Stocks Manage a Mildly Mixed Monday Finish

Charles Schwab: On the Market

Posted: 7/10/2017 4:15 PM ET

Stocks Manage a Mildly Mixed Monday Finish

U.S. stocks began the week mixed as tech listings outperformed on light data following Friday's upbeat employment report, while the markets await a heavy week of events, notably the unofficial start of Q2 earnings season and Fed Chair Yellen's Congressional testimony. Treasuries advanced as the lone report from the domestic docket showed consumer credit expanded more than expected. Gold and crude oil prices were higher and the U.S. dollar was nearly flat. In light equity news, ClubCorp agreed to be acquired by Apollo Management and Abercrombie & Fitch announced that it terminated takeover talks

The Dow Jones Industrial Average (DJIA) dipped 6 points to 21,409, the S&P 500 Index increased 2 points (0.1%) to 2,427, and the Nasdaq Composite increased 23 points (0.4%) to 6,176. In moderate volume, 798 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.17 to $44.40 per barrel and wholesale gasoline was flat at $1.50 per gallon. Elsewhere, the Bloomberg gold spot price gained $1.57 to $1,214.03 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was mostly flat at 96.06.

Apollo Global Management LLC. (APO $27) announced an agreement to acquire ClubCorp Holdings Inc. (MYCC $17), owner-operator of golf and country clubs, for $17.12 per share in cash, or about $1.1 billion. APO rose, while MYCC rallied sharply.

Abercrombie & Fitch Co. (ANF $10) fell after the company announced that it has terminated discussions regarding a potential transaction and has determined that the best path to enhance value for stockholders is the rigorous execution of its business plan.

Economic and earnings data set to heat up this week

Consumer credit, released in the final hour of trading, showed consumer borrowing advanced by $18.4 billion during May, well above the $13.5 billion forecast of economists polled by Bloomberg, while April's figure was adjusted higher to an increase of $12.9 billion from the originally reported $8.2 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, climbed by $11.0 billion, while revolving debt, which includes credit cards, increased by $7.4 billion.

Treasuries ticked higher as the yield on the 2-year note dipped 2 basis points (bps) to 1.38% and the yield on the 10-year note declined 1 bp to 2.37%, while the 30-year bond rate was flat at 2.93%.

Although the economic front began slowly, this week's calendar will heat up and is poised to garner heavy attention as the markets grapple with what path the Fed's monetary policy normalization will take. Bond yields have rebounded from depressed levels hit in mid-June and the U.S. dollar has stabilized from lows hit to close out the first half of 2017. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. We believe the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, assuming inflation doesn't slip further. Read more, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Inflation will come into focus, with the releases of the Producer Price Index (PPI) and Consumer Price Index (CPI), while key hard data will come in the form of retail sales, as well as industrial production and capacity utilization. Sentiment and business activity indicators will also be released, courtesy of the Fed's Beige Book, along with tomorrow's NFIB Small Business Optimism Index and Friday's preliminary July University of Michigan's Consumer Sentiment Index. However, this week's two-day Congressional monetary policy testimony by Fed Chairwoman Janet Yellen will likely headline the docket. Also, earnings season is set to kick off with some major companies out of the financial sector delivering results. For our latest look at financials and the other major stock market sectors, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Christmas in July! (Status of the Consumer).

Additional reports expected on tomorrow's domestic docket include the Labor Department's Job Openings and Labor Turnover Survey (JOLTS), with economists forecasting that the measure of unmet demand for labor showed 5.95 million jobs were available to be filled during May, down slightly from the 6.04 million posted the month prior and wholesale inventories, forecasted to have increased 0.3% m/m in May, matching the rise seen in April.

As noted in the latest Schwab Market Perspective: Smooth Sailing for Stocks?, stocks have been drifting along near record highs and background conditions remain relatively positive in the near term. But seasonal tendencies remain a risk and volatility has picked up a bit, so investors should be on alert for a summer pullback. The U.S. economy continues to glide along, with subdued inflation, providing what typically has been a good environment for stocks, though uncertainty regarding future Fed actions has risen. Bond yields have ticked higher and some commodities have recovered, but it's too early to say that the reflation story is regaining credence. Read these articles on the Markets & Economy page at www.schwab.com and be sure to follow us on Twitter: @schwabresearch.

Finally, with Congress returning to work following a recess and the Senate healthcare bill remaining uncertain, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Europe and Asia higher as busy week begins

European equities finished higher, with Friday's upbeat U.S. labor report helping improve global sentiment as a busy week begins, overshadowing festering geopolitical concerns toward North Korea and following last week's G-20 Summit in Germany. The euro and British pound dipped versus the U.S. dollar and bond yields in the region gave back some recent gains. Amid this backdrop, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com, as well as Jeff's and Vice President of Trading and Derivatives, Randy Frederick's video, How Do U.S. Equity Market Valuations Compare to Other Developed Markets?, on the Insights & Ideas page at www.schwab.com. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. In economic news, German exports grew more than anticipated, French business sentiment slipped and eurozone investor confidence topped forecasts.

Stocks in Asia finished mostly higher following Friday's gains in the U.S. that followed a stronger-than-expected June nonfarm payroll report, while the markets digested some mixed data in the region. Japanese equities advanced with the yen losing ground on the U.S. jobs data and a report that showed Japanese machine orders—a gauge of capital spending—unexpectedly fell. Mainland Chinese stocks declined and shares that traded in Hong Kong were higher after reports showed the nation's CPI and PPI both rose roughly in line with expectations. Australian securities increased and South Korean listings ticked higher. Indian equities rallied to another record high. The markets shrugged off heightened geopolitical concerns following last week's first intercontinental ballistic missile (ICBM) test by North Korea and in the wake of the G-20 Summit in Germany. For analysis if the global front, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks and his commentary 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks as we reach the halfway point of 2017on the International Investing page at www.schwab.com.

The international economic docket for tomorrow will be relatively light with releases including machine tool orders from Japan, home loans and business confidence from Australia and industrial production from Italy.

