Financial Review

Good to be King

Sinclair Noe — December 8, 2015

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

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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

See Opportunities

Sinclair Noe — December 1, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW + 168 = 17,888
SPX + 22 = 2102
NAS + 47 = 5156
10 YR YLD – .07 = 2.15%
OIL un 41.65
GOLD + 4.30 = 1069.80
SILV + .10 = 14.27

More than 180 nations are gathered in Paris to discuss a far-reaching agreement to reduce global carbon emissions. The emerging deal would require wealthy countries, including the U.S., to cut their own pollution while helping poorer countries shift from dependency on fossil fuels and mitigate the effects of climate change.

President Obama held a news conference today in Paris at the U.N. global climate summit; Obama said the world needs an enduring framework for addressing climate change and that he would seek an agreement that would boost economies as well as help the planet’s environment.

President Obama said the U.S. will meet commitments to help finance developing nations’ efforts to reduce carbon pollution, challenging congressional Republicans who have fought most of his environmental policies.

Some people look at the call for reducing carbon emissions and only see expenses, while others see opportunities. The number of annual patents for green energy has increased fivefold since 2002 and this year is on track to break another record after eight consecutive increases. Most patents in 2015 have been for solar technologies, 586 granted in the first half of the year; followed by fuel cells, electric vehicles, and wind power.

In Paris, countries and companies are pledging billions to fund even more research and development of new clean energy technologies. For the first time, more than half the world’s annual investment in clean energy is coming from emerging markets instead of from wealthier nations. The world recently passed a turning point and is adding more capacity for clean energy each year than for coal, natural gas, and oil combined.

For that trend to continue, rapidly developing economies are critical. Wind and solar are already competitive in price with grid electricity in some countries, and battery prices for large-scale electricity storage continue to fall.

As talks on climate change entered their second day in Paris, the Indian capital of New Delhi was buried under a thick smog, with visibility reduced to about 200 yards.

The Cyber Monday sales estimates are trickling in, and they’re looking good. Adobe Digital Index estimated that sales were up 12% year-on-year to $2.98 billion. It was enough to blow up the inter-webs. The websites of Target, PayPal, Walmart, and Victoria’s Secret, among a few others, experienced periodic outages or slow checkout times. Target had its biggest online-shopping day ever on Cyber Monday. Amazon said the holiday weekend was the best ever for its own devices.  Adobe says each of the first 18 days of December will tally $1 billion in sales.

If you were shopping over the holiday weekend, there is a good chance that you did not buy something with Apple Pay. According to Infoscout, nearly half as many eligible purchases were made using Apple Pay this Black Friday than last year, when the service was barely a month old. After the novelty wore off, well…

Vehicle sales maintained a strong sales pace in November: On a seasonally adjusted annualized basis, sales reached 18.2 million units for the third consecutive month. Ford pickups remain the top selling trucks and the Toyota Camry is the top selling passenger car. Fiat Chrysler said its U.S. auto sales rose 3 percent year-over-year in November. While Ford (+0.3%) and GM (+1.5%) missed estimates.

Hyundai, Toyota and Nissan all came in with better than expected sales. Volkswagen’s US sales in November fell almost 25%. Also today, Standard and Poor’s cut Volkswagen’s credit rating a notch, from A- to BBB+, on “a tarnished reputation and brand image, reduced business prospects, a more challenging competitive position, substantial costs, and weaker leverage metrics.”

The ISM manufacturing index fell to 48.6% last month from 50.1% in October; a reading below 50 indicates contraction. In a separate report, the private research firm Markit said its final PMI manufacturing index finished at a 25-month low of 52.8% in November.

Construction spending jumped a seasonally adjusted 1.0% in October, and was 13.0% higher for the year. During the first 10 months of this year construction spending amounted to $888 billion. For October, residential construction was 1.0% higher, while nonresidential construction rose 0.6%.

FOMC voting member Charles Evans said today that he is nervous about the December rate hike decision. His feeling is that the Fed needs to target 2% inflation, adding that the Fed Funds rate may be under 1% by the end of 2016. Fed funds futures now show that traders are assuming a 70% probability of a December rate hike, down from 76% yesterday. Keep in mind, FOMC Chair Janet Yellen will be speaking twice tomorrow.

Negotiators from both chambers of Congress reached agreement today on a 5 year highway plan. The highway measure also would revive the US Export-Import Bank, whose charter expired June 30. Lawmakers have until Friday to enact a highway plan or pass another temporary extension of transportation funding, and House Speaker Paul Ryan said his chamber will vote on the bill this week.

The legislation would provide $281 billion over six years for roads, bridges and mass transit. The measure would be financed in part by a one-time use of Federal Reserve surplus funds and by a reduction in the 6 percent dividend that national banks receive from the Fed.

Puerto Rico paid $354 million today on their Government Development Bank debt, avoiding default for now. A missed payment would have been the first default on the commonwealth’s direct debt. Over the past decade, Puerto Rico’s government has laid off 30,000 employees, closed nearly 200 schools, raised taxes and reformed pension funds. They still face $72 billion in debt, with the next payment of $1 billion due on January 1^st, and there is no indication they can pay. Governor Padilla is hoping to negotiate with creditors.

Morgan Stanley is planning to cut up to a quarter of its fixed income jobs over the next two weeks, resulting in the loss of hundreds of jobs. The cuts reflect a slowdown in client activity, pressure from investors to lift returns and new capital rules that penalize big banks for holding vast inventories of debt securities. In October, Morgan Stanley reported a 42% Y/Y drop in bond trading revenue in what CEO James Gorman called the bank’s worst quarter for fixed income since he took over in 2010.

Drug-benefit manager Express Scripts Holding said it is making arrangements with a drug compounder for patients to receive a lower-priced alternative to the expensive anti-parasitic pill Daraprim, whose price jumped more than 50-fold earlier this year. Turing Pharmaceuticals bought the rights to Daraprim and then jacked up the price from $13.50 a pill to $750 a pill. Express Scripts said it has arranged for patients to get the drug for $1 a capsule from San Diego-based drug compounder Imprimis Pharmaceuticals.

