Financial Review

When It Rains It Pours

Sinclair Noe — September 19, 2017

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DOW + 39 = 22,370
SPX + 2 = 2506
NAS + 6 = 6461
RUT – 0.68 = 1440
10 Y + .01 = 2.24%
OIL – .06 = 49.85
GOLD + 3.60 = 1311.70

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	3,908.8	$64.92B	$1.56B	37.66%	1	+0.43%	-3.98%
	Ethereum	ETH	283.50	$26.71B	$643.03M	15.53%	0.0722237	+0.31%	-1.68%
	Bitcoin Cash	BCH	524.76	$8.60B	$800.36M	19.33%	0.132646	-0.75%	2.96%
	Ripple	XRP	0.18400	$7.03B	$53.73M	1.30%	0.000047	-0.33%	-11.57%
	Litecoin	LTC	53.050	$2.80B	$280.54M	6.78%	0.0135243	+0.32%	-16.96%
	Dash	DASH	322.71	$2.44B	$34.29M	0.83%	0.082652	-0.70%	1.18%
	NEM	XEM	0.23856	$2.14B	$5.07M	0.12%	0.00006087	+0.10%	-3.03%
	IOTA	MIOTA	0.56389	$1.56B	$12.86M	0.31%	0.00014337	+0.76%	-0.14%
	Monero	XMR	98.35	$1.47B	$48.69M	1.18%	0.0249811	+0.52%	-11.23%
	Ethereum Classic	ETC	11.5000	$1.09B	$68.20M	1.65%	0.00292037	-0.35%	-20.25%

The fun never stops. The Dow hit another record high close. The S&P 500 hit another record high close. The Nasdaq Composite hit a record high close. For the Dow Industrial average, this is the sixth record high. The S&P has a streak of three record highs.

The Fed will wrap up its two-day meeting tomorrow and release an announcement on monetary policy at 2:00 p.m. Eastern – 11:00 a.m. in Arizona. Although we don’t see any surprise rate increase this month, the betting at the Chicago Merc is for a 57% likelihood of a rate increase at the December meeting.

There’s no meeting in November, and after December, the next planned Fed get-together is March. And Fed Chair Janet Yellen’s term expires in February, so December seems like the time to increase rates a quarter point.

At the current meeting, traders are expecting talk of downsizing the Fed’s $4.5 trillion bond portfolio. The Fed has outlined its plan and will only be taking baby steps at first. At first, it will sell Treasuries and mortgage backed securities to reduce its holdings by only $10 billion per month and, as time and conditions warrant, it will work up to $50 billion per month. Wall Street typically likes economic stimulus and typically throws a tantrum when the punch bowl is taken away. We’ll see.

President Trump delivered his first speech to the United Nations General Assembly this morning. Trump escalated his standoff with North Korea over its nuclear challenge, threatening to “totally destroy” the country of 26 million people and mocking its leader, Kim Jong Un, as a “rocket man.”

A bipartisan group of 10 governors — including the Republican governors of Alaska and Nevada –  expressed opposition to a last-ditch Republican effort to repeal and replace most of Obamacare. The bill must pass by a Sept. 30 deadline under a process known as reconciliation, that makes it possible for Republicans to get around any filibuster attempt from Senate Democrats.

Senate Majority leader Mitch McConnell says he’ll only bring the legislation to the floor if it has the needed 50 votes to pass. So far, a vote has not been scheduled. Meanwhile, negotiations to stabilize the ACA market exchanges have broken down.

After Senate Republicans failed to repeal Obamacare in July, talks began on fixing the law rather than dismantling it. Trump has threatened to withhold billions in Obamacare subsidies, which would upend private insurance markets.

Top Republicans on a key Senate panel have reached a tentative agreement on a tax plan that would add about $1.5 trillion to the government’s $20 trillion debt over 10 years. The figure would allow deeper cuts to tax rates than would be allowed if Republicans followed through on earlier promises that their upcoming tax overhaul wouldn’t add to the deficit.

The divide between the Senate GOP’s deficit hawk and “supply side” wings must overcome before action on this fall’s tax measure can commence in earnest. Unlike the House, Senate Republicans aren’t planning to pair the tax measure with spending cuts. The work of the budget panel is critical since Republicans need to agree on a Capitol Hill budget plan to pass a follow-up tax bill.