Stocks Gain Ground Following Friday's June Jobs Report

Charles Schwab: On the Market

Posted: 7/7/2017 4:15 PM ET

Stocks Gain Ground Following Friday's June Jobs Report

U.S. stocks finished nicely higher following the mostly upbeat June nonfarm payroll report that showed job growth for the month was well above projections. Treasury yields extended a recent run and the U.S. dollar was higher, while crude oil prices gave back the previous session's gains and gold was lower. In light equity news, Qualcomm announced that it has filed a patent infringement complaint against Dow member Apple.

The Dow Jones Industrial Average (DJIA) gained 94 points (0.4%) to 21,414, the S&P 500 Index increased 15 points (0.6%) to 2,425, and the Nasdaq Composite jumped 64 points (1.0%) higher to 6,153. In moderately-light volume, 735 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil decreased $1.29 to $44.23 per barrel and wholesale gasoline lost $0.03 to $1.50 per gallon. Elsewhere, the Bloomberg gold spot price dipped $1.96 to $1,225.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 96.00. Markets gained modest ground for the week, as the DJIA increased 0.3%, S&P 500 Index ticked 0.1% higher and the Nasdaq Composite rose 0.2%.

Warren Buffett's Berkshire Hathaway Inc. (BRK/B $171) announced that its energy subsidiary executed an agreement to merge with Energy Future Holdings Corp in an all-cash transaction totaling $9.0 billion, which the company said will ultimately result in the acquisition of Oncor, the largest electricity-transmission operator in Texas. Berkshire traded modestly higher.

Qualcomm Inc. (QCOM $55) announced that it has filed a patent infringement complaint with the U.S. International Trade Commission (ITC) against Dow member Apple Inc. (AAPL $144), seeking to ban certain iPhones from being imported to the U.S.

Shares of both companies traded higher as the technology sector rebounded on the heels of the group's recent rollover after leading the markets higher for the past twelve months to record levels. Schwab's Chief Investment Strategist Liz Ann Sonders offers her commentary, The Space Between … Tech Today Doesn't Resemble Tech Circa 2000, and her latest, 2017 Mid-year US Equity Outlook: Rattle and Hum. Meanwhile, we are maintaining our outperform rating on the tech sector, as discussed in Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Christmas in July! (Status of the Consumer). Read these articles on the Markets & Economy page at www.schwab.com and be sure to follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

June nonfarm payroll report shows job growth easily tops forecasts

Nonfarm payrolls (chart) rose by 222,000 jobs month-over-month (m/m) in June, compared to the Bloomberg forecast of a 178,000 increase. The rise of 138,000 seen in May was revised to a gain of 152,000 jobs. The total upward revision to the job gains in May and April was 47,000. Excluding government hiring and firing, private sector payrolls increased by 187,000, versus the forecasted gain of 170,000, after increasing by 159,000 in May, revised from the 147,000 rise that was initially reported. Job growth came in healthcare, social assistance, financial activities and mining, while professional and business services and food services and drinking places remained on upward trends.

The unemployment rate ticked higher to 4.4% from 4.3%, where it was forecasted to remain, as the labor force participation rate ticked higher from 62.7% to 62.8%. Average hourly earnings rose 0.2% m/m, below projections of a 0.3% gain and versus May's downwardly revised 0.1% increase. Compared to the last year, average hourly earnings were 2.5% higher, versus the prior month's downwardly revised 2.4% pace and below the projected 2.6% rate. Finally, average weekly hours rose to 34.5 from May's unrevised 34.4 rate, where it was projected to remain.

The report showed job growth remains steady, averaging 180,000 per month thus far this year, roughly in line with the average 187,000 seen in 2016, likely not changing expectations of one more rate hike this year and the beginning of balance sheet reduction by the Fed. The U.S. dollar was higher and Treasury yields added to a recent rally following the employment report, with the yield on the 2-year note increasing 1 basis point (bp) to 1.40%, the yield on the 10-year note rising 2 bps to 2.39%, and the 30-year bond rate gaining 3 bps to 2.93%. Bond yields have rebounded notably from depressed levels seen in mid-June.

However, the Fed noted in its June statement that it was "monitoring inflation closely" and today's weaker-than-expected wage growth suggests inflation remains subdued, possibly throwing a wrench into the Fed's plans if inflation continues to soften. Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' despite the positives forces on the economic front, we don't see inflation picking up significantly. While the labor market is tightening and wages should pick up, structural changes seem to be tempering the gains. We expect one more rate hike this year by the Fed and a gradual reduction in its balance sheet, assuming inflation doesn't slip further. In the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. Read more, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Finally, for a look at the political front amid heightened geopolitical and policy implementation uncertainty, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Europe mixed, Asia mostly lower

European equities finished mixed following today's stronger-than-expected U.S. job growth and as U.K. stocks benefitted from a drop in the British pound on the heels of unexpected declines in the nation's manufacturing and industrial production. Oil & gas issues led to the downside as crude oil prices gave back yesterday's gains, while the markets continued to grapple with recent hawkish commentary from global central banks. Geopolitical concerns remained heightened on the heels of this week's intercontinental ballistic missile (ICBM) test by North Korea and as the G-20 Summit in Germany garnered attention. The G-20 Summit delivered the first meeting between U.S. President Donald Trump and Russian President Vladimir Putin though very few details of the talks were released. The euro was lower versus the U.S. dollar and bond yields in the region were mixed. For a look at the global environment, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com, as well as Jeff's and Vice President of Trading and Derivatives, Randy Frederick's video, How Do U.S. Equity Market Valuations Compare to Other Developed Markets?, on the Insights & Ideas page at www.schwab.com. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. In other economic news, German and Spanish industrial production grew more than expected and France's trade deficit narrowed more than anticipated.

Stocks in Asia finished mostly to the downside, following the declines in the U.S. ahead of today's June employment report and amid heightened geopolitical concerns with North Korea's latest missile test and the G-20 Summit in Germany garnering attention. For more, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com. Also, the recent rally in global bond yields on a flare-up in hawkish central bank tones remained in focus. Japanese equities declined despite some weakness in the yen as the Bank of Japan announced ramped up bond-buying operations. Mainland Chinese stocks rose and shares traded in Hong Kong declined amid a rise in foreign exchange reserves for the fifth-straight month in June and weakness in banking, telecom and video game stocks. Australian securities were dragged down by weakness in oil & gas issues as crude oil prices gave back some of yesterday's gains. South Korean equities traded lower and Indian listings finished flat. With 2017 reaching the halfway point, see Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.