Meanwhile, Martin Shkreli, the CEO of Turing, is also the new CEO of a company called KaloBios Pharmaceuticals. KaloBios, which was at one point of time trading below a penny and was planning to wind down its operations after unsuccessfully finding a strategic alternative of staying afloat in the business, hit a 52-week high on Nov 23. The upsurge was due to the purchase of 70% of KaloBios’ shares by an investor group led by Shkreli.

After gaining control of the company, Shkreli assumed the position of the CEO and Chairman of the company’s board of directors. And then he stopped lending the company’s shares to people looking to short it. The shorts were squeezed and squeezed hard. The price jumped from about 90 cents to just over $45 in a matter of days.

Markit Economics said that its Purchasing Managers Index for the euro area rose to 52.8 in November from 52.3 the previous month. All euro area countries, with the exception of Greece, are seeing expansion in their manufacturing sectors. There was also good news on the employment front with Germany’s unemployment rate falling to a record low of 6.3 percent while in Italy unemployment dropped more than expected to reach 11.5 percent. However, it is unlikely that this improving data will do anything to hold back the European Central Bank’s easing plans on Thursday.

The Bank of England singled out two of Britain’s largest lenders for failing to meet certain capital thresholds in the latest round of stress tests examining the banking sector’s ability to withstand future global financial shocks. Despite the shortfalls, the central bank said that the two lenders, Standard Chartered and the Royal Bank of Scotland, passed the exercise, and that neither would be required to raise additional capital for now, but the tests will get tougher. So they say.

Brazil just dropped its latest batch of GDP numbers, and they point to a deepening recession. The country’s economy shrank 1.7% in the third quarter versus the second, on top of a 2.1% contraction the previous quarter and a 0.8% dip the quarter before that. That’s the first three-quarter streak of negative GDP growth since 1999, and it’s a far worse one at that.

Financial Review

Decision Day

Sinclair Noe — October 28, 2015

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

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DOW + 198 = 17,779
SPX + 24 = 2090
NAS + 65 = 5095
10 YR YLD + .06 = 2.09%
OIL + 2.93 = 46.13
GOLD – 11.30 = 1156.70
SILV + .07 = 16.04

It’s Decision Day for the Federal Reserve, and it was an easy decision. The FOMC wrapped up a two-day policy session with a statement that interest rates will remain unchanged near zero; where they have been stuck for 7 full years. The Fed’s statement left open the possibility that the Fed will raise rates at its final meeting of the year, in December. While noting that job growth has slowed, it said that other economic indicators remained relatively strong and the domestic economy “has been expanding at a moderate pace”.

The Fed also signaled that its concerns about the global economy have diminished. In the statement from the meeting in September the Fed said global economic and financial developments might restrain domestic growth. In today’s statement they just say the Fed “is monitoring global economic and financial developments.”

The next FOMC meeting is scheduled for December 15 and 16. Fed chairwoman Janet L. Yellen said in a late September speech that she still expected to raise rates this year, as long as economic growth continued. Stanley Fischer, the Fed’s vice chairman, said much the same a few weeks later. Many Fed policymakers have been saying they will raise interest rates since March, but there are also doves among the Fed, arguing against rate hikes.

Today’s decision to keep rates near zero was supported by nine of the ten members of the Federal Open Market Committee. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, once again dissented, as he did at the September meeting, arguing the Fed should start to raise rates now. Of course any decision would need to be supported by better economic data, and for now at least, the economy can’t seem to build any real momentum.

The Fed will raise interest rates …, someday. But it won’t be easy. We’ve been locked into near zero since December 2008, but that was during rough times; the economy lost 576,000 jobs that month. Things have improved quite a bit since those dark days. But there are still risks and no guarantees that recovery can continue without monetary stimulus. The recovery has received almost no fiscal stimulus – to the contrary. The lack of fiscal stimulus has been one of the main reasons why the recovery has been so sluggish, even as the economy has shown consistent growth.

Even as the federal debt grew substantially in recent years, the government’s annual interest payments barely increased thanks to the Fed’s efforts to minimize borrowing costs. Higher rates mean higher debt servicing costs which would choke off any possibility of fiscal policy shouldering the burden of recovery.

The labor market has recovered most of the ground lost during the downturn but there is still slack. Full employment is a loose target and the Fed doesn’t really know when we will hit it. We’re close but not there yet. Workers remain underutilized and discouraged. Wages have not shown strength, certainly not enough to push inflation, which remains well below the Fed’s 2% target. And while the price of oil has an outsized influence on broader prices, the Fed has little control over the commodity markets one way or the other.

The Fed also has little control over long term interest rates, they just set the target for very short-term rates; still, if they raise the target, you could expect the rates on everything from cars to credit cards to mortgages to jump, along with a stronger dollar. And this is where it gets tricky. A stronger dollar would hurt US exports while also making imports cheaper; in other words the possibility of a slowing economy combined with disinflation. Further, it could hurt emerging market economies, as their currencies buy less and their resources sell for less.  Higher rates would be good news for savers, who now earn near zero, but for now they have to take on more risk, which is why Wall Street enjoyed a nice rally on today’s news.

The House has approved the reauthorization of the U.S. Export-Import Bank, marking a big victory for business groups that had fought to secure its revival. The bank’s future, however, may not be fully resolved until December. The House bill now goes to the Senate, which recently approved a similar measure as part of an unrelated transportation bill.

Following years of intense debate, the Senate has passed a controversial bill that will see the Department of Homeland Security become a hub for sharing information about cyber-attacks within the government and the private sector. The Cybersecurity Information Sharing Act, known as CISA, would give legal protection to companies that share information about cyber-threats with the government and with each other.