Both House and Senate Republicans are divided and the budget debate is months behind schedule. Many Republicans in Washington promise that cutting corporate and individual rates and ridding the code of inefficient tax breaks, deductions, and preferences will boost the economy and cause a burst of new revenue.

But the outlines of their tax plan itself remain secret, and it’s not clear how successful they will be in cleaning up the loophole-choked tax code. Congress’ impartial scorekeepers have accepted the premise of such “dynamic scoring,” but past studies by the Joint Tax Committee and Congressional Budget Office have been cautious about how much economic growth and tax revenues would follow tax cuts.

If, as it appears, the tax plan would add to the deficit, the development also means, under the Senate rules governing fast-track debate on the budget and taxes, some of the provisions in the upcoming tax measure would have to be temporary.

The House Financial Services Committee has published a report entitled: “Did the CFPB let Wells Fargo ‘beat the rap’?” The report claims the Consumer Financial Protection Bureau could have fined Wells Fargo $10 billion instead of $100 million last year for the unauthorized customer accounts fraud. The regulator settled for so much less to resolve the matter quickly.

The Equifax hack just keeps getting worse. A security failure exposed the personal information of 143 million Americans. Equifax now says about 100,000 Canadian consumers may have had their personal information compromised.

The SEC is investigating the sale of company stock by 3 executives, days after the breach and before it was publicly announced. There are multiple lawsuits in the pipeline. Now, Equifax says it had a security breach earlier this year that involved a different part of the company than the one accessed in the larger hack.

That breach involved TALX, which is Equifax’s human resources and payroll service. The company said there’s no evidence that the TALX breach, which happened between March and April this year, and the wider breach are related.

Hurricane Maria is expected to hit Puerto Rico tomorrow morning with Category 5 winds of up to 160 miles per hour. There is also concern about flooding from heavy rains and storm surge. Puerto Rico is still suffering from Hurricane Irma, which grazed the island, knocking out power and communications. If Maria retains its strength, it would be the most powerful hurricane to hit Puerto Rico in 85 years.

A magnitude 7.1 earthquake rocked central Mexico today, centered just south of Mexico City, killing at least 44 people as buildings collapsed in plumes of dust and thousands fled into the streets in panic. The quake came less than two weeks after another quake left 90 dead in the country’s south, and it occurred as Mexicans commemorated the anniversary of a 1985 quake that killed thousands.

Construction on new houses slipped 0.8% in August to an annual rate of 1.18 million from an upwardly revised 1.19 million in July. Although housing starts fell 7.9% in the South, Hurricane Harvey had very little impact. The storm only made landfall at the end of the month. And Hurricane Irma did not batter Florida until September.

Permits to build new homes jumped 5.7% to a 1.3 million rate, matching the level in January and marking the second highest amount since 2007.

Post Holdings will buy refrigerated foods producer Bob Evans Farms in a deal with an equity value of about $1.5 billion. Under terms of the deal, Post, a consumer goods holding company, will pay $77 for each Bob Evans share outstanding, which is 5.6% above Monday’s closing price.

Shares of Sprint gained more than 6% after a CNBC report reignited speculation that the mobile company is in talks to merge with T-Mobile.  Shares of T-Mobile were up more than 3%, and shares of other mobile carriers also saw a bump.

The Federal Trade Commission signed off on a deal for Walgreens Boots Alliance to buy 2,186 Rite Aid stores for $5.19 billion. That amounts to a much smaller deal than the companies originally sought when Walgreens pushed to buy Rite Aid. The companies abandoned that deal following opposition from regulators.

As expected, Toys R Us filed for Chapter 11 bankruptcy protection. The court allowed Toys R Us to borrow up to $2 billion to start paying suppliers so it can stock up on toys for the holiday season. As part of its restructuring, the company plans to spend around $1 billion over the next 5 years to transform its big box stores by adding event space, increasing staff and wages for in-store product demonstrations and combining its flagship stores with Babies ‘R’ Us stores.