Stocks tick higher amid sector divergence

The shortened week for stocks finished with modest gains as the divergence among the major sectors continued to begin the second-half of 2017. Financials extended a rally, along with Treasury yields amid a rise in global bond rates on the recent increase in hawkish sentiment toward global central banks, bolstered by some upbeat data. The U.S. dollar ticked higher as Friday's upbeat domestic labor report was preceded by a plethora of global business activity reports that came in mostly stronger than expected, headlined by U.S. ISM Manufacturing and non-Manufacturing Indexes that unexpectedly showed growth accelerated for June. Technology stocks modestly pared a recent rollover after Friday's rally, though volatility in the group remained elevated. The energy sector saw pressure to hamstring the markets as crude oil prices fell sharply as continued supply concerns overshadowed some bullish domestic oil inventory data. Conviction appeared stunted by the aforementioned global central bank focus and as geopolitical uncertainty flared-up as North Korea conducted its first ICBM test and the market paid close attention to the G-20 Summit in Germany.

As such, next week's U.S. economic calendar is poised to garner heavy attention as the markets grapple with what path the Fed's monetary policy normalization will take. Inflation will come into focus, with the releases of the Producer Price Index (PPI) and Consumer Price Index (CPI), while key hard data will come in the form of retail sales, as well as industrial production and capacity utilization. Sentiment and business activity indicators will also be released, courtesy of the Fed's Beige Book, along with the NFIB Small Business Optimism Index and the preliminary July University of Michigan's Consumer Sentiment Index. However, amid the aforementioned market backdrop, next week's two-day Congressional monetary policy testimony by Fed Chairwoman Janet Yellen will likely headline the docket. Also, earnings season is set to kick off with some major companies out of the financial sector delivering results.

As noted in the latest Schwab Market Perspective: Smooth Sailing for Stocks?, stocks have been drifting along near record highs and background conditions remain relatively positive in the near term. But seasonal tendencies remain a risk and volatility has picked up a bit, so investors should be on alert for a summer pullback. The U.S. economy continues to glide along, with subdued inflation, providing what typically has been a good environment for stocks, though uncertainty regarding future Fed actions has risen. Bond yields have ticked higher and some commodities have recovered, but it's too early to say that the reflation story is regaining credence. Read more on the Markets & Economy page at www.schwab.com.

International reports due out next week that deserve a mention include: Australia—consumer confidence. China—CPI and PPI, along with lending statistics and trade balance. India—CPI, industrial production and trade balance. Japan—machine orders and trade balance. Eurozone—industrial production, new car registrations and trade balance. U.K.—employment change.

Stocks Log Losses Ahead of June Jobs Report

Charles Schwab: On the Market

Posted: 7/6/2017 4:15 PM ET

Stocks Log Losses Ahead of June Jobs Report

U.S. stocks traded lower as the global markets continued to grapple with a recent uptick in hawkish central bank tones amid a rise in international bond yields. Treasuries were lower on the rising yields, crude oil prices rebounded on some bullish oil inventory data, gold dipped and the U.S. dollar declined. In economic news, ADP's employment data was below expectations ahead of tomorrow's June labor report. On the equity front, PriceSmart and L Brands reported figures that were shy of analysts' forecasts, while the tech sector and Tesla added to recent drops.

The Dow Jones Industrial Average (DJIA) lost 158 points (0.7%) to 21,320, the S&P 500 Index declined 23 points (0.9%) to 2,410, and the Nasdaq Composite dropped 61 points (1.0%) to 6,089. In moderate volume, 878 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.39 to $45.52 per barrel and wholesale gasoline added $0.03 to $1.53 per gallon. Elsewhere, the Bloomberg gold spot price dipped $1.96 to $1,225.08 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 95.81.

Costco Wholesale Corp. (COST $157) reported June same-store sales growth of 6.0% year-over-year (y/y), above the FactSet estimate of a 3.9% gain. Excluding the impact of changes in gasoline prices and foreign exchange, COST's same-store sales were 6.5% higher. Shares gave up early gains and finished mildly lower.

L Brands Inc. (LB $46) fell sharply after posting a 9.0% y/y drop in June same-store sales, versus the expected 6.8% decline, as sales tumbled at its Victoria's Secret stores.

PriceSmart Inc. (PSMT $81) reported fiscal Q3 earnings-per-share (EPS) of $0.62, versus expectations of $0.67, as revenues rose 3.7% y/y to $730 million, compared to the projected $735 million. Shares saw solid pressure.

Tesla Inc. (TSLA $309) continued a recent slide amid competition concerns toward the electric car maker and safety uncertainty after the Insurance Institute for Highway Safety (IIHS) announced that the Model S earned an "acceptable" rating, the second highest designation, in a collision test. TSLA responded by saying the most objective and accurate independent testing of vehicle safety is currently done by the U.S. Government, which found Model S and Model X to be the two cars with the lowest probability of injury of any cars that it has ever tested.

Yum China Holdings Inc. (YUMC $35) was under heavy pressure after the recently spun-off company posted softer-than-expected Q2 revenues and in line EPS, while same-store sales at Pizza Hut in the region missed forecasts, overshadowing upbeat results out of KFC.

For a look at the stock markets at the halfway point this year, Schwab's Chief Investment Strategist Liz Ann Sonders offers her commentary, 2017 Mid-year US Equity Outlook: Rattle and Hum. She adds that stocks have had a remarkable—and recently drama-free—run over the past eight-plus years. We are likely in a more mature phase, which could be marked by bouts of volatility and/or pullbacks—possible driven by Fed policy. But liquidity remains ample, financial conditions loose and earnings growth healthy; which have underpinned this bull for much of its history. Those are the key things on which to keep an eye as we head into the year's second half. Read these articles on the Markets & Economy page at www.schwab.com and follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

Services sector growth surprisingly accelerates, ADP employment report misses

The June Institute for Supply Management (ISM) non-Manufacturing Index (chart) rose to 57.4 from May's unrevised 56.9 level, and compared to the Bloomberg forecast of a dip to 56.5. A reading above 50 denotes expansion. New orders rose 2.8 points month-over-month (m/m) to 60.5 and business activity ticked higher and remained above the 60 mark, while employment declined 2.0 points to 55.8. Prices rose increased 2.9 points to 52.1. The ISM said the majority of comments from respondents were positive about business conditions and the overall economy.