This should help them detect intrusions faster, improve their defenses, and take advantage of government advice and intelligence. It should give law enforcement a clearer picture of the threats facing U.S. networks and help in pursuing cybercriminals. The bill, which has faced privacy concerns from high-tech firms and advocacy groups, must now be reconciled with a separate piece of legislation that was passed by the House of Representatives earlier this year. In the end, Senator Harry Reid summed it up best: “The bill, which is okay, is better than nothing.”

The Energy Information Administration said U.S. commercial crude inventories rose by 3.4 million barrels to a total of 480 million barrels in the previous week, but gasoline and distillate inventories fell. Also, Mexico’s state oil company Pemex said it had received a license from the United States to import U.S. light crude to be refined at Mexican refineries in exchange for its own heavier crude oil. Now, oil was up today, which seems a little counter-intuitive because the EIA had reported weekly jumps of eight million and 7.6 million barrels in its past two reports and today’s data marked a fifth weekly rise in a row.

Volkswagen reported a net loss of $1.84 billion in the third quarter, its first quarterly decline in more than a decade. Volkswagen subtracted €6.7 billion-euro from profit to cover the cost of recalling and repairing about nine million cars equipped with illegal software intended to cheat on emissions tests. The effect of the deceptive software on sales and revenue is likely to worsen in coming quarters.

Fiat Chrysler Automobiles reported a better-than-expected 35 percent jump in quarterly earnings helped by strong performance in North America, and confirmed its full-year guidance.

A successful contract pitch, that included a Super Bowl ad, has landed Northrop Grumman as much as $80 billion to build the U.S. Air Force’s Long-Range Bomber. Northrop beat out Boeing and Lockheed Martin for the contract.

As reported yesterday, Walgreens Boots Alliance is acquiring Rite Aid for $ 9.4 billion, or $17.2 billion after factoring in debt. Walgreens expects the transaction to close in the second half of 2016.

Separately, Walgreens Boots Alliance reported a better-than-expected quarterly profit, helped by lower costs achieved through its cost-cutting plan. Walgreens in April launched a plan to cut $1.5 billion in costs by the end of fiscal 2017, which would include store closures and freezing salary hikes for senior U.S. executives.

Confirming earlier rumors, Toshiba has announced the sale of its image sensor business to Sony as it tries to recover from a $1.3 billion accounting scandal. Sony recently said it would spin off its image sensor business into a new wholly-owned subsidiary called Sony Semiconductor Corporation, and Toshiba’s operations are set to come under that umbrella. No financial details of the deal have been disclosed.

Amazon, which has rapidly built a network of on-demand workers for its Prime Now service, now faces a lawsuit over how those workers are treated. The action potentially thrusts Amazon into the center of a debate roiling Silicon Valley over whether on-demand workers should be treated as employees or independent contractors. Companies such as Uber and Postmates, which consider their workers contractors and thereby avoid some expenses, have faced similar suits.

IBM announced it will acquire the digital and data assets of The Weather Company in a deal valued at about $2 billion. The Weather Company is currently owned by the Blackstone Group, Bain Capital and NBC Universal, which paid $3.5 billion for the firm in 2008. IBM will use the Weather Company’s digital assets to boost its Watson cloud and Internet of Things platforms.

It’s an interesting idea. The Weather Company gathers data from 147,000 weather collection stations, and that process could be improved through the Internet of Things and then analyzed by Watson. The result: Airlines use it to manage turbulence. Insurance companies use it to judge risk. Agricultural companies use it to manage crops. A side benefit to the deal is that much of the Weather Company’s data is managed on the computing systems of IBM competitors, including Amazon and Google, and now it will move to IBM’s cloud, called Softlayer. That is not enough to right the ship at IBM, but it might give us a hint of how some companies will commoditize the cloud.

Now, just a reminder that the third Republican debate starts in less than one hour, so this is a good time to remind you of the rules for the drinking game. Whenever you hear the phrase that starts with: “I’m the only candidate on this stage….” You take a drink. Also, you should take a shot of something, your choice, whenever a candidate mentions Ronald Reagan. If Reagan is mentioned along with Tip O’Neil, it’s a double shot. Remember to watch responsibly and hydrate.

U.S. Economy Looks Shaky, Which Weak GDP Reading Would Confirm

Denying Denial

Sinclair Noe — October 26, 2015

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

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DOW – 23 = 17,623
SPX – 3 = 2071
NAS + 2 = 5034
10 YR YLD – .02 = 2.06%
OIL – .87 = 43.73
GOLD – 1.10 = 1163.90
SILV + .03 = 15.94

The U.S. economy has looked shaky of late, and an expected weak reading on third-quarter gross domestic product should confirm that. As a result, the Federal Reserve is again expected to keep interest rates near zero. The Fed decision, due Wednesday, and the GDP report, coming Thursday, will be the center of focus on this week’s economic calendar. Weak data almost certainly means the Fed will stick with its Zero Interest Rate Policy at this week’s meeting. The big question is whether the Fed will hint at a December move.

Also on the calendar this week is some sort of deal for the debt ceiling, which needs to be raised by November 3 in order to avoid default; and to meet the November 3 deadline, a deal needs to be reached this week. Talks have intensified between the White House and House Speaker John Boehner on a two-year budget agreement that would also increase the federal debt limit. Congressional leaders are said to be nearing an agreement, which would then need to win backing from most Democrats and at least several dozen Republicans for House passage. The deal raises the prospect that Boehner could resolve two of the thorniest fiscal hurdles before he resigns later this week.

If completed, the agreement would be the most significant spending accord in two years and perhaps since 2011, when the White House and congressional Republicans enacted deep spending cuts in exchange for an increase in the debt ceiling. Obama and some Republicans have been trying to undo part of those cuts, known as sequestration, ever since—GOP defense hawks want to lift budget caps for the Pentagon, while the president has refused to do so unless he can get an equivalent increase in domestic spending.

Under the emerging agreement, that’s what would happen. Money for defense and non-defense accounts would go up by about $50 billion this year and another $30 billion in fiscal 2017. The deal would also prevent steep premium increases for millions of Medicare beneficiaries, the House official said, in a win for Democratic negotiators. CNN is reporting that the spending increases would be offset by oil sales from the Strategic Petroleum Reserve, higher fees for telecommunications companies, and changes to the crop insurance program.