FedEx reported a lower quarterly net profit due to service disruptions following June’s Petya cyber-attack on its Dutch delivery unit TNT Express and the impact of Hurricane Harvey. FedEx shares trade lower in after-hours.

Bed Bath & Beyond reported earnings far below expectations, citing restructuring- and hurricane-related issues. Share closed down almost 12%.

Financial Review

Bounce Back

Sinclair Noe — June 28, 2017

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DOW + 143 = 21,454
SPX + 21 = 2440
NAS + 87 = 6234
RUT + 21 = 1425
10 Y + .02 = 2.22%
OIL + .54 = 44.78
GOLD + 2.10 = 1249.80
BITCOIN + 0.05% = 2585.84 USD
ETHEREUM + 3.73% = 314.34

Well, isn’t this familiar. The markets have a down day only to bounce back. The S&P 500 posted its largest one-day gain in two months while Nasdaq Composite recorded its best day in eight months. The S&P 500 has been somewhat fickle this month with three of this year’s biggest gains and two of its worst losses having occurred in June.

For the first time in seven years, the Federal Reserve did not object to any of the capital plans of 34 banks it reviewed in the second part of the annual stress tests implemented in the wake of the financial crisis.  Only Capital One Financial needed to submit a new capital plan by Dec. 28 to address “weaknesses in its capital planning process.”

Last Thursday, all 34 banks passed the Dodd-Frank Act Stress Tests for the third time by topping the Fed’s requirements for being able to handle a severe recession. Wednesday’s results from the Comprehensive Capital Analysis and Review, or CCAR, marked the first time since the test launched seven years ago that the Fed did not object to any of the banks’ capital plans.

The passing grade means banks can use extra capital for stock buybacks, dividends and other purposes beyond a cushion against possible catastrophe. And we are already hearing from big banks. Citigroup announced plans to repurchase up to $15.6 billion of common stock over the next 12 months and double its quarterly dividend to 32 cents per share, bringing total payouts to $18.9 billion.

Fewer buyers signed contracts to buy existing homes in May, likely because they can’t find or afford what they want. The pending home sales index from the National Association of Realtors dropped 0.8 percent month to month and is now 1.7 percent lower than May 2016.

The number of home sales that closed this spring was slightly higher than a year ago, but the lack of listings clearly held the market back. The supply of homes for sale at the end of May was down more than 8 percent from a year ago, and homes that were listed sold at the fastest rate on record. The tight supply is pushing home prices higher, considerably faster than income growth.

Low mortgage rates have not been much help in offsetting these big price gains, and in fact may be exacerbating the problem, especially if rates begin to rise as is widely expected. The inventory crisis is worst on the low end of the market, where demand is highest.

The number of starter and trade-up homes currently on the market is down 15.6 percent and 13 percent, respectively, compared with a year ago, according to Trulia. The inventory of premium homes has fallen 3.9 percent.

The supply situation has buyer confidence in the housing market dropping. Just over half of renters say they think now is a good time to buy. That is down from 62 percent one year ago. While about 80 percent of current homeowners think now is a good time to buy, they are not listing their homes for sale. This may have more to do with weakening affordability than anything else. They don’t want to sell if they can’t afford a move-up home.

Senate leadership has reportedly set a Friday deadline for a new draft of the Better Care Reconciliation Act. The Congressional Budget Office could score it next week, setting up a mid-July vote. The vote has been delayed, but the Senate’s repeal and replace efforts are far from over.

When it comes to public support, there’s room for improvement. Just 17 Percent of Americans approve of the Republican Senate Health Care Bill – that’s almost as low as the approval rating for Congress. Fifty-five percent say they disapprove, while about a quarter said they hadn’t heard enough about the proposal to have an opinion on it.

Yesterday, we told you about the new Petya cyber virus that started in Ukraine and was infecting computers around the globe. The malicious code locked machines and demanded victims post a ransom worth $300 in bitcoins or lose their data entirely, like the extortion tactic used in the global WannaCry ransomware attack in May.

Day 2 of the ransomware attack and the situation is getting worse. Danish shipping giant A.P. Moller-Maersk said it was struggling to process orders and shift cargoes, congesting some of the 76 ports around the world run by its APM Terminals subsidiary.

