’s first period, when strong demand for a newly redesigned F-150 pickup truck helped Ford post its best quarterly operating profit in history.

Earnings per share were 39 cents in the latest quarter, beating analysts’ consensus of 36 cents. Revenue for the first quarter rose 4% to $39.1 billion, driven by a favorable mix of pickup trucks and sport-utility vehicles. Ford plans to cut $3 billion in costs this year and expects profit to rebound in 2018, driven by continued strength in the pickup-truck market.

American Airlines Group has a healthy track record with respect to earnings. The company has delivered positive earnings surprises in three of the last four quarters, with an average beat of 20%. The first quarter down 60% from the year ago quarter but it was another beat. Adjusted earnings per share came in at 61 cents per share, beating estimates of 57 cents. American shares dropped about 5% today.

American Airlines announced it was increasing pilot and flight attendant salaries an average of 6.5 percent, or by a total of $930 million through 2019. A JPMorgan analyst described it as a “wealth transfer” to labor groups. American CEO Doug Parker described the higher wages as a correction to years of “incredibly difficult times” for airline employees. American employees had been underpaid compared to other airline employees. Parker called the pay hikes an “investment” in better service.

Southwest Airlines dropped about 2%, after the air carrier reported first-quarter profit and revenue that missed expectations. CEO Gary Kelly announced that Southwest will no longer overbook its flights, ending a practice that sometimes leaves paying passengers without a seat.

It’s impossible for an airline to guarantee it will never have to bump a passenger. Carriers still must transport other pilots and crew members to work, and an air marshal could also need a seat. But ending overbooking does make it less likely.

Comcast beat expectations ahead of the bell and jumped 3%, while Abbvie performed similarly. Those companies were joined by railroad company Union UNP, which also gained 3% in early trade, and another pharmaceutical giant, Bristol-Myers Squibb + 3.5%. Other post-earnings gainers included KKR +5% and Domino’s Pizza, up 2.5%.

European markets closed slightly lower Thursday. The European Central Bank kept interest rates unchanged. ECB President Mario Draghi surprised some investors by explicitly recognizing the bloc’s economic recovery.

The euro initially reached the day’s peak of $1.0930 as Draghi struck an optimistic tone when answering questions from reporters. The ECB maintained a deposit rate of -0.4% for banks, a base interest rate of 0.0%, and a quantitative easing (QE) program of up to €60 billion per month.

President Trump said he’ll give the re-negotiation of the North American Free Trade Agreement a “good, strong shot” but reiterated he would “terminate” U.S. participation if he doesn’t get what he called a fair deal. He said he decided to have talks since pulling out would be a “shock to the system.”

House Speaker Paul Ryan said he’s confident Congress will pass a “short-term extension” of current government funding that would keep operations going past Friday. Ryan did not give a time for a vote.

A gauge of pending home sales declined in March as inventory continued to tighten. The National Association of Realtors’ index fell 0.8% to a reading of 111.4. The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed.

Thanks to a strong first quarter, the Realtors forecast sales in 2017 to rise 3.5% compared to 2016. But supply isn’t keeping up with demand. There were 3.8 months of supply in March, and properties stayed on the market an average of only 34 days. A balanced market is usually thought to have 6 months of supply.

West Virginia is coal country. Chris Beam, president of Appalachian Power, the state’s largest utility, is not a coal guy. Beam told the West Virginia Gazette-Mail he had a recent conversation with the governor of West Virginia, who asked him to burn more coal.  Beam responded, “That’s not going to happen.” And the reason is customers don’t want it.

Beam says the debate over climate change, and the role of coal in it, is essentially over. Appalachian Power’s parent company AES believes the regulation of carbon dioxide is inevitable. In the coming decades, renewable energy and natural gas are poised to dominate the fuel mix. Appalachian Power’s residential and industrial customers are now asking about switching to 100% renewables.

To get out in front of this growing demand, the utility, which serves more than a million customers across the US mid-Atlantic region, has begun preparing power plans that would allow customers to stop using fossil fuels. Appalachian Power estimates it will reduce its coal capacity from 60% of its energy mix to about 50% by 2020.

At the same time, wind and solar will rise from about 4% of capacity to 20% by 2031. And yes, West Virginia trails most of the rest of the country in its switch to renewables.

And we finish with a special note for the philatelists among us. The Postal Service will debut a new shape-shifting Forever stamp in June ahead of a rare solar eclipse set for Aug. 21. The new issue will transform from an image of a total solar eclipse into an image of the moon when you press it with your finger. The back will feature a U.S. map tracking when the eclipse will appear across the country.

It’s the first time a stamp will make use of thermochromic ink, which is sensitive to body heat (and changing temperatures — which means stamps should be kept away from direct sunlight). The stamp’s photo of the eclipse was taken in Libya in 2006 by an Arizona-based astrophysicist, Fred Espenak, aka Mr. Eclipse, of Portal, AZ.