In political terms, the agreement would be a victory for three people in particular. Boehner would succeed in his stated goal of (mostly) clearing the deck of big issues for his successor. Ryan, who has barely won the support of hardliners in the House, would be spared the challenge of having to negotiate contentious fiscal agreements within weeks of assuming the speakership.

And, Obama would walk away victorious in his bid for Congress to relax spending restraints now that the economy has improved and the budget gap has shrunk (at least for the next few years). The president would also get relief in another respect: By removing the shadow of a possible government shutdown or default, he stands a better chance of seeing Congress act on his other priorities, namely criminal-justice reform, in his remaining 14 months in office.

A bipartisan group of House members will try to revive the Export-Import Bank, a federal government agency that finances exports. This is separate from the debt limit. Created during the Depression, the Ex-Im Bank provides insurance and loan guarantees to overseas buyers of American products. The Ex-Im Bank, essentially stopped doing new business on July 1, after House leaders let its charter lapse.

Opponents of the Ex-Im Bank claim it is nothing more than an example of corporate welfare, even though the bank paid the Treasury $675 million in fiscal year 2014. The bank says it supported $27.4 billion in exports and 164,000 American jobs last year. Nearly 90 percent of its loan recipients, the bank says, were small businesses, whose exports accounted for about 40 percent of those supported with Export-Import funding. Supporters in the House appear to have enough votes to re-authorize the bank, although it’s less clear it can pass the Senate.

The pace of new-home sales in the U.S. sank 11.5% in September to an annual rate of 468,000, marking the lowest level in 10 months. Sales for August were also revised down to a 529,000 pace from an original 552,000, which would have been a post-recession high. The median price of a new home in September was 13.5% higher compared to one year ago: $296,900 vs. $261,500. Despite the big drop in sales in September, new-home purchases are up 2% in comparison to September 2014.

Toyota has regained its crown as the world’s biggest car company by sales after releasing figures for the first nine months of the year. The Japanese carmaker sold 7.49 million in the first three quarters of 2015, beating Volkswagen’s 7.43 million and General Motors’ 7.2 million. The reversal could prove the tip of the iceberg for Volkswagen, which is engulfed in the worst scandal in its 78-year history.

Negotiators for the United Auto Workers and General Motors reached a tentative agreement on undisclosed terms for a new four-year labor contract, averting a threatened strike. The proposed deal will now go to a council of several hundred UAW leaders on Wednesday, and will then head to a ratification vote by UAW’s 52,700 workers.

FedEx said it expects shipments during the holiday period between the Black Friday and Christmas Eve to rise 12.4% above year ago levels to 317 million shipments. This holiday period includes one more day that last year. FedEx expects the holiday period to include three shipment volume spikes, including Cyber Monday and the first two Mondays in December. The package delivery service said it was adding 55,000 employees for the holidays, and will expand operations.

Valeant Pharmaceuticals has conducted an internal reviewed of the company’s accounting for its Philidor arrangement and has confirmed the appropriateness of the company’s related revenue recognition and accounting treatment. “In light of the recent allegations, however, the Board of Directors has decided to establish an ad hoc committee to review allegations related to the company’s business relationship with Philidor and related matters.”

Last Wednesday, Citron Research accused the company of using a network of pharmacies to create phantom sales of its products. Valeant said Philidor is independent and that the drugmaker’s accounting leaves no way for it to stuff inventory into the pharmacy. Valeant can’t remove the CEO or management of Philidor, and the drugmaker’s executives and board members don’t own any stake in the pharmacy. Valeant shares were down 35% last week, and even after the conference call today, shares dropped another 5%.

Duke Energy announced plans to buy Piedmont Natural Gas for $4.9 billion in cash. The boards of both companies have unanimously approved the buyout deal. Piedmont shareholders will receive $60 in cash for each share of common stock, representing a roughly 40% premium to Piedmont’s closing price on Friday.

Eating processed meats causes cancer, and red meat probably increases cancer risks. That’s the judgment of a panel of global experts assembled by the World Health Organization. Eating an extra 50 grams daily of processed meat increases the risk of colorectal cancer by 18 percent. The W.H.O. says that while the overall risk is small, it “increases with the amount of meat consumed.”

ExxonMobil has responded to mounting calls for a federal investigation into accusations that the company knew for decades about the risks of burning fossil fuels and the effects on climate change, but withheld the information and sought to sow doubt among the public. Exxon says the allegations are “inaccurate and deliberately misleading.” But there is more to the story than a simple denial and it goes back to former Exxon CEO Lee Raymond.

Beginning in 1977, Exxon scientists began to produce a decade of papers that described a general scientific consensus that the burning of fossil fuels was changing global climate. It was not yet knowable whether the planet was undergoing a heating trend, but if it was, temperatures could rise by three to 10 degrees Celsius, one early paper said.

In the late 1980s, however, Exxon abruptly embraced a message that scientists were exaggerating how much they knew, and that the risk was that they were utterly wrong. In full-throated public statements, Raymond himself said he did not believe the planet was warming.

The possible legal ramifications of the Exxon paper trail are that the company could potentially be shown in a court to have deliberately squelched scientifically based evidence that effectively accepted the consensus view. Science is rarely incontrovertible, but, as the tobacco industry was fined a decade ago for having lied about the dangers of cigarettes, Exxon could be liable for stiff penalties should it be shown to have purposely misled the public for corporate gain.

A former prosecutor in the successful 2006 US racketeering case against tobacco companies has asserted that similar charges might be warranted against ExxonMobil. Exxon under Raymond had not previously been seen to have maliciously distorted in-house scientific research. But now, the news reports, relying on previously little-known papers and documents, many of them housed in an ExxonMobil archive at the University of Texas, allege that the company knew much more than it owned up to. The scandal has implications beyond ExxonMobil, as other oil companies that conducted their own research could also face public scrutiny.