FedEx shares temporarily halted trading before the package delivery giant disclosed that an information system virus significantly affected the global operations of its TNT Express subsidiary. In a statement, FedEx said that while TNT’s operations and communications systems were disrupted, “no data breach is known to have occurred.” The company noted that operations of all other FedEx companies were unaffected. FedEx shares finished the day up 1.3%.

United Parcel Service will freeze a pension plan for about 70,000 nonunion U.S. employees because of escalating costs and volatility in determining future payments, replacing it with a different retirement benefit. UPS’s pension plans in the U.S. had a $9.85 billion shortfall at the end of last year, meaning they were about 76 percent funded. The shift won’t occur until Jan. 1, 2023, giving affected workers more than five years to prepare.

The US announced today it’s rolling out a set of new, largely undisclosed security measures targeting some 2,000 international flights arriving at American airports every day.  The new rules will apply to 180 airlines flying out of 280 airports in 105 countries, and could prompt additional screening time for the 325,000 airline passengers arriving in the United States daily.

The move aims to end a limited in-cabin ban on laptops and other large electronic devices and prevent its expansion to additional airports. Officials said that travelers can expect intensified screening at airports, in the form of sniffing dogs, or more screening equipment. Details are still sketchy, including when the new confidential rules will be put in place. Sometime in the short and medium term.

Blue Apron Holdings cut the expected price range for its initial public offering to $10 to $11 per share from its previous estimate of $15 to $17 per share after potential investors expressed concerns about Amazon’s Whole Foods deal as well as Blue Apron’s marketing costs and lack of profitability.

Blue Apron’s new pricing guidance gives the company a valuation of up to $2.08 billion, below both the $3.2 billion implied by its previous estimate and the $2.2 billion by its latest private fundraising round two years ago. Blue Apron is the biggest U.S. meal-kit company and the first set to go public.

Amazon already has a small meal-kit business, delivering ingredients and recipes to customers in a handful of cities, and the Whole Foods deal announced could provide a ready-made distribution system for food delivery in the form of brick-and-mortar grocery stores.

Dutch healthcare company Philips has agreed to buy U.S.-based Spectranetics for $2.1 billion including debt. Spectranetics uses techniques including lasers and tiny drug-covered balloons to clean the insides of veins and arteries that have become clogged due to heart disease.

Beef Products Inc has settled its defamation lawsuit against the ABC television network over news reports on its processed beef product known as “pink slime.” The settlement came 3-1/2 weeks after the trial in the case got under way. Terms of the settlement were not disclosed. ABC used the term “pink slime” more than 350 times across six different media platforms including TV and online. ABC said it is not retracting or apologizing for anything. Bon Appetit.

Facebook tops 2 billion users. CEO Mark Zuckerberg made the announcement on his personal Facebook page. Facebook now becomes the unofficial least exclusive club in the world.

Brazil’s federal police have halted issuing new passports on the eve of school vacations, citing insufficient funds. The federal police exhausted its budget for immigration control and travel documents and won’t be able to restore the service until additional funds are approved.

For the third year in a row, the state of Illinois is poised to begin its fiscal year on July 1 with no state budget and billions of dollars in the red. If that happens, S&P Global Ratings says Illinois will probably lose its ­investment-grade status and become the first U.S. state on record to have its general obligation debt rated as junk.

Illinois is already the worst-rated state at BBB-, S&P’s lowest investment-grade rating. The state owes at least $800 million in interest and late fees on its unpaid bills. Any further downgrade will make it more expensive the next time the state needs to sell bonds.

Two years ago, Illinois’s budget impasse meant that the state’s lottery winners had to wait for months to get their winnings. Now, with $15 billion in unpaid bills, Illinois is on the brink of being unable to even sell Powerball tickets. And winning the Powerball was probably their best chance of breaking the budget impasse.

KB Homes  announced earnings of $0.33 a share on revenue of $1 billion, both better than expected. KB Home climbed 5 percent.

General Mills rose 1.9 percent after the maker of Cheerios cereal, Yoplait yogurt and other packaged foods served up fourth-quarter earnings and revenue that beat expectations.