Financial Review

The Streak Ends

Sinclair Noe — February 28, 2017

Podcast: Play in new window | Download (Duration: 13:16 — 7.6MB)

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DOW – 25 = 20,812
SPX – 6 = 2362
NAS – 36 = 5825
RUT – 21 = 1386
10 Y – .01 – 2.36%
OIL – .13 = 53.92
GOLD – 4.30 = 1248.80

After 12 straight record high closes, the Dow Industrials finally posted a losing session. No milk and cookies today. It was the best run of record highs since 1987.

After topping out at 103.82 on January 3, the US dollar has weakened against a basket of its peers, pulling back into the 100 area. Dollar weakness is good news for the multinationals that dominate the S&P 500. Stocks rallied right after the election, bonds sold off for roughly the same reasons.

Yields on the benchmark 10-year Treasury note rose to a high of 2.64% in the middle of December (yields move opposite to prices) – reflecting expectations for faster growth, but in the past month buyers returned to bonds, pushing yields down as low as 2.32% and today finishing at 2.36%.

The rally in bonds might be explained by recent headlines that Trump’s proposed stimulus plans will take longer to implement than previously expected and that the stimulus will be less expansionary than first thought. Today, the market paused ahead of President Trump’s address before Congress; and the markets will be looking for specifics with specific timelines.

President Trump speaks to a joint session of Congress tonight, where investors hope for more details on the administration’s plans for tax reform, deregulation and infrastructure spending. The future of the Affordable Care Act could also be a subject, as well as updates on the Border Tax Adjustment.

Trump said he believes the extra $54 billion dollars he has proposed spending on the US military will be offset by a stronger economy as well as cuts in discretionary spending. Still to be answered – what will be cut, and how will the military spend an extra $54 billion, and how will it be accounted for.

Today, Trump signed an executive order that asks new EPA Administrator Scott Pruitt to begin the long process of repealing the Clean Water Rule (also known as the “Waters of the US rule”) and replacing it with… something else. Here’s the catch: Rolling back this rule won’t be easy to do.

By law, Pruitt must go through the years-long federal rulemaking process and replace the Obama-era regulation with his own version – and then defend it in court as legally superior. And, as Pruitt’s about to find out, figuring out which bodies of water deserve protection is a maddeningly complex task that could take years and years.

Gross domestic product increased at a 1.9 percent annual rate, per the Commerce Department’s second estimate for the fourth quarter, confirming the estimate published last month. Output increased at a 3.5 percent rate in the third quarter. The economy grew 1.6 percent for all of 2016, its worst performance since 2011, after expanding 2.6 percent in 2015.

Consumer spending was revised from 2.5 percent to 3.0 percent. Economic data early in the first quarter has been mixed, with retail sales rising in January but home-building and business spending on capital goods easing.

The US trade deficit for goods widened in January, as Americans snapped up consumer goods made abroad. The advance look at the trade deficit widened 7.6% to $69 billion. Imports widened by $4.4 billion while exports fell by $400 million. Imports of consumer goods jumped 4.8% in January and climbed 7.8% over 12 months.

The S&P/Case-Shiller 20-city index rose 5.6% in the three-month period ending in December compared to a year ago, up from a 5.2% annual gain in November. The broader national index rose 5.8% for the year in the December period, the strongest gain in 30 months.

In December, the hottest markets were again in the West. Seattle prices rose 10.8% compared to a year ago. In Phoenix, home prices rose 0.2% in December, and 4.9% compared to a year ago.

The Conference Board’s survey of consumer confidence rose to 114.8 in February from 111.6 in January. That’s the highest level since July 2001. Only 20% of survey respondents said jobs are “hard to get,” that is an 8-year low. In February, the present situation index rose to 133.4 from 130.0. The index measures how Americans feel now. The expectations index that looks six months ahead increased to 102.4 from 99.3 last month.

The Senate has confirmed billionaire investor Wilbur Ross as Commerce secretary, clearing another one of Trump’s economic team members. Ross has agreed to divest from much of his business empire.

Dallas Fed President Rob Kaplan says the financial market is pricing in the probability of an interest-rate hike by the Federal Reserve in either March, May or June and that is “likely in the neighborhood of where we are heading.” Kaplan said, “I don’t think the exact timing is the most important thing. I think the path of rates is.”

Kaplan, who is a rate-policy voter this year, said the economy is making good progress toward the Fed’s goals of full employment and a stable 2% rate of inflation. Meanwhile, Philadelphia Fed President Patrick Harker, another rate-policy voter said today, “I see three hikes as appropriate for 2017, assuming things stay on track.”