FINANCIAL REVIEW

More Worthwhile Pursuits

Sinclair Noe — October 12, 2015
Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)
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DOW + 47 = 17,131
SPX + 2 = 2017
NAS + 8 = 4838
10 YR YLD closed
OIL – 2.10 = 47.53
GOLD + 7.50 = 1164.90
SILV – .01 = 15.92

The Dow Industrials posted a gain for the seventh consecutive session, and ninth gain in the past 10 sessions. During the rally, the Dow has gained 1,130 points. Crude oil futures settled 5.1 percent lower after gaining almost 9 percent last week. The dollar was down slightly.

Dell and private-equity firm Silver Lake will buy EMC Corp. for roughly $67 billion in cash and stock, marking one of the largest technology-industry takeovers ever. The $33.15 a share price tag represents a 19% premium over Friday’s closing price. EMC also owns about an 80% stake in VMware, which will remain a publicly traded company. EMC holders will receive $24.05 a share in cash and in addition to tracking stock linked to a portion of EMC’s economic interest in the VMware business. VMware has a market value of about $33 billion.

The Dell deal is the largest in tech history, and it may be the biggest tech deal in terms of debt. Dell will add about $50 billion in debt to complete its proposed acquisition, bringing the closely held company’s total debt to about $60 billion.

Budweiser must really like Miller. Anheuser Busch InBev upped the ante again, making its fourth bid in the past few weeks for SABMiller, saying it’s willing to pay $103 billion in cash and stock. Under British takeover rules Anhesuer Busch InBev must make a formal offer by Wednesday or sit on the sidelines for at least 6 months. SABMiller, the world’s second largest brewer, has rejected three prior proposals since news first emerged in September that Anheuser-Busch InBev was interested in a merger.

The deal, if it were to be completed, would create a combined company with $64 billion in annual revenue that commands 30 percent of global beer sales. Any deal between the brewing giants would most likely face significant regulatory scrutiny.

Separately, the Justice Department is investigating allegations that Anheuser-Busch InBev is trying to cut competition by buying distributors, making it harder for fast-growing craft brewers to get their products on store shelves. In the past few months, A-B InBev has made deals for five distributors in three states. Many states require brewers to use distributors to sell their product, and once AB InBev buys a distributor, craft companies say they find that they can’t distribute their beer as easily and sales growth stalls.

A demonstration in Berlin on Saturday involved hundreds of thousands of protesters against the Transatlantic Trade and Investment Partnership being negotiated between the U.S and EU. The broad trade accord is seen as picking up momentum following last week’s Trans-Pacific Partnership deal, along with some gentle nudging from large multinationals. Groups in Europe are taking issue with TTIP’s lack of transparency and the potential impact on labor and safety.

Standard & Poor’s has cut its ratings on Catalonia by one notch to BB-, saying it expects increasing political tension following last month’s regional elections.

Greece’s new government faces a major test this week when several new economic reforms and austerity measures demanded by international creditors need to be voted on to become law. The Greek parliament will vote this week on an omnibus bill cutting pensions, raising the retirement age and increasing punishments for tax evasion ahead of the country’s first bailout review later this month. The reforms will need to be approved to unlock a fresh -euro loan installment from the country’s €86-billion-euro bailout.

Several dozen Republican congressmen have signed a petition that will force the House to vote on whether to revive the Export-Import Bank that helps American companies sell goods overseas. After the House votes on the Ex-Im Bank bill later this month, the Senate would still have to approve the measure.

The interest rate watch goes on. Here’s the latest twist. U.S. Federal Reserve policymakers are still likely to raise interest rates this year but that is “an expectation, not a commitment,” – so says Fed Vice Chairman Stanley Fischer at a weekend International Monetary Fund (IMF) meeting in Peru. Fischer also said “Considerable uncertainties” still surround the U.S. economic outlook, including the drag on exports from slowing global growth, low investment caused by the decline in oil prices and the recent “disappointing” drop in U.S. jobs.

This morning, Atlanta Federal Reserve Bank President Dennis Lockhart says the Fed will have plenty of new economic data to make a decision in December. And San Francisco Federal Reserve Bank President John Williams said that even “a little bit” more economic data could convince him to support a rate hike at the Fed’s next meeting, in October. Over the weekend Chicago Federal Reserve Bank President Charles Evans said the Fed that globally low inflation makes it “challenging” for the U.S. central bank to lift domestic inflation to its 2 percent goal.

Social Security recipients shouldn’t expect an increase in benefits next year. Adjustments are based on increases in inflation, however falling gasoline prices over much of the last year mean the cost-of-living adjustment, set to be announced Thursday, will likely be zero. The COLA adjustment affects payments to around 70 million Americans. This is just the third time in the past 40 years that Social Security would get no increase in next year’s benefits.

Much of the stock market is sensitive to the economic ramifications of Fed decisions, of course. But perhaps the sector with the most near-term sensitivity is the financial sector. The big banks are scheduled to report earnings this week, including: GS, BAC, WFC, C, JPM, and MS. While the broader market has recovered from losses sustained in the latter half of August, banks are still struggling. Other major earnings reports on the calendar this week include, Intel, GE, and Alphabet (formerly known as Google).

General Electric is in advanced talks to sell a specialty finance portfolio, worth more than $30 billion, to Wells Fargo. Reuters reports Wells Fargo has so far outbid other parties for General Electric’s vendor financing, commercial distribution finance and direct lending assets. A deal could be announced by the time Wells Fargo publishes its third-quarter earnings on Wednesday.

Glencore halted trading of its Hong Kong-listed shares overnight pending the announcement of an asset sale. The embattled mining giant then confirmed the sales process for its wholly-owned Cobar copper mine in Australia and Lomas Bayas copper mine in Chile. The deals are part of a broader plan Glencore has outlined to cut $30 billion in net debt, weather a slump in commodity prices and revive its shares (which have dropped 57% this year).