The final Markit U.S. Services PMI Index was revised to 54.2 in June from the preliminary 53.0 level, where it was expected to remain, and up compared to the 53.6 figure posted in May. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently.

The data adds credence to our view in the latest Schwab Market Perspective: Shifting Sentiment?, that a solid economy—along with strong earnings—should foster a continuation of the stock market's grind higher but investors should be prepared for more turbulence as investors consider the path which Fed policy normalization will take. Read more on the Markets & Economy page at www.schwab.com.

The ADP Employment Change Report showed private sector payrolls rose by 158,000 jobs in June, below forecasts of a 188,000 gain, while May's increase of 253,000 jobs was revised to a gain of 230,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of tomorrow's broader June nonfarm payroll report, expected to show an increase of 178,000 jobs to the headline rate and a rise of 169,000 jobs to private sector payrolls (economic calendar). The unemployment rate is forecasted to remain at 4.3%, and average hourly earnings are projected to rise 0.3% m/m.

With the labor market continuing to be quite tight and inflation in retreat, the wage component of the report will likely continue to foster scrutiny as the markets grapple with the trajectory of Fed policy normalization. Compared to the last year, wages are projected to accelerate slightly to a 2.6% rate from May's pace of 2.5%. Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, notes in his recent Schwab Sector Views: Christmas in July! (Status of the Consumer), that wages have started to move higher, although gains remain modest, and consumers haven't appeared to add to debt in a meaningful way after being forced to cut back on borrowing in the wake of the financial crisis. Read the whole article on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Bond yields have rebounded sharply over the past couple weeks, though Schwab's Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' although we expect the Federal Reserve to continue to tighten monetary policy and reduce its balance sheet gradually, the yield curve is likely to continue to flatten in the absence of higher inflation. Kathy points out that this could be thwarted by an upside surprise in inflation if low unemployment leads to higher wages. Read more, including how we feel investors should position themselves in this environment on the Fixed Income page at www.schwab.com and follow Kathy on Twitter: @kathyjones.

Weekly initial jobless claims (chart) rose by 4,000 to 248,000 last week, above forecasts of 243,000, with the prior week’s figure being unrevised at 244,000. The four-week moving average increased by 750 to 243,000, while continuing claims gained 11,000 to 1,956,000, north of estimates of 1,940,000.

The trade balance (chart) showed that the deficit came in at $46.5 billion in May, compared to estimates of $46.3 billion. April's deficit was unrevised at $47.6 billion. Exports rose 0.4% m/m to $192.0 billion, while imports dipped 0.1% to $238.5 billion.

The MBA Mortgage Application Index rose 1.4% last week, following the previous week's 6.2% drop. The increase came as a 0.4% dip in the Refinance Index was more than offset by a 3.1% gain for the Purchase Index. The average 30-year mortgage rate rose 7 basis points (bps) to 4.20%.

Treasuries were lower, with the yield on the 2-year note flat at 1.40%, the yield on the 10-year note gaining 4 bps to 2.36% and the 30-year bond rate rising 5 bps to 2.90%.

Finally, for a look at the political front, which remains a source of market uncertainty, see Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's latest article, Washington Midyear Update: 4 Key Issues for Investors to Watch, on the Insights & Ideas page at www.schwab.com.

Europe lower, Asia mixed

European equities finished mostly lower, with the euro gaining ground, along with bond yields in the region, as the markets digested minutes from monetary policy meetings by the Fed and European Central Bank (ECB), with the latter preserving the recent uptick in hawkish sentiment. For a look at the global environment, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, article, Are bonds signaling a major stock market peak? on the Markets & Economy page at www.schwab.com, as well as Jeff's and Vice President of Trading and Derivatives, Randy Frederick's video, How Do U.S. Equity Market Valuations Compare to Other Developed Markets?, on the Insights & Ideas page at www.schwab.com. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Focus was on the political landscape as U.S. President Trump joined the G-20 summit in Germany, while geopolitical concerns lingered after North Korea's intercontinental ballistic missile (ICBM) test this week. In economic news, German factory orders rose at a smaller-than-expected amount. The British pound ticked higher versus the U.S. dollar. However, Italian stocks bucked the trend amid continued eased banking sector concerns in the nation on the heels of recent bailout announcements, while the global sector continued to get a boost from the rise in bond yields as of late.

Stocks in Asia finished mixed amid heightened geopolitical concerns following this week's test of an ICBM by North Korea, while the markets awaited a flood of economic data out of the U.S. For more, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com. Japanese equities declined, with the yen recouping yesterday's drop, while Indian stocks advanced amid eased concerns in the banking sector. Australian securities finished lower even as the nation's trade surplus widened much more than expected in May. Mainland Chinese shares rose and those traded in Hong Kong declined amid weakness in energy stocks following yesterday's drop in crude oil prices and as property developers rebounded from a recent drop. South Korean equities finished flat. For a look at the global landscape, see Jeffrey Kleintop's, CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com.

The international economic docket for tomorrow will begin with the Leading Index from Japan, foreign reserves from China and construction data from Australia. Releases from across the pond will include industrial production from Germany, retail sales from Italy and trade data, industrial production and manufacturing production from France and the U.K., while the latter will also release construction output.