Well, if the Fed does raise rates in 2 weeks, we have been warned. Those comments helped push the 2-year yield to its highest since December. Interest rate futures implied traders saw a nearly 57 percent chance the Fed will raise rates at its next meeting on March 14-15, up from roughly 31 percent late on Monday, per Reuters data.

Morgan Stanley gave some wealth management clients incorrect tax information that caused some to underpay and others to overpay. The bank is setting aside $70 million to cover the costs and is in discussions with the IRS over the errors that occurred in tax years 2011 through 2016.

South Korean authorities have formally charged the heir of Samsung – Jay Y. Lee – with bribery and embezzlement in the corruption scandal that has rocked the country’s political establishment. Samsung Electronics President Park Sang-Jin has also resigned, as well as Vice Chair Choi Gee-Sung.

YouTube viewers worldwide are now watching more than 1 billion hours of videos a day, threatening to eclipse US television viewership, which is estimated at 1.25 billion hours. YouTube surpassed the figure, which represents a 10-fold increase since 2012, late last year. By comparison, Facebook and Netflix, as of January 2016, counted 100 million and 116 million hours of daily video views, respectively.

It goes to show… Comcast has announced a deal that will allow customers with the latest gear to search for and watch YouTube videos through their cable boxes. The deal follows a similar tie-up with Netflix unveiled last July. YouTube apps are available through many smart TVs and internet-connected boxes like Roku, but those don’t allow for an integrated search across traditional TV networks and Netflix.

YouTube is getting ready to take on traditional cable companies, today unveiling Unplugged, a live TV service streamed over the internet. Unplugged will be similar to Dish’s Sling TV and AT&T’s DirecTV Now, allowing you to subscribe to a so-called “skinny bundle” of popular pay TV channels at a cost of around $30 to $40 per month.

A large swath of the internet went down today when Amazon’s cloud-based Simple Storage Service, or S3, went offline. Amazon’s service provides website and image hosting and storage capabilities for a variety of companies including Imgur, Dropbox, Slack, Snapchat’s Bitmoji, parts of Amazon itself and a slew of others.

UBS published a research report on Apple, writing: “the company may have over 1,000 engineers working on a project in Israel that could be related to AR [augmented reality]. Augmented reality is an area where Apple could leapfrog competition in providing a superior user experience. This could result in sustained iPhone retention rates and more switchers.”

However, if you really want the skinny on Apple, they were holding their annual shareholder meeting today, and Apple CEO Tim Cook predicts tons of revenue from “future stuff I can’t talk about.”

Target forecast a drop in full-year sales at established stores and reported a steeper-than-expected fall in holiday-quarter sales due to “unexpected softness” at its stores. Target’s net sales have now declined for six quarters in a row as shoppers increasingly gravitate to online retailers. Target said it expects sales at stores open for at least a year to decline in the low-single digit percentage range, and they cut earnings guidance 16% to 24%.  Target shares down about 13% at a 2-year low.

Valeant Pharmaceuticals  posted better-than-expected earnings and revenue for the fourth quarter as it cut costs and saw strength in its Bausch & Lomb eye care business. However, revenue fell 13% from a year ago. The company has been struggling to regain investor confidence after it came under investigation over its accounting and drug pricing practices last year.

Priceline Group hit a 52-week high after reporting a beat on both its top and bottom lines for the fourth quarter. Revenue was up 17% thanks to a jump in hotel reservations.

Saudi Aramco will buy a 50% equity stake in Malaysian firm Petronas’ major refining and petrochemical project for $7 billion. The deal will boost Aramco’s downstream business ahead of a planned initial public offering next year.

OneWeb Ltd, a US satellite startup backed by Japan’s SoftBank Group, and debt-laden satellite operator Intelsat SA agreed to merge in a share-for-share deal.  SoftBank will buy voting and non-voting shares in the combined company for $1.7 billion in cash.

Starbucks will locate one of its ultra-luxurious coffee “roasteries” in Milan, Italy, marking the chain’s first entry into the Italian coffee market where founder and CEO Howard Schultz originally drew inspiration for the company. Starbucks plans to open 20 to 30 Roastery locations worldwide, where customers are treated to personalized small-batch brews of Starbucks Reserve coffee.

Financial Review

A Date That Will Live in Infamy

Sinclair Noe — December 7, 2016

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

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DOW + 297 = 19,549
SPX + 29 = 2241
NAS + 60 = 5393
RUT + 11 = 1364
10 Y – .05 = 2.35%
OIL – 1.04 = 49.89
GOLD + 4.00 = 1174.30

Another record high close for the Dow Industrial Average – 3 in a row. The Dow is up in 18 of 22 sessions, but today was the first triple-digit gain since Nov. 10. Plus, records for the S&P 500 index and the Russell 2000 index of small cap stocks. The Dow Transportation Average gained 231 to close at a record high of 9371, taking out the old record high of 9217 set December 19, 2014.