Copper rose 0.4 percent following a near 4 percent gain last week after production cuts by Glencore boosted base metals. Glencore plans to cut zinc production by a third. Zinc capped the biggest one-day gain in at least 26 years on Friday and copper jumped 3.1 percent.  The shift in output may not be enough to offset weak demand growth in China. Demand has been disappointing, but supply has also been worse than expected.

Fiat Chrysler  has disclosed the price range of Ferrari’s initial public offering that could value the luxury unit at close to $10 billion. The company will sell up to 10% of Ferrari in the IPO at a price of between $48-$52 per share and use the proceeds of the offering to help pay for its own turnaround plan.

Looking to secure a larger slice of the world’s biggest auto market, Ford is investing $1.8 billion over the next five years to expand research and development in China. The company also expects to introduce the C-MAX Energi, a plug-in hybrid, to the Chinese market next year. Beijing has been trying to encourage more electric vehicles to combat pollution, but progress has been slow due to the lack of infrastructure.

Angus Deaton, a Princeton economist, was awarded the Nobel Memorial Prize in Economic Science. The award committee said Deaton’s research has “shown other researchers and international organizations like the World Bank how to go about understanding poverty at the very basic level.” Deaton has criticized the widening income gap between rich and poor in the U.S.

In his 2013 book, “The Great Escape,” Deaton wrote that “inequality can sometimes be helpful” in promoting prosperity by giving people incentives to work harder and more efficiently. But last year Deaton wrote that he worried that high-paying jobs in finance and other fields were diverting talented young people from “more worthwhile pursuits.” He also warned that the very rich might be using their disproportionate influence to “write the rules in their favor, and they may work against the public provision of health care or education, for which they pay a large share but have little personal need.”

In a 2003 essay, Deaton wrote about the difficulty in determining how we define poverty. He wrote: Even if you have enough goods, they are worth little if you are not healthy enough to enjoy them. Children who live in an unsanitary environment will obtain little nutritional benefit from the food that they eat if they continually suffer from diarrhea. More broadly, girls who are denied the opportunity to go to school experience yet another type of poverty, the poverty of not being able to read and to participate in activities that are only open to the literate. People are also poor in another sense if they lack the resources to participate fully in the society in which they live, who in Adam Smith’s term “are afraid to appear in public,” even if their incomes would be sufficient in some other society.

Financial Review

Seven Years

Sinclair Noe — September 15, 2015

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

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DOW + 228 = 16,599
SPX + 25 = 1978
NAS + 54 = 4860
10 YR YLD + .09 = 2.28%
OIL + .38 = 44.97
GOLD – 3.30 = 1106.10
SILV – .01 = 14.51

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.4 percent in August after an upwardly revised 0.6 percent increase in July. These so-called core retail sales, which correspond closely to the consumer spending component of gross domestic product, provided the latest sign of sturdy economic momentum and suggested the recent stock market sell-off had little immediate impact on U.S. household spending.

A separate report from the Federal Reserve, however, showed manufacturing output fell a sharper-than-expected 0.5 percent as auto production slid, after a rise of 0.9 percent in July. Excluding autos, factory output was unchanged. The manufacturing sector has been struggling, faced with the headwinds of a strong dollar, slack economies overseas and lower oil prices.

While most economists think the Fed may wait to raise interest rates, and futures contracts show only a 30 percent probability that the Fed will boost rates on Thursday, the Treasury market is bracing for a hike. Treasuries tumbled, lifting the two-year note yield to the highest since April 2011. Treasury two-year note yields rose eight basis points, or 0.08 percentage point, to 0.81 percent. Benchmark 10-year note yields rose nine basis points to 2.28 percent.

The World Bank is warning that a Federal Reserve interest rate hike could cut capital inflows to emerging markets by as much as 45%. The paper from World Bank economists published today says, “Emerging and frontier market economies may hope for the best during the upcoming tightening cycle, but given the substantial risks involved, they would do well to buckle their seatbelts in case the ride gets bumpy.”

More stock market volatility in China extended as the Shanghai Composite Index shed 3.6% to mark its sharpest drop in three weeks. The index barely held onto the psychologically critical 3,000 level. The Hang Seng lost 0.5%, and the major index in Australia was off 1.5%. The yen broke back higher after the Bank of Japan held rates steady. The central bank warned on slowing demand from emerging markets.

Brazil announced a new round of spending cuts and tax hikes in an effort to narrow a budget deficit after the nation’s credit rating was reduced last week. The new measures total almost $17 billion, including tough cuts in public health and housing spending. Brazil is racing to get ahead of more credit agency cuts to speculative territory after S&P acted last week.

German Chancellor Angela Merkel called for an emergency summit of European Union leaders next week on the region’s worst refugee crisis since World War II after the EU failed to reach an agreement on binding quotas to distribute migrants. EU interior ministers only agreed to the broad outlines of proposals to relocate 120,000 refugees as a cluster of eastern European nations continued to balk at accepting the proposed quota system. Merkel defended her decision to allow tens of thousands of refugees into her country in recent weeks, only to then turn around and restore border controls as the flood turned into a deluge.

Inflation in the U.K. was flat during August, meeting analysts’ expectations. Food and transport prices were a significant drag on inflation during the month. The reading on prices has been flat or negative for five months out of seven as inflation in the region stays well below the Bank of England’s 2% target rate.

General Electric is moving 500 jobs to France, Hungary and China after Congress halted the Export-Import Bank’s ability to offer new financing. Positions now in South Carolina, Maine, New York and Texas, including some Houston-based packaging operations for gas turbines, are being shifted. GE has been threatening such a move for months as it urges lawmakers to revive the agency, which provided almost $1 billion in credit assistance to the company’s international customers last year.

GE says the loss of Ex-Im financing imperils overseas sales of products such as diesel locomotives, gas turbines and jet engines. While about 55 percent of GE’s 305,000-person workforce was outside the U.S. at the end of 2014, the shifting of domestic jobs is a sensitive political issue. GE has been threatening such a move for months as it urges lawmakers to revive the agency, which provided almost $1 billion in credit assistance to the company’s international customers last year.