Financial Review

Knock On

Sinclair Noe — November 16, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Review

Bargain Bloodhounds

Sinclair Noe — November 13, 2015

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

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DOW – 202 = 17,245
SPX – 22 = 2023
NAS – 77 = 4927
10 YR YLD – .04 = 2.28%
OIL – .99 = 40.76
GOLD – 1.10 = 1084.90
SILV – .03 = 14.38

The S&P 500 moved into negative territory year to date, for the first time since Oct. 22. The Dow Industrial Average is also down year to date, moving below the 200-day MA, with a weekly loss of more than 650. Commodity prices are weighing heavily on the markets, following yesterday’s report showing crude oil stockpiles were 4 times higher than market expectations. Still, the IEA predicts that supplies outside OPEC will decline next year by the most since 1992 as low prices take their toll on the U.S. shale industry.  Meanwhile, the dollar index is trading just above 99. That would put it within striking distance of 100.40, its highest level in 12 years.

Retail sales rose a seasonally adjusted 0.1% last month. Sales were revised lower in September to show no gain. Sales were also flat in August. In October, sales were held down by lower spending at auto dealers, gas stations and grocery stores. Although the number of autos sold last month was quite strong, sales fell a seasonally adjusted 0.5%, perhaps suggesting heavier discounting. Stripping out gas and autos, U.S. retail sales rose a somewhat better 0.3%. Shoppers have used some of their gas savings to go out to eat more. Spending at restaurants climbed 0.5% in October.

The third quarter of 2015 was rough for American department stores. Macy’s, the nation’s largest department-store chain, had such a bad quarter that it cut its year-end forecasts across the board, lowering earnings, revenue, and same-store sales projections. And upscale competitor Nordstrom followed suit after reporting a 42% drop in profits, which caused shares to drop 15%.

But it’s not all retail doom and gloom. JC Penney reported same store sales were up 6.4%, and that helped boost net sales nearly 5% to $2.9 billion. The retailer also dialed up its year-end outlook for adjusted earnings before interest, taxes, depreciation, and amortization. All that said, JC Penney still isn’t turning a profit, but its net loss shrank 23% to $137 million. Shares were still down 16% today. Seriously, we should see some major bargains this holiday season.

Consumers were in a good mood. The University of Michigan’s consumer sentiment index rose to 93.1 in early November from a reading of 90.0 in October. The survey showed an improvement in buying plans for large discretionary purchases, especially vehicles. Lower-income households also were upbeat about their prospects in November.

The producer price index fell 0.4% in October. The index, which measures prices at the wholesale level, has been flat or lower for four straight months, contributing to a record 1.6% decline over the past year. The overall cost of services dropped 0.3% last month, reflecting lower revenue generated by wholesalers and retailers. The cost of goods declined 0.4%. Lower energy costs and cheaper imports have pushed prices down. Core producer prices that exclude the volatile categories of food, energy and trade fell a smaller 0.1% in October.

So, to recap: consumers are feeling good, wholesale prices are down (not just going up slowly, but actually down), and retail sales are flat lining right before the holiday shopping season. Here’s a thought; maybe consumers who were slammed by the Great Recession and were forced into squeezing every dime out of a dollar aren’t ready to go back to just throwing their cash at high priced department stores. We learned how to sniff out deals, we learned how to use technology to beat big margins.

The downturn turned us into bargain bloodhounds. Maybe this is the beginning of the end of department stores and malls as we know them. And maybe wage growth hasn’t yet been enough to warrant abandoning our newfound thrift. Maybe there’s even a little saving going on. The savings rate has been stubbornly high (by American standards). Or maybe everybody maxed out their credit cards. Maybe the economy is headed off the recessionary cliff. Or maybe it’s just a little statistical noise in the long term uptrend. Who knows? The salient point is that it isn’t really tough to spot the winners and losers in this market.

The federal government ran a budget deficit of $136 billion in October, up 12% or $15 billion from the same month last year. Spending in the first month of the fiscal year was $348 billion, up 4% from October 2014. Total receipts were $211 billion, a 1% decrease.

Eurozone economic growth was slower than expected in the third quarter. Eurostat said the gross domestic product of the 19 countries sharing the euro expanded 0.3 percent quarter-on-quarter for a 1.6 percent year-on-year increase in the July-September period. This outcome is lower than the ECB’s staff projections, which would add to the already strong case for the ECB to step up monetary stimulus in December.

China is moving to contain leveraged wagers on its stock market, cutting in half the amount of borrowed money investors can use to buy shares. Margin requirements will be raised to 100% from 50% starting on Nov. 23. The rule change means that an investor with 1 million yuan in their account is limited to borrowing another 1 million yuan from a broker to buy more shares. Previously, they could borrow as much as 2 million yuan. That should curtail speculation.

British prosecutors charged 10 former Deutsche Bank and Barclays employees with manipulating a benchmark interest rate, with an 11th facing indictment as soon as next week. Six traders from Deutsche Bank and four from Barclays were charged with conspiracy to manipulate the Euribor benchmark. Banks and other financial institutions have paid about $9 billion in fines tied to Libor and other key rates. So far, we are expected to believe that upper management was nothing but a bunch of overpaid, out of touch, incompetent morons who had no clue about trillions of dollars of trades resulting in billions of profits. At some point, prosecutors will have to figure out that someone in the C-suite knew what was going on and put their seal of approval on all this rigging.

The Group of 20 summit gets underway this weekend in Turkey. The primary purpose of the meeting is to look for ways to stimulate the global economy. A secondary agenda has been raised by Turkish President Erdogan to use concerns in the Eurozone over the refugee crisis to bolster support for military intervention in Syria. And while there will certainly be some lively debates at the G-20 meeting, the most likely outcome is a very nice photo-op.

Mylan failed to attract a majority of Perrigo shareholders by a Friday deadline for its $26 billion unsolicited offer to acquire the over-the-counter drugmaker. About 40 percent of Perrigo holders tendered their shares, short of the 50 percent needed to move ahead. Mylan now can’t try again for a year. Mylan offered $75 in cash and 2.3 Mylan shares for each Perrigo share, a bid that Dublin-based Perrigo had rejected as inadequate.

Cisco had a mixed quarter. The network-technology giant reported better-than-expected revenue and earnings. But guidance was a little light. Management expects to deliver $0.53 to $0.54 per share in earnings, which is below the $0.56 expected.