For Dow Theorists, this is confirmation of the bull. Dow Theory holds that strength in the shipping and rail stocks needed to transport goods — a sign of healthy demand and production — is a prerequisite to strength in the broader market.

The transportation average often is a leading indicator for the economy. If we get everything in gear, it suggests everything is in harmony to the upside. From a recent low of 7885 on October 26, the Transports have jumped about 19%, which is just freakish strength. If you caught the planes, trains and shipping containers early, congratulations. The Transports are pricing in a high success rate for infrastructure not only passing, but happening right away and that should give you pause.

A lot is at stake this today as  Time Warner chief executive, Jeff Bewkes, and his AT&T counterpart, Randall Stephenson, answered questions at the Senate antitrust committee hearing about conflicts that might arise from the merger of a major media producer and a major distributor.

AT&T’s $108 billion acquisition would join America’s largest pay TV provider with a media and entertainment company that has a massive catalog of movies and TV shows. Critics charge it could give the telecom giant a huge advantage in the marketplace.

At issue is something called “zero-rate.” That means the ISP, in this case AT&T, won’t count a customer’s viewing of AT&T-owned content against his or her data allowance. Currently, AT&T has such a promotion with DIRECTV. AT&T wireless customers who also subscribe to DIRECTV can watch that content on their mobile devices without it counting against their data allowance.

If you are both an AT&T and DIRECTV customer, that’s a great deal. But if you are a small ISP trying to compete against AT&T, you may think the playing field has suddenly become a lot less even. So far, AT&T is batting one for two on proposed mega-mergers. Last year its deal to acquire DIRECTV got a green light from regulators. Before that, its deal to acquire rival T-Mobile did not.

President-elect Donald Trump continued to show the power of his fully operational Twitter feed yesterday as one tweet brought an offer of talks from Boeing on the cost of a plane order, while another saw shares in SoftBank Group rally to their highest level since August 2015.

While there is disagreement over whether Trump’s tactics will prove effective over the long term, and even if the investments he flags are possible, this Twitter feed seems likely to continue to be one of the most important in markets.

Meanwhile, Trump has picked Scott Pruitt, the Oklahoma attorney general to run the Environmental Protection Agency. Pruitt has been a close ally of the fossil fuel industry and a staunch opponent to environmental regulations. So, it’s kind of like picking an atheist to be the next Pope.

Time magazine has named its Person of the Year – Donald Trump. Trump is the magazine’s 90th person of the year. The runner-up is Hillary Clinton. Trump, in an interview with the Time magazine, said he would bring down drug prices. The S&P 500 healthcare index swiftly lost 1.6 percent, while the Nasdaq Biotechnology index dropped 3.8 percent – set for its worst day in nearly two months.

Pfizer was hit with a $107 million fine by British officials for an epilepsy drug price increase of as much as 2,600 percent. In the UK, branded drug prices are regulated. Pfizer figured out a way to raise the price – sort of through the back door. Pfizer sold the UK distribution rights to Flynn Pharma, debranding the drug and making it generic.

Because generic drugs are generally available to customers at cheaper prices than branded products. The drug was no longer subject to price regulation, leaving Pfizer free to sharply increase the price it charged Flynn, which in turn further raised the price it charged the National Health System. Pfizer jacked up the price from £2.83 to £67.50. Pfizer says it will appeal the fine.

The European Commission has fined three banks for manipulating a key interest rate, known as the Euribor, or European Interbank Offered Rate. The commission levied $520 million in fines against JPMorgan, Credit Agricole, and HSBC. JPMorgan faced the largest fine at $360 million. Euribor is used to set rates on everything from home loans to complex derivatives. Major banks submitted information daily to set the rate. The regulator said the banks had acted as a “cartel.”

Citi is being investigated for its role in the pound’s “flash crash. “Citi’s Japanese trading operation is being investigated by the Bank of England for exacerbating the pound’s October flash crash by placing many sell orders after the initial fall began

Shares in Italian banks continued their recovery after falling sharply on Monday in response to Prime Minister Matteo Renzi’s referendum defeat. La Stampa newspaper had reported that Rome would be asking for €15-billion-euro from the European Stability Mechanism to help the Italian banking system.

At the same time, Reuters quoted unnamed sources as saying that the government would take a €2-billion-euro controlling stake in Monte dei Paschi. The Italian government plans to buy junior bonds to boost its stake to 40%, although there are concerns this might amount to state aid, in violation or Eurozone regulations.

Traffic at U.S. fast-food restaurants fell 1% in the third quarter to mark the sector’s first traffic decline in five years. The industry tracker NPD Group said total restaurant visits were also down 1%, hurt by the now familiar list of factors that have weighed this year, ranging from the higher costs of eating out, changing consumer behavior and higher bills for items such as rent and prescriptions.