Hewlett-Packard is splitting into two separate entities, and will cut 25,000 to 30,000 more jobs as part of a $2.7 billion restructuring. These cuts will be focused on HP’s Enterprise Services Division, the consulting arm of the company. HP has so far let go over 51,000 people.

FedEx just increased its shipping rates by 4.9%; the higher rates go into effect on January 4. And since right now all markets can think about is the Federal Reserve and its dual goals of maximum employment and price stability, the quick reaction to the news was that this is a sign inflation is perking up. Actually, FedEx increased rates by the same amount last year. And this at a time when fuel costs are down. Go figure.

The United Auto Workers union said just after midnight Tuesday it would extend its national labor agreement with Fiat Chrysler on an hour-by-hour basis. The contract expired at 11:59 PM Monday, but talks continued past the deadline. Typically, during talks, the UAW will agree to extend the current agreement indefinitely once it expires. To do so by the hour is an unusual move. The UAW’s contracts with the Detroit car makers cover about 140,000 U.S. hourly workers. For now, those workers will operate under the terms of the 2011 contract until a new agreement can be reached.

BMW and Toyota are looking to expand their partnership in a bid to lower global manufacturing costs and explore hydrogen car options. The two automakers have already worked together on a hydrogen prototype of the BMW Series 5. Toyota and BMW are out in front of peers in hydrogen development. Speculation on strategic alliances between automakers has been a large focus of the Frankfurt Motor Show this week, although most executives have danced around questions on major mergers.

Porsche’s new 600-horsepower concept car, unveiled Monday at a German auto show, can speed from 0 to 60 mph in about three seconds — but that’s far from the most interesting thing hidden under the hood. The four-seat sports car is all electric. Not only can the Mission E drive more than 300 miles without powering down, it can recharge almost completely within 15 minutes.

Ford will start using an advanced Alcoa aluminum alloy for several parts of its top-selling F-150 pickup, and the companies will collaborate on using the next-gen “Micromill” process aluminum in other vehicles through a joint development agreement. The steel-replacing alloy has been a key target for automakers seeking to meet tougher fuel standards with lighter vehicles while meeting safety standards. Ford’s F-150 sales in the U.S. have picked up momentum this summer, as production has ramped up.

The US Court of Appeals for the 9th Circuit has issued a ruling that could change the contours of fair use and copyright takedown notices. The three-judge panel found that Universal Music Group’s view of fair use is flawed. The record label must face a trial over whether it wrongfully sent a copyright takedown notice over a 2007 YouTube video of a toddler dancing to a Prince song. That toddler’s mother sued Universal in 2007, saying that its takedown practices violated the Digital Millennium Copyright Act. The judges ruled today that copyright holders “must consider the existence of fair use before sending a takedown notification.”  Universal will now have to face a trial over whether it “knowingly misrepresented” its “good faith belief the video was not authorized by law.”

Exactly 7 years ago today, Wall Street came closer to imploding than at any other time since the Great Depression. That was when the investment bank Lehman Brothers filed for bankruptcy on Sept. 15, 2008, amid the global mortgage meltdown, triggering a cascade effect across Wall Street. Within days, the insurer AIG had to be bailed out by the federal government while other investment banks, including Morgan Stanley and Merrill Lynch, were pushed to the brink. Merrill, in fact, was eventually sold amid panic to Bank of America.

Seven years later, and the anniversary is a good chance to reflect on the lessons learned. For individual investors you have probably turned a bit more cautious. For Wall Street it looks like nothing was learned; there is still a big revolving door between Wall Street and Washington; regulators are still dysfunctional; the foxes still guard the hen house; the biggest banks of 7 years ago are even bigger today and just as dangerous. You might not have remembered the exact date, but you probably remember the moment, even if you probably haven’t fully recovered.

Financial Review

The Value of Everything

Sinclair Noe — July 30, 2015

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

Subscribe: iTunes | Android | RSS

DOW – 5 = 17,745
SPX + .06 = 2108
NAS + 17 = 5128
10 YR YLD – .01 = 2.27%
OIL – .27 = 48.35
GOLD – 8.40 = 1089.30
SILV – .08 = 14.83

Gross domestic product rose at a 2.3% annual rate from April to June, missing expectations for 2.6% growth. First quarter GDP was revised to show 0.6 percent growth after previous reports showed a 0.2 percent downturn. The latest reading on GDP was propelled by higher consumer spending on big-ticket items such as new cars and trucks and the strongest housing market in years. Personal spending accounted for two percent of the 2.3% headline increase.

Builders increased spending on new home construction at a 6.6% clip in the spring, especially for townhouses, condos and apartment units. That follows 10% gains in the prior two quarters. US exports, meanwhile, snapped back with a 5.3% increase after a 6% drop in the first quarter. Imports rose at a slower 3.5% pace. The improved trade figures also gave the economy a small boost.

Business investment was weak again. Outlays on equipment declined 4.1% and the value of inventories fell slightly to $110 billion from $112.8 billion. Spending on structures such as oil platforms fell 1.6%, largely because of the drop in oil prices. The story on the economy remains consistent: strong consumption, weak investment.

Inflation as measured by the PCE price index increased at a 2.2% annual rate after falling by 1.9% in the first quarter, a decline tied mostly to plunging gasoline costs. Excluding food and energy, core PCE rose to a 1.8% annual pace from 1% in the first three months of the year. The PCE is the Fed’s preferred measure of inflation and it is really close to their inflation target. The personal saving rate was 4.8 percent for the quarter, the same as the average of 2014; this would indicate that people are indeed spending the money they save on lower prices at the gas pump.