Hulu may sell a stake of itself to Time Warner as part of a deal that would value the streaming-video service at more than $5 billion and advance its efforts to compete with Netflix and Amazon.com. The Wall Street Journal reports, “The companies have been in talks about Time Warner becoming an equal stakeholder in Hulu alongside Walt Disney, 21st Century Fox and Comcast.

Shares of BHP Billiton fell close to a decade low today as a drop in commodity prices overnight compounded investor worries about the fallout from a dam-burst at its jointly-owned Brazilian iron-ore mine operation last week which killed nine people. Brazil President Dilma Rousseff has slapped preliminary fines of $96 million against the Samarco mine where two waste dams burst, spilling sludge and mine waste over 2 states. The fines could go much higher. Prosecutors are investigating possible crimes that could have contributed to the disaster at the mine

The Supreme Court has agreed to hear a challenge to a Texas law that would leave the state with about 10 abortion clinics, down from more than 40. The court has not heard a major abortion case since 2007, and the new case has the potential to affect millions of women and to revise the constitutional principles governing abortion rights. The case concerns two parts of a state law that imposes strict requirements on abortion providers. One part of the law requires all clinics in the state to meet the standards for “ambulatory surgical centers,” including regulations concerning buildings, equipment and staffing. The other requires doctors performing abortions to have admitting privileges at a nearby hospital. Other parts of the law have already caused about half of the state’s 41 abortion clinics to close. If the contested provisions take effect, the brief said, the number of clinics would again be halved.

The challengers’ brief said that the law “would delay or prevent thousands of women from obtaining abortions and lead some to resort to unsafe or illegal methods of ending an unwanted pregnancy.” The remaining clinics would be clustered in four metropolitan areas: Austin, Dallas-Fort Worth, Houston and San Antonio. The case, Whole Woman’s Health v. Cole, could provide the Supreme Court with an opportunity to decide whether the law interferes with its 1992 decision in Planned Parenthood v. Casey, which said states may not place undue burdens on the constitutional right to abortion before fetal viability. The court said undue burdens included “unnecessary health regulations that have the purpose or effect of presenting a substantial obstacle to a woman seeking an abortion.” The justices will hear arguments in the case within the next few months and hand down a decision by June.

Financial Review

No Rhyme nor Reason

Sinclair Noe — September 8, 2015

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

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DOW + 390 = 16,492
SPX + 48 = 1969
NAS + 128 = 4811
10 YR YLD + .06 = 2.19%
OIL – .11 = 45.94
GOLD – 1.40 = 1122.40
SILV + .22 = 14.90

There is no particular rhyme nor reason to explain today’s rally on Wall Street, or for that matter, last week’s declines. Last Friday’s jobs report did little to provide clarity about whether the Fed would raise rates at next week’s FOMC meeting.

The economy added 173,000 jobs in August, which was below expectations; and the unemployment rate dropped to 5.1%. Following Friday’s employment data, futures market traders predicted about a 20 percent chance a rate hike will come this month, down from around 30 percent before the jobs report. I think the Fed might act next week, just to clear the air. If you remember back to the “taper tantrum” of 2013, when the markets became jittery about the prospect of the end of Quantitative Easing, the anticipation was worse than the actual event. So, the easiest thing might just be to do it and be done.

Of course, it is easy to argue against a rate hike. The U-6 unemployment rate is still around 10.3%; some people consider this the “real” unemployment rate because it includes part-time employees seeking full-time jobs and marginally employed workers. The Fed has a dual mandate: to promote full employment and price stability. Prices have been stable for the most part, inflation is not a problem; the usual argument for raising interest rates is to dampen an overheating economy in which inflationary pressures have become too high.

As for full employment, the Fed has said that 5.2% is full employment, but wages have been stagnant and there is still plenty of slack in the labor market. For many, many people there has been no recovery. The argument for raising rates really does nothing to help Main Street, but it might help the bankers on Wall Street, and faced with that option the Fed has always erred on the side of Wall Street.

China’s imports shrank far more than expected in August, falling for the 10th straight month. Imports fell 13.8 percent from a year earlier; that follows a drop of 8.1% in July.  Exports were down 5.5%. The trade is calculated in US dollars, and research firm Capital Economics reckons that “trade has actually been quite healthy recently in volume terms.”

China’s government has spent $236 billion trying to shore up its stock market since a rout began three months ago, according to Goldman Sachs. At the G20, China was all about talking stability. A governor of the People’s Bank of China said the rout in the stock market was near its end, noting that leverage had declined and that the real economy went relatively unscathed.

Despite the Chinese economy’s visible slowdown and dramatic action over the past month officials maintained that the economy would continue to grow at 7% annually. Yes, the country’s economy will close this year the same way it did last year; 7% growth, despite all the market turmoil and the yuan devaluation and industrial slowdown; 7% growth. China’s major stock indexes moved higher: the Shanghai was up 2.9% and the Shenzen advanced 3.8%.

Japanese Prime Minister Shinzo Abe has won a second three-year term as the President of his Liberal Democratic Party. Japan’s economy contracted at an annualized of 1.2% rate in the second quarter, which was a little better than estimates. However, capital expenditure fell 0.9%, more than the original estimate of 0.1%, clouding growth prospects.

German exports recovered to climb 2.4%  in July after dropping 1.1% in June. Eurozone Q2 GDP growth has been revised up to 0.4% on quarter from an initial estimate of 0.3%. The Stoxx Europe 600 index had its best gains in more than a month.

U.S. small business confidence rose modestly in August, suggesting the economy continued to grow at a steady clip halfway through the third quarter. The NFIB optimism index improved from 95.4 to 95.9 – and still not above the 42 year average of 98. Small business owners did not seem to be very concerned about the antics of the stock market or China’s currency devaluation.

Maybe it was too late in the month to be fully captured by the survey so more might be revealed in September, but most small business owners have their capital primarily invested in their own firm, not other people’s firms. And a side note, thirty-three percent of small business owners reported all credit needs met, and 49 percent explicitly said they did not want a loan. For most of the recovery, record numbers of firms have been on the “credit sidelines”, seeing no good reason to borrow.