Eating out has become more expensive even as the cost of at-home dining has fallen. The cost of food purchased for home use — that is, groceries — has fallen 2.4% in the past year, according to the October consumer price index. That’s the biggest decline over a 12-month period since the end of the Great Recession in 2009

Sometimes it seems there is a Starbucks on every corner, but not every intersection has been caffeinated. Starbucks hopes to change that. The coffee retailer plans to open 12,000 new stores in the next five years.  The company also said it would open an outlet of its high-end coffee chain, Reserve Roastery and Tasting Room – for the real coffee connoisseurs, or at least someone crazy enough to pay $10 for a cup of Joe, or should we say Josephus.

Today, is of course, December 7^th, a date which will live in infamy; 75 years ago, today the United States was suddenly and deliberately attacked by the naval and air forces of the Empire of Japan.

It is a hallowed site. About 15 minutes into the attack at Pearl Harbor, the Arizona was destroyed, killing 1,177 sailors and Marines on board. And there the Arizona remains to this day.  On December 6, 1941, Arizona took on a full load of fuel – nearly 1.5 million gallons – in preparation for its scheduled trip to the mainland later that month. The next day, much of it fed the explosion and subsequent fires that destroyed the ship following its attack by Japanese bombers.

However, despite the raging fire and ravages of time, some 500,000 gallons are still slowly seeping out of the ship’s submerged wreckage: 75 years after its demise, Arizona continues to spill up to 9 quarts of oil into the harbor each day. They call the leaking oil, the “tears of the Arizona.”

Some people believe the oil will continue to leak until the last Pearl Harbor survivor dies. We will know if that is true soon.

Financial Review

Quitaly or Not to Quitaly

Sinclair Noe — December 1, 2016

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

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DOW + 68 = 19,191
SPX – 7 = 2191
NAS – 72 = 5251
RUT – 8 = 1313
10 Y+ .07 = 2.44%
OIL + 1.52 = 51.86
GOLD – 1.40 = 1172.60

Another Dow record high close.

Yesterday, OPEC agreed to its first production cut in eight years; that pushed prices over $51 a barrel. But the higher prices might not last. Production cuts early in the year are a normal response to a low-demand season in February and March when Asian refiners typically shut for maintenance.

Even without increased supplies from elsewhere, if OPEC and Russia do reduce production by 1.2 million barrels per day as pledged, the cuts probably would not be deep enough to shrink a glut that began to build in mid-2014. Meanwhile, higher oil prices and lower production costs are encouraging US shale operators to increase output, and rig count has been rising.

Bonds had a terrible November. Global bonds lost $1.7 trillion of value in November as they suffered through their worst month since at least 1990. The sell-off is continuing the first day of December, with the US 10-year yield up another 5 basis points at 2.43%, its highest since July 2015. The outlook isn’t great for fixed income either, with European sovereign debt looking vulnerable, Chinese rates continuing to rise, and Treasuries under pressure from the administration change.

Almost all yield investments have been hammered as rates raced higher. Panic among investors has been seen in Treasuries, corporate bonds, REITs, preferred shares and several dividend champions. Of course, there has been some carnage in the utility sector as well as some investors treat them as a proxy for bonds. There are a few arguments for why rates are increasing so substantially, but the strongest case may simply be that no one wants to get in the way of the herd.

Economic activity in the manufacturing sector expanded in November, according to The Institute for Supply Management, and the overall economy grew for the 90th consecutive month. U.S. manufacturing index hit 53.2 in November, up from 51.9 in October.

Construction spending increased in October to a seven-month high with gains in home building and public outlays, and estimates for the prior two months were revised sharply higher, pointing to strength in the sector. The Commerce Department said construction spending increased 0.5% in October to $1.173 trillion, the highest since March 2016. Spending on private construction projects slipped 0.2%. Public construction spending jumped 2.8%

The number of Americans filing for unemployment benefits rose more than expected last week, hitting the highest level in five months, but the underlying trend remained consistent with a healthy labor market. Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 268,000 for the week ended November 26.

Despite the increase, claims remained below the 300,000 threshold for the 91st straight week. That is the longest run since 1970. Yesterday we saw a very strong report from ADP showing 216,000 net new private sector jobs were added last month, which might indicate a very strong jobs report from the Labor Department tomorrow morning but this news on unemployment benefits tamps down expectations slightly. The estimate for tomorrow’s jobs report is 180,000 new jobs.

In a separate report, global outplacement consultancy Challenger, Gray & Christmas said employers announced plans to lay off 26,936 workers last month, down from the 30,740 job cuts announced in October. Jobs cuts in November were concentrated in the retail sector, with 4,850 announced layoffs, most of which stemmed from the bankruptcy of American Apparel. The retail losses were, however, more than offset by a surge in holiday hiring.