Staples will be acquired by Sycamore Partners for about $6.9 billion in one of the largest retail deals of the year. Sycamore is paying $10.25 a share for the retailer; that represents a 12 percent premium to its share price on Tuesday, before reports surfaced that the transaction was close to be being completed.

Financial Review

Driving Down Third Avenue

Sinclair Noe — December 28, 2015

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DOW – 23 = 17,528
SPX – 4 = 2056
NAS – 7 = 5040
10 YR YLD – .01 = 2.23%
OIL – 1.39 = 36.71
GOLD – 7.50 = 1069.80

Storms hit the South, Southwest and Midwest over the Christmas holiday weekend, unleashing floods and tornadoes that killed at least 43 people, flattened buildings and snarled transportation for millions during a busy travel time. The bad weather, or the threat of it, prompted the governors of Missouri and New Mexico to declare a state of emergency for their states. Flash floods killed at least 13 people in Missouri and Illinois. In Texas, at least 11 people were killed in the Dallas area over the weekend by tornadoes.

Oil prices were down again this morning, following a five-day rally that saw prices move to the highest level in three weeks. Iran repeated its goal of boosting exports after sanctions on the country are lifted. OPEC effectively abandoned output limits earlier this month. Today, Saudi Arabia announced it would boost production to defend its market share. The kingdom’s revenue from oil sales will make up about 70% of the budget next year, down from 73% this year and down from 89% last year.

The Saudi 2016 budget is estimated to be based on a $37 a barrel for Brent oil prices; the first Saudi budget in more than 10 years that is based on an oil price of less than $50 a barrel. For the Saudis this means big changes. They will cut government spending and reduce subsidies on energy, water, and electricity, plus they will privatize some state-owned entities. And for the first time in a decade, they will issue bonds to cover their deficits.

West Texas Intermediate crude is headed toward its second yearly decline. Brent, the benchmark for more than half the world’s oil, is poised to end 2015 with the lowest annual average price in 11 years; low oil prices have hurt oil-exporting countries and companies, but it has been a boon for consumers.

Major stock market drivers this year have included sluggish global and domestic growth, shrinking corporate profits, a stronger dollar, and lower commodity prices, especially in the energy markets. A drop in energy prices and other commodities hit the junk bonds. We have just recently seen an example of this dynamic at play in the collapse of Third Avenue Management. A quick recap: Third Avenue shut down on December 9^th and blocked investor redemptions following losses of about 30%; its assets shrank to less than $800 million from more than $3 billion.

When compared with other junk-bond funds, Third Ave’s Focused Credit Fund carried an elevated amount of risk. The fund disclosed, for example, that its so-called Level 3 assets, or securities that are hard to value and trade, were 20% of assets at the end of July. And the fund had 76% of its portfolio exposed to very low-rated “CCC+” rated securities and below. Focused Credit found its way into the portfolios of mom-and-pop investors, pension plans, and nonprofits because the reality is that almost nobody pays close attention to the credit ratings and liquidity of junk-bond funds. So, for any of you that were in Third Ave, the first step is to fire the advisor that sold this junk to you.

Last Thursday PwC released its audit of Third Avenue. The fund made big bets on illiquid, hard-to-trade assets that included bankruptcy-related claims. Texas-based Global Geophysical Services, a provider of seismic data for exploration and production companies in the energy sector, turned out to be one of the fund’s biggest performance detractors during the fiscal year. Global Geophysical was not the only contributor, but it may have been a tipping point, a break in the levee. Bad performance begets redemption requests from investors, forcing a fund to sell already stressed assets at lower and lower prices. The result is a downward spiral of fund redemptions and forced sales.

And the damage is not distinct to the junk bond market. The big investment banks are also vulnerable, to a much lesser degree. OPEC projected that oil prices will remain at historic lows until at least 2040 before they rebound to $100 a barrel. The projections for continued low demand for oil could spell trouble for both the oil industry as well as the financial sector. With ongoing low demand and low prices, oil companies may have difficulty repaying loans from banks.

Through Sept. 2015, Bank of America had an increase in bad balances for its commercial credit business of $2 billion. The bank attributed a large portion of those bad balances to defaults on energy sector loans. They are not alone; JPMorgan, Citigroup, Deutsche Bank, and others will face similar pressures in the year ahead. The big investment banks can absorb many billions in big losses without fear of shutting down, however it could be enough to curtail lending to other sectors as well as significant cuts to dividends the big banks pay.