Gross domestic product is supposed to be a measure of everything a nation produces. As you might imagine, that is a difficult task. How do you go about placing a value on everything? GDP includes the value of electricity produced but it does not subtract for the air pollution from the coal fired plant; it includes the price of divorce lawyers but places no value on a healthy marriage. In other words, it is imprecise. And so it is constantly subject to revision. The mixing and matching of what drives GDP growth has changed to reflect the economy, with greater emphasis on services, consumption, and housing. Spending on intellectual property products grew at an annual rate of 5.5% in the second quarter, continuing a nice string of advances which offers some hope for improved productivity growth in future quarters. A couple of years ago, intellectual property wasn’t even counted.

The second-quarter report is the first to include new methodology meant to make GDP more accurate. Over the past several years GDP has slightly underestimated growth in the first quarter and sharply overestimated growth in the third quarter. The problems stemmed mostly from difficulties in measuring spending on the military as well as consumer services such as health care. The new report also incorporates changes in how certain taxes and social benefits are categorized. Based on the new calculations, the economy expanded at average 2% rate each year from 2012 to 2014 instead of 2.3% as reported under the old method of calculating GDP. So, if you thought the recovery wasn’t quite as robust as the numbers, you were unfortunately correct.

The GDP report was decent, not great, but good enough. It is totally consistent with the Fed’s assessment of the economy. Yesterday, the Federal Reserve FOMC left interest rates unchanged, but they left the door open for a possible interest rate hike when central bank policymakers next meet in September – if the economy and job growth continue to improve. Fed officials said they felt the economy had overcome a first-quarter slowdown and was “expanding moderately” and job gains have been “solid”. Today’s GDP report is in-line with that view.

The Fed will also watch the next couple of jobs reports to see if they are in-line with their assessment of the economy. Today, a report showed new applications for unemployment benefits rose by 12,000 to 267,000 in the week ended July 25. Jobless claims have been below 300,000 since May. That’s the longest run in 15 years. Next week, we’ll see the jobs report for July; based upon first time claims, the jobs report should be “solid”. And that in turn would point to a September rate hike by the Fed.

The average rate for a 30-year fixed-rate mortgage dropped to 3.98% in the week that ended July 30, falling to the lowest level in almost two months. This would seem to be a good time for many homeowners to refinance, but not everybody can, because many homeowners are still underwater.

There are programs to help, such as the Home Affordable Modification Program, or HAMP, which aims to make mortgages more affordable by changing terms, such as interest rates and loan duration. But there is a problem. Mortgage servicers reject 72% of struggling borrowers from HAMP. The Treasury Department requires mortgage servicers to explain why they reject borrowers, but a new report says the servicers aren’t giving a clear picture for the rejection, and that officials have found that servicers have “wrongfully denied” borrowers from entering HAMP.

Chinese stocks tumbled in the last hour of trading – with the Shanghai composite falling more than 2 percent-on reports that banks were investigating their exposure to the stock market. This year’s slump in China’s property market could hit the country’s banks, according to ratings agency Standard & Poor’s, in the latest warning to the world’s second largest economy.

Saudi Arabia, is planning to pull back from record-high levels of production at the end of the summer. The reduction could begin as soon as September and would amount to about 200,000 to 300,000 barrels a day.

Earnings season continues: Royal Dutch Shell warned that lower crude prices could continue for several years. Shell announced lower earnings, and plans to cut 6,500 jobs and pull back on capital spending.

Linn Energy reported a $379 million net loss and a 46% decline in revenue. Share price dropped 26% today.

Procter & Gamble posted a better-than-expected profit of $521 million, or 18 cents a share, but the consumer-products giant missed on revenue and provided a downbeat outlook for its fiscal 2016 earnings.

T-Mobile posted better-than-expected second-quarter revenue of $8.2 billion, and said it added 2.1 million subscribers, and raised its full-year subscriber outlook.

Time Warner Cable missed Street estimates with a second-quarter profit of $463 million, or $1.62 a share. The cable company did report a growth in subscribers.

LinkedIn revealed second-quarter results that easily topped Wall Street’s estimates on both lines, along with an upbeat full-year outlook.

Higher sales of Amgen’s blockbuster rheumatoid arthritis drug Enbrel and some newer drugs boosted second-quarter profit 7 percent. Amgen beat Wall Street estimates and raised full year profit forecasts.

Samsung Electronics is warning of “mounting challenges” ahead as the company’s once-highflying mobile unit again dragged on its quarterly results. With poor Galaxy S6 sales and a dramatic loss of Chinese market share, operating profit dropped 4% to $5.9 billion.

Looking to gain a better foothold in the mobile messaging market, Yahoo is launching Livetext, an app that makes video calling almost as private as texting. Users will be able to hold video chats in which text messages/emojis appear on the screen, but no audio is present. The app will be released today for Apple and Android devices.

After recently passing hedge funds in terms of total assets, ETFs are setting fresh sales record. In the past 12 months investors traded $18.2 trillion worth of ETF shares, a 17% increase from the 12 months prior and more than triple what it was 10 years ago. For perspective: The amount of dollars exchanging hands through ETFs is now more than the U.S. GDP, which stands at $17.4 trillion.

Meanwhile, the Export-Import Bank will stay shuttered for the rest of the summer after the House passed a highway funding bill that excluded a measure to save the lender. As a result, several corporations – the latest Boeing – are considering moving work overseas given the federal credit agency’s uncertain future. Ex-Im provided $27.4 billion in financing for U.S. exports in fiscal year 2014.

The Senate today passed legislation funding the nation’s highways, bridges, and roads for another three months – one day before construction across the U.S. would have come screeching to a halt. It is the 34th short-term patch passed by Congress since 2009. Remember the government shutdown of 2013; it didn’t last long, but it was a mess; it actually cost more to shut the government down than to keep it running. After that fiasco, lawmakers agreed to lift spending curbs for 2 years. That agreement expires October 1, when Congress will again be subject to the caps known as sequester. That may sound like plenty of time to fix the problem but remember, we’re talking about Congress; summer recess just started; they won’t even be back in Washington for a few weeks, and then they’ll take another break for Labor Day. So, they will try to pass a stop-gap spending resolution to buy more time in September. Still, you can’t rule out a partial government shutdown, again.