Carrier announced late Tuesday that it had reached a deal with President-elect Donald Trump and Vice President-elect Mike Pence, who is currently governor of Indiana, to keep about 1,000 of 1,400 jobs at its Indianapolis plant, rather than move them to Mexico. Today, Trump and Pence went to Indiana to celebrate the Carrier jobs deal. The company said state “incentives” from Indiana were an “important consideration” to its decision to stay put.

Carrier is getting $7 million in financial incentives over the next 10 years. It will also get about $200,000 a year to retrain workers, funding which is generally provided by the state. Carrier had said it would move all the jobs from the plant to Mexico to save $65 million.

Carrier parent United Technologies is a major defense contractor, with $5.6 billion in revenue from federal government contracts, or 10% of its total revenue. The government also pays for $1.5 billion of its research and development costs. So, the $7 million subsidy was likely not the only math in the equation.

Pledging to come clean about secret assets, Credit Suisse has frozen dozens of accounts as it tries to determine if U.S. clients are hiding money from the IRS. The bank is looking at indicators such as phone numbers or powers of attorney to determine whether Americans are the true owners of accounts not disclosed to the tax agency. Any client activity on these accounts now requires approval by a group within Credit Suisse.

Italians will vote Sunday in a crucial referendum that could – in one scenario – force the prime minister’s resignation, spark a banking crisis and ultimately push Italy out of the Eurozone. Such a scenario would require a line of political dominoes to fall in just the right way. Italians are being asked to vote on a sweeping series of constitutional reforms championed by Prime Minister Matteo Renzi.

The reforms would reduce the size and power of the Senate. The upper house currently has equal power to the lower house, the Chamber of Deputies, which regularly results in legislative gridlock as laws are batted back and forth. Rather than being directly elected as the majority of Senators currently are, the new Senate would be made up of regional councilors who would not be salaried.

The president will be able to appoint five senators to serve for seven years each, replacing the five lifetime Senators there are currently. The chamber would retain veto on constitutional matters but lose the power to block everyday laws. Renzi says the changes are vital to end political gridlock and revive Italy’s stagnant economy, and has pledged to resign if voters reject them.

A “No” vote would probably not result in huge changes; Renzi would resign, Italy would remain in the Eurozone, and life and the euro go on – at least in theory.  Europe has faced far more problematic and challenging situations. Still, it would be a major victory for the populist parties.

And the immediate risk stems from the country’s troubled banks, which are saddled with about $383 billion in non-performing loans, roughly a third of the Eurozone total. The sector is already in distress, but the prospect of a political crisis would probably make matters worse.

Monte dei Paschi – the world’s oldest operating bank – is likely to serve as the proverbial canary in the coal mine. The bank is racing to raise new funds, and its plan could be upended by a sudden change in government. Its stock has lost 86% so far, this year, and other heavyweights such as Unicredit have fared little better. And if the Italian banks fail, just outright fail, well things could get dicey.

Parker Hannifin announced an agreement to buy Clarcor in a cash deal that values the maker of filtration products at about $4 billion. Parker will pay $83 for each Clarcor share outstanding, which is an 18% premium to Wednesday’s closing price. The deal is expected to close during the third quarter of 2017.

Howard Schultz, the CEO of Starbucks, will be stepping down next year. Schultz is being replaced by former Microsoft senior exec Kevin Johnson, who will become the new CEO. In a statement, Schultz said the move “ideally positions Starbucks to continue profitably growing our core business around the world into the future.” Schultz famously returned to Starbucks in 2008 to help guide the coffee giant through the recession and restore growth at the company. Starbucks dropped about 3% in after-hours trade.

Americans snapped up new vehicles at a rapid pace in November, giving the auto industry a chance of breaking its all-time record for full-year sales. Auto sales rose 3.7% compared with a year ago, according to Autodata. On an annualized basis, that equaled a rate of 17.87 million units. Last year, the industry sold a record 17.47 million.

Even as auto lending continues to boom at a near record pace,  regulators are airing “significant concern” about the millions of Americans who are falling behind on their car loans. The Federal Reserve Bank of New York reports increasing distress among auto borrowers with shaky credit, as subprime delinquencies rose in the third quarter. In the third quarter, 2 percent of subprime auto loan balances became at least 90 days delinquent, up from 1.6 percent in the third quarter of 2014.

A massive network of high-speed fiber optic internet is coming to 20 states over the next five years, according to an announcement from Altice, the cable company behind Optimum, Lightpath and Suddenlink. Altice’s planned 10-gigabit per second connection far outpaces Google Fiber’s current 1-gigabit per second connection, as well as Verizon Fios.