More US companies have defaulted on their debt this year than issuers from any other country or region. As of last week, S&P reports 111 companies worldwide had defaulted on their obligations, the highest tally since 2009 when the figure hit 242 for the same period. About 60% of this year’s global defaults have come from U.S. borrowers.

The cracks in the levee appear in what is known as the yield spread; this is the difference between the yield on a security and a comparable US Treasury bond. For example, investors in junk bonds are now demanding a higher yield to compensate for the extra risk. We are now seeing wider yield spreads on a variety of higher-yielding securities, such as investment-grade corporate bonds, municipal bonds, convertible bonds, preferred stocks, REITs, utilities, and MLPs. And remember that many of the bond funds that look like plain vanilla actually contain high yield or derivatives or alternatives.

The spread between Treasuries and CCC-rated bonds is now 16.1%. The spread between CCC-rated bonds and B-rated bonds is also blowing out. As of Friday, it stood at 9.0%, higher than at any point in the first nine months of 2008. The spreads to Treasuries between BB- and B-rated bonds have not yet blown past their 2008 pre-Lehman highs.

Now this is where it gets interesting. Today Saudi Arabia reassessed its federal budget based upon lower oil prices; they announced a $98 billion deficit, and they announced they will ramp up production. The year-end assessment is not unique to Saudi Arabia; it is standard operating procedure for oil companies big and small. Each year end the oil companies calculate their reserves based on the average price for oil and gas during the calendar year. Then, lenders use that valuation to calculate whether they will lend, cut lending, or stop lending. The calculation for 2015 will be a substantially lower value than it was for 2014 for most companies.

Does this portend a blood bath in the debt markets? Not necessarily. Wall Street’s biggest bond dealers are forecasting that blue chip companies will sell more than $1 trillion of bonds for the fifth straight year in 2016. Companies are expected to take advantage of borrowing costs that remain historically low. Meanwhile, four technology startups with billion-dollar-plus valuations are getting ready for initial public offerings in early 2016, following one of the slowest technology IPO years on record. While market conditions could alter their plans, Nutanix, Okta, Twilio and Coupa Software are in various stages of preparing to go public, and their performance could signal whether investors are once again willing to pay premium prices for startup IPOs.

Yields on investment-grade bonds reached a four-year high of 3.68% this month even as the Fed boosted its benchmark rate for the first time in nearly a decade. The Fed thinks the economy is strong, or at least strong enough to withstand the problems in the energy market and subsequent problems in the credit markets. If the Fed is right, the junk bond market represents a bargain, but only for those with a cast iron gut. The thinking for the Fed is that low energy prices are a good thing for the world’s largest energy consumer. They might be right.

Strong online sales and demand for furniture and women’s apparel helped U.S. retail sales grow by a “solid” 7.9% this holiday season – up from 5.5% last year – according to MasterCard Advisors, which tracks customer spending. Online sales grew 20% in the holiday season this year.

FedEx drivers had to work extra shifts over the holiday to help manage the surge in online shopping and the severe weather plaguing the South. FedEx’s major air hub is located in Memphis, an area affected by the heavy storms. Meanwhile, UPS seems to have avoided holiday trouble this year, stating it had established detailed operating plans to ensure available capacity.

Amazon typically plays its customer data close to the chest, but it has released several figures about its Prime service and holiday season. More than 3 million people joined Prime in the third week of December alone, and 200 million items were shipped to Prime subscribers, and more than two-times as many Amazon devices were sold compared to the 2014 holiday season, the company said in a statement. So how many Prime members does the retail giant now boast? The exact figure is still not known, but Amazon said it’s in the “tens of millions.”

Star Wars: The Force Awakens crossed the billion-dollar mark on Sunday, accomplishing the feat in just 12 days, and it hasn’t even opened in China, the world’s second largest movie market. Prior to The Force Awakens, the fastest movie to cross the $1 billion threshold was Universal Pictures’ Jurassic World, which took just 13 days after its release in June.

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

Seven Years

Sinclair Noe — September 15, 2015

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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.