The American Medical Association says two proposed mergers of U.S. health insurers worth tens of billions of dollars would hurt competition in commercial health plans in as many as 17 states. Aetna announced plans to buy smaller rival Humana in early July and Anthem agreed to buy Cigna later that month. Both mergers are being reviewed by federal antitrust regulators as well as state insurance officials. The American Hospital Association also recently made public its analysis of the two deals, also saying they would hurt competition.

European Union antitrust regulators have approved GE’s $13.9 billion acquisition of the power business of French peer Alstom. GE will have to sell some of Alstom’s assets.

A federal appeals court is set to decide whether judges can tear up corporate prosecution agreements they deem too lenient. In February, a federal district judge in Washington, D.C., rejected a Deferred Prosecution Agreement, or DPA, he considered weak in a case involving Fokker Services BV, a Dutch aerospace firm accused of making more than 1,000 illegal shipments of parts and components to Iran and other sanctioned countries from 2005 to 2010. The U.S. Court of Appeals for the D.C. Circuit is now reviewing the judge’s decision, with arguments scheduled for this week and a ruling expected in coming months.

DPAs have been the favored tool of the Department of Justice in dealing with banksters. The DOJ sets up a deal to allow banksters or other corporate criminals to promise not to break the law in the future in exchange for a fine; in essence, cash for leniency. In the case of Fokker, the DOJ made a big splash about a $10.5 million fine for selling aircraft parts and services to customers in Iran, Burma and Sudan. There was a parallel civil settlement with the Treasury Department’s Office of Foreign Assets Control to pay an additional $10.5 million. If you go down the press release, you find that Fokker received $21 million in gross revenue for these 1,153 illegal transactions, so the penalty was simply to give back what they received.

It is supposed to be a probationary period for the offenders. If they can stay out of trouble, they can stay out of legal trouble. The problem is that many corporations, especially the bankers, are repeat offenders, serial offenders. In the case of Fokker, the probationary period was only 18 months, and a judge considered that overly lenient. It really doesn’t matter because the DOJ never goes back on repeat offenders.

The major banks, JPMorgan, BofA, Citi, and Goldman Sachs; along with international cohorts, UBS, RBS, HSBC, Barclays, and Deutsche Bank have all been repeat offenders; everything from rigging Libor to forex to muni bond markets to money laundering to bribery to sanctions violations to forgery…, well the list goes on and on. The result is that even after a long history of offenses, JPMorgan can pay a $550 million dollar fine for rigging the foreign exchange markets, sign a DPA, and Jamie Dimon gets a $20 million pay package.

Media General said it would buy media company Meredith Corp for about $2.3 billion to create the third-largest local TV station owner in the United States. The combined company, to be named Meredith Media General, will initially have 88 TV stations that reach 30 percent of TV households.

Blackstone Group’s real estate fund will buy U.S. luxury hotel owner Strategic Hotels & Resorts and a unit of Strategic Hotels Funding LLC in a deal valued at $6 billion, including debt. Strategic Hotels & Resorts is a real estate investment trust that owns hotels operated by top hospitality chains such as Hyatt Hotels Corp, InterContinental Hotels Group and Marriott International.

United Continental has fired CEO Jeff Smisek because of a probe into improprieties at Port Authority of New York and New Jersey. Smisek, who served as chairman, president and CEO, will receive about $4.9 million as separation payment.

Amazon plans to release a $50 tablet in time for the holiday season, with a 6-inch screen tablet and a mono speaker, priced at half the cost of its cheapest Fire device.

MasterCard starts testing a program today to allow cardholders to verify their online purchases with a selfie. The credit card company is also testing fingerprint and voice recognition for verification. (So, if someone steals your card and takes your picture, you are in real trouble.)

This Wednesday, Apple has a big event planned in San Francisco, where they are expected to announce a new iPhone, because that new phone you just bought is already obsolete; they will almost certainly introduce a faster, slimmer phone because – well, because  Apple is a phone company. They are also expected to introduce a redesigned Apple TV set-top box with new capabilities for apps and games, plus recognition of Siri voice commands to search for shows; so now you can ask your TV where you left the remote control.

And they are also expected to announce a new, smarter version of Siri; so you could tell Siri to set the alarm for 6 AM tomorrow morning, and it could wake you up and also turn on the lights, open the curtain and start the coffee machine, if you were really a geek about it.

Financial Review

Labor Day Jobs Report

Sinclair Noe — September 4, 2015

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

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DOW – 272 = 16,102
SPX – 29 = 1921
NAS – 49 = 4683
10 YR YLD – .04 = 2.13%
OIL – .71 = 46.04
GOLD – 2.30 = 1123.70
SILV – .13 = 14.70

This is a Jobs Report Friday, and I tend to get a little wonkish about the monthly jobs reports, mainly because I believe jobs are pretty much the most important part of the economy; we’ve even set aside a holiday to recognize the importance of labor. Today’s report is especially important because it comes right before a Federal Open Market Committee Meeting where the Fed just might raise interest rates.

The US economy added 173,000 jobs in August, and the unemployment rate dropped to 5.1%. While this was the smallest increase in new jobs since March, the June and July numbers were revised higher by 44,000 jobs. The Labor Department said 245,000 new jobs were created in July instead of 215,000. June’s gain was revised up to 245,000 from 231,000. The 173,000 new jobs missed estimates of 210,000 to 220,000 but the August numbers are notorious for underestimating – only to be revised higher in following months. The unemployment rate of 5.1% is down from July’s 5.3% rate, and beats estimates that the rate would hold steady.

Between 2005 and 2014, August was the month with the lowest first estimate for job growth relative to revisions that were published in the employment reports for the subsequent two months. Over that period, on average the government found 58,000 more jobs added to payrolls in August than initially figured. Job growth in August was revised lower only in 2005 and 2008. One reason why August is difficult to calculate is because it marks the start of the school year, which varies from town to town.

So, one way to get a better grasp on the numbers is to look at longer-term trends. Over the last three months the economy added 221,000 new jobs on average – fairly solid gains. In August, the year-over-year change was over 2.9 million jobs – again, fairly solid gains. The economy has been adding jobs every month going back to March 2010 – a nice streak. The U.S. has added an average of 212,000 jobs a month in 2015 and the economy is on track to generate more than 2 million jobs for the fifth year in a row.