Mild Morning Gains Fade by Friday Afternoon

Charles Schwab: On the Market

Posted: 11/4/2016 4:15 PM ET

Mild Morning Gains Fade by Friday Afternoon

U.S. stocks finished lower, though a steady October nonfarm payroll report that was highlighted by stronger-than-expected wage growth stirred a modest early advance. The morning gains for stocks faded as December Fed rate hike expectations remain elevated and political uncertainty continues to linger ahead of next week's Presidential election. Treasuries advanced, crude oil prices and the U.S. dollar were lower and gold was mildly higher.

The Dow Jones Industrial Average (DJIA) declined 42 points (0.2%) to 17,888, the S&P 500 Index decreased 3 points (0.2%) to 2,085 and the Nasdaq Composite lost 12 points (0.2%) to 5,046. In moderately-heavy volume, 899 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil declined by $0.59 to $44.07 per barrel, wholesale gasoline lost $0.04 to $1.38 per gallon and the Bloomberg gold spot price moved $2.31 higher to $1,305.12 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 96.95. Markets were lower for the week, as the DJIA lost 1.5%, the S&P 500 Index decreased 1.9% and the Nasdaq Composite was 2.8% lower.

Starbucks Corp. (SBUX $53) reported fiscal 4Q earnings-per-share (EPS) of $0.56, one penny above the FactSet estimate, as revenues grew 16.0% year-over-year (y/y) to $5.7 billion, roughly in line with forecasts. 4Q same-store sales rose 4.0% y/y, below the expected 4.9% increase. SBUX issued full-year EPS guidance that came in below estimates. Separately, the coffee chain raised its quarterly dividend by 25.0% to $0.25 per share. Shares finished solidly higher.

Activision Blizzard Inc. (ATVI $42) posted 3Q EPS ex-items of $0.52, north of the expected $0.42, with revenues rising 58.4% y/y to $1.6 billion, matching expectations. ATVI issued 4Q guidance that missed forecasts, while raising its full-year outlook. Shares were solidly lower.

Kraft Heinz Co. (KHC $84) announced 3Q earnings ex-items of $0.83 per share, versus the expected $0.74, as revenues rose 2.4% y/y to $6.3 billion, due to the merger of Kraft and Heinz, roughly in line with forecasts. KHC traded lower.

CBS Corp. (CBS $57) reported 3Q EPS of $1.05, north of the projected $0.98, with revenues increasing 4.0% y/y to $3.4 billion, above the estimated $3.3 billion. Shares moved nicely higher.

Shares of Whole Foods Market Inc. (WFM $29) reversed solidly to the upside following a Bloomberg report, citing people familiar with the matter, that the company's largest shareholder has met with potential activist investors to discuss making sweeping changes to the upscale grocer, including replacing management and exploring a sale of the company. Per the report, a Whole Foods spokeswoman responded that it values the strong and open relationships it has with its shareholders, and as discussed on yesterday's earnings call, "we are focused on pursuing the right strategies to position the company to produce strong results and returns for our shareholders over the long term."

October job growth steady and wage gains top estimates

Nonfarm payrolls (chart) rose by 161,000 jobs month-over-month (m/m) in October, versus the Bloomberg forecast of a 173,000 increase. September's gain was upwardly revised to 191,000 jobs. The total upward revision to job gains in August and September was 44,000. Private sector payrolls increased by 142,000, versus the forecasted 170,000 rise, after increasing by an upwardly revised 188,000 in September. The Labor Department noted that employment continued to trend up in healthcare, professional and business services, and financial activities, while adding that Hurricane Matthew affected parts of the East Coast during the month.

The unemployment rate dipped to 4.9% from 5.0%, in line with estimates, while average hourly earnings grew by 0.4% m/m, topping projections of a 0.3% increase, and September's upwardly adjusted 0.3% gain. Wages are up 2.8% y/y/, the largest gain since June 2009. The labor force participation rate dipped to 62.8% from 62.9%, but was up from the 62.5% rate a year ago. Finally, average weekly hours remained at September's unrevised 34.4 hours level, matching forecasts.

The report preserved elevated December Fed rate hike expectations, while the stronger-than-expected wage growth figures are likely fostering optimism that the consumer, which makes up the lion's share of U.S. economic output, could be poised to support the impact of a rate increase from an abnormally low level. As noted in the recent Schwab Market Perspective: Looking Past the Election, economic data continues to support a sluggish growth narrative, although there are glimmers of hope that we could see at least a modest acceleration in 2017. The U.S. consumer appears to be gaining some confidence and wage growth has already shown signs of picking up as the economy approaches full employment. We believe, after several false starts, the Fed will actually follow through on a rate hike this time around. Perhaps equally as important will be the message the Fed sends regarding what it may be looking to do into 2017. Read more at www.schwab.com/marketinsight.

The trade balance (chart) showed that the deficit came in at $36.4 billion in September, compared to the $38.0 billion estimate. August's deficit was revised to $40.5 billion from the $40.7 billion posted earlier. Exports rose 0.6% m/m to $189.2 billion, while imports fell 1.3% to $225.6 billion.

Treasuries were higher, with the yield on the 2-year note declining 2 basis points (bps) to 0.78%, while the yields on the 10-year note and the 30-year bond fell 4 bps to 1.77% and 2.56%, respectively. Bond yields remain choppy in the wake of a recent rally that has come courtesy of some upbeat economic data that has bolstered the case for a December rate hike, which was also preserved with Wednesday's unchanged monetary policy decision from the Federal Open Market Committee (FOMC). Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis of the FOMC's decision in her article, The Fed Plays It Safe, December Hike Likely, at www.schwab.com/insights, while also offering her article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds. Follow Kathy on Twitter: @kathyjones.

Europe and Asia lower as U.S. political uncertainty festers

European equities finished broadly lower, with the markets digesting the stable U.S. October labor report, while political uncertainty in the nation remained elevated with polls indicating a tight race ahead of next week's election. Financials saw pressure amid some lackluster earnings reports out of the sector. The British pound extended yesterday's rally versus the U.S. dollar that came amid eased "hard" Brexit concerns after a court ruled that the U.K. government would have to request parliamentary approval to trigger Article 50 and start official negotiations with the European Union (EU) regarding its vote to leave the EU, known as a Brexit. For more analysis of the Brexit fallout, Schwab's Director of International Research, Michelle Gibley, CFA, offers her latest article, Keep Calm and Carry On: The Brexit Shock That Wasn't. In economic news, the final Markit Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised lower to 53.3 in October, from the 53.7 preliminary report, where it was expected to remain, and up versus the 52.6 level recorded in September. The euro ticked higher versus the greenback, while bond yields in the region were mixed. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscape. Read these articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished lower, with the looming U.S. Presidential election continuing to stymie global conviction and foster caution, while the extended selloff in crude oil prices remained a drag on the energy sector. Japanese equities fell, returning to action after yesterday's holiday break, with the yen continuing to strengthen on risk aversion bolstered by the heightened U.S. political risk. Australian securities dropped, with heavyweight financial, basic materials and oil & gas sectors all seeing pressure. Stocks trading in mainland China and Hong Kong dipped, reversing early gains amid the political uneasiness and some disappointing earnings reports weighing on sentiment. Indian equities traded lower with drugmakers falling on persistent uneasiness regarding to impact of the election on the U.S. healthcare sector, which overshadowed strength in consumer-related companies on continued optimism over the nation's recent tax reform measures. South Korean stocks ticked to the downside.

Amid the continued global market volatility, Schwab's 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 at www.schwab.com/oninternational.

Stocks fall as U.S. election nears

The equity markets fell solidly on the week, with an apparent tightening of the U.S. Presidential race bolstering political uncertainty and stymieing global conviction, with the healthcare sector continuing to get crushed. Crude oil prices extended a tumble to pressure the energy sector. Upbeat economic reads on personal spending and manufacturing activity, culminating with Friday's October labor report, along with the Federal Open Market Committee's (FOMC) monetary policy statement, preserved December rate hike forecasts. The real estate sector led a broad-based decline. The U.S. dollar slipped and Treasury yields modestly gave back some of a recent rally. Earnings season turned the corner to home stretch, and results were mixed, with Facebook Inc. (FB $121) disappointing with its warning of a meaningful revenue growth deceleration, while Electronic Arts Inc. (EA $81) topped profit projections and issued upbeat full-year earnings guidance. Thus far, of the 422 companies in the S&P 500 that have reported results, about 56.0% have exceeded sales expectations and approximately 76.0% have bested earnings estimates.

Next week, the NFIB Small Business Optimism Index, JOLTS Job Openings and the preliminary University of Michigan's Consumer Sentiment Index will headline a light U.S. economic docket, while earnings season downshifts. However, the political front will garner the most attention and volatility is set to remain as the results from Tuesday's Presidential election, including how the House and Senate races play out, are digested and scrutinized by the markets.

As noted in the Schwab Market Perspective, given the polling numbers and betting markets, the stock market appears to be expecting a Clinton win and continued gridlock, with at least the House remaining in Republican hands. If the results are quite different than expectations, market volatility could surge, but we suggest investors hold tight. Much as we saw following the Brexit vote, reacting in a kneejerk fashion can be detrimental to longer term performance. Read more at www.schwab.com/marketinsight. For more analysis on the election, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Election Night: How to Watch the Returns, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles.

International report due out next week that deserve a mention include: Australia—consumer confidence. China—trade balance, CPI and PPI, and lending statistics. Japan—machine orders. Eurozone—retail sales. U.K.—industrial and manufacturing production, and trade balance.

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.