The bulk of the hiring in August, one-third of all new jobs, took place in health care. Healthcare added 56,000 jobs; Professional and business services added 33,000 jobs; employment in eating and drinking places gained 26,000 job; financial firms hired 19,000; retail added over 11,000, wholesale trades hired almost 8,000, construction gained 3,000. Government hired 33,000 workers and it looks like the declines in government hiring are now over. Federal payrolls were unchanged in July, and Federal employment is up just 6,000 year-to-date. Mining and logging, an industry that includes oil exploration and drilling, lost 10,000 jobs; and manufacturing was the big loser – down 17,000 jobs for the month.

The average hourly wage paid to American workers rose 8 cents, or 0.3%, in August to $25.09 an hour. From August 2014 to August 2015 hourly wages rose 2.2%, matching the best gain of the past four years. The Federal Reserve has targeted a 2% rate of inflation, but in the 12-months through July, the Consumer price Index climbed just 0.2%. This means that workers are seeing wage increases that are running faster than inflation – that means real gains – but wage pressure has not been strong enough to push inflation throughout the economy.

But there is another, shorter-term trend in place, wage gains in the past 3 months have only been running at 1.9%. The average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour to 34.6 hours in August. The manufacturing workweek was unchanged at 40.8 hours, and factory overtime edged down by 0.1 hour to 3.3 hours.

Full-time jobs climbed to 122 million, exceeding the prior peak reached in November 2007. The U-6 unemployment rate fell to 10.3%, the lowest level since June 2008; U-6 includes unemployed plus underutilized workers, or people working part-time for economic reasons, plus discouraged workers who aren’t counted under the U-3 measure, or the headline number.

The headline or U-3 unemployment rate doesn’t capture workers who, because of a difficult job market, have stopped looking for work.  The labor force participation rate – the share of the population that is either working or actively looking for work – dropped off sharply during the recession, from about 66 percent to about 63 percent.  While some of those folks left for retirement, others–maybe a third to a half by some measures–can be enticed back into a more welcoming job market.

The nation’s unemployment rate, meanwhile, fell to 5.1% from 5.3%, marking the lowest level since April 2008. The jobless rate is determined by a separate survey of households that showed a sharp 237,000 drop in the number of people who said they were unemployed. Only a smattering of people dropped out of the labor force. The labor force participation rate was unchanged at 62.6% – which is still a historically low rate. There are 2.19 million workers who have been unemployed for more than 26 weeks and still want a job. This was up slightly from 2.18 million in July.

What this means is that there are still lots of potential workers ready to jump back in the labor pool and it is possible that the economy could add new jobs, but see the unemployment rate move higher as workers are encouraged to look for work.

In less than 2 weeks the Federal Open Market Committee will meet to determine monetary policy, and the strength or weakness of the labor market will be a major factor in their deliberations. The Fed has set a target of 5.2% unemployment as the level that might warrant a rate hike, but that won’t be their only concern. An increase seemed all but certain just weeks ago before the stock market’s slide amid fears of a softening Chinese economy and stagnant growth worldwide. Janet Yellen has repeatedly suggested the FOMC was waiting to see data showing a sustained economic recovery.

In a speech just before the jobs report, Richmond Fed president Jeffrey Lacker said the labor market supported the case for raising rates sooner rather than later. But this report was unlikely to “materially alter the labor market picture or, for that matter, the monetary policy outlook.”

Fed-funds futures, used by investors and traders to place bets on central-bank policy, showed Friday a 34% likelihood of a rate increase at the September meeting, compared with 27% before the jobs report. The odds had been around 50% a month ago.

Finance ministers and central bankers of G20 member states have gathered in Ankara, Turkey today. The  Federal Reserve is coming under pressure from emerging markets not to raise rates too soon as turmoil in China threatens global growth, but the G20 will not publicly call for any delay. This G20 comes at a very good time because it gives the Fed an opportunity to gauge all the elements at stake.

In addition to China and emerging markets and all the other concerns, the Fed will likely consider the impact on Wall Street; back when the Fed hinted at ending Quantitative Easing, Wall Street threw a Taper Tantrum. And as the Fed has been inching closer to raising interest rates, Wall Street has thrown what might be called a Rate Ruckus, (you’re welcome to come up with a better name if you wish). In the U.S. stock market, the S&P 500 had its sixth decline exceeding 1 percent in 12 days.

Prior to that there had been 10 such declines since January. The benchmark gauge has moved up or down by an average of more than 2 percent a day since falling out of its 2015 trading range on Aug. 20; almost four times as much as in the prior nine months. September is historically the worst month of the year for the S&P 500, with the equity gauge falling 1.1 percent on average based on data going back to 1927. So, you could blame the declines today on anything, including history, but part of it was a Rate Ruckus.

And there are plenty of reasons why the argument can be made that more needs to be done to improve employment: the Labor Force Participation rate is too low, wages aren’t going up enough, millions have just given up on the prospect of a job, and the jobs created are not quality jobs. The current pace of job growth would result in an extremely low unemployment rate of 4.2% a year from today, with other factors such as labor-force participation held constant. The rate has dropped by about a percentage point over each of the last four 12-month periods.

So even though the Fed targeted 5.2%, as if this is the magical full employment rate, it doesn’t paint a complete picture. The unemployment rate says “raise!” The payroll number says “hold!” The markets will whine and complain no matter what the Fed does.

This month’s jobs report showed signs of strength and signs of weakness, along with very little clarity. One month’s job data is not enough to seal the deal one way or the other. The Fed could just as easily claim victory with the unemployment rate at 5.1%. And like T-Ball athletes, everybody gets a trophy. For many on Wall Street, they can’t imagine a rate hike; after all, it has been almost 10 years since we’ve seen one, so there are actually traders on Wall Street who have not seen a rate hike from the Fed. It’s like the anticipation of ripping off the Band-Aid is worse than the actual act. At a certain point, and we don’t know where that point is, the Fed will likely just raise rates; just do it and be done. That’s my guess.

The Financial markets will be closed on Monday. So, have a safe and happy Labor Day holiday weekend.