Financial Review

Probably a Preview

Sinclair Noe — September 14, 2016

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DOW – 31 = 18,034
SPX – 1 = 2125
NAS + 18 = 5173
10 Y – .04 = 1.69%
OIL – 1.26 = 43.64
GOLD + 4.20 = 1323.60

Wall Street edged lower, and trading seemed calm compared to the past few days. The S&P 500 remains down almost 3 percent from before a steep selloff on Friday, even though interest rate futures indicate expectations for a rate hike at the Fed’s Sept. 20-21 meeting are still low. What we are seeing is probably a preview for what will happen when the Fed does raise rates.

Monsanto has finally agreed to a takeover offer from Bayer, valuing it at $128 per share or a total of more than $66 billion, ending months of wrangling after increasing its bid for a third time. The deal would be the largest all-cash transaction on record and put a quarter of the combined world market for seeds and pesticides under one roof. Bayer has also settled on a $2 billion break-up fee for the deal, which could close by the end of 2017.

The Monsanto-Bayer deal will face anti-trust scrutiny. Last year Monsanto tried to buy Syngenta, but the Swiss company fended off the attempt, only to agree later to a takeover by China’s state-owned ChemChina. Elsewhere in the industry, U.S. chemicals giants Dow Chemical and DuPont plan to merge and later spin off their respective seeds and crop chemicals operations into a major agribusiness.

Here’s why it matters to you: the consolidation of two big industry players into one of the world’s largest agrochemical firms may limit farmers’ choices and bargaining power, with increasing seed prices expected to be passed on to the grocery aisles. Regulators are likely to take a dim view of so many Big Ag deals happening at once.

If the 3 deals go through, it would result in just 3 companies selling 59% of all the globe’s seeds, with Monsanto/Bayer control 30% of the total; and 64% of the world’s pesticides. There will be strong opposition in the US and around the globe. Regulators will likely demand the sale of some soybeans, cotton and canola seed assets as a condition for approving the deal, at the very least. And it is possible that all three deals will be shot down.

Vitae Pharmaceuticals shares more than doubled to $20.85 after Allergan said it would buy the company for $639 million.

U.S. import prices fell for the first time in six months in August on declining petroleum and food costs. The Labor Department says import prices decreased 0.2 percent in August after an unrevised 0.1 percent gain in July. Last month’s drop was the first since February. Import prices have been constrained by a strong dollar and cheap oil.

That, together with sluggish wage growth have left inflation persistently running below the Fed’s 2 percent target. Imported petroleum prices declined 2.8 percent last month after decreasing 3.6 percent in July. Import prices excluding petroleum were unchanged after climbing 0.5 percent in July. The report also showed export prices fell 0.8 percent in August.

You’ve heard that old line “we fought a War on Poverty, and poverty won.” Well, maybe poverty hasn’t won, but it is still too high. New data from the Census Bureau shows median middle-class wages rose 5.2% between 2014 and 2015, the first annual increase since 2007. But the median household income was still lower than it was in 2007.

The official poverty rate decreased to 13.5 percent for last year, a drop of 1.2 percentage points. That represents 3.5 million people who are no longer in poverty and is the largest annual percentage point drop since 1999. And the uninsured rate continued to fall. The percentage of Americans without health insurance for the entire year dropped by 1.3 percentage points, to 9.1 percent.

Since 2013, the uninsured rate is down 4.3 percentage points. Still, the Census Bureau reports that 11.2 million individuals were pushed below the poverty line last year because of medical expenses. The latest data found that 29 million people went uninsured last year, including 3.7 million children, and that deductibles and other out-of-pocket costs have continued to rise well after the Affordable Care Act (ACA) went into law in 2010. The quickest path to the poor house is to get sick.

Americans all grew richer pretty much across the board last year, but they also stayed relatively unequal. The Gini coefficient, which the Census uses to track the gap between the rich and poor, was unchanged in the last year, despite all those wage gains and declining poverty. In fact, it’s up 5.5% since 1993, when the government first began tracking the data.

Women might be earning more today, but the gap between what they earn and what men expect to earn hasn’t narrowed significantly since 2007. Despite the many positive trends in the report, there are also still lingering signs of an uneven recovery. To date, only one income group is actually earning any more than they were in 2007: the top 5%.

In his annual State of the Union speech, European Commission President Jean-Claude Juncker warned the EU was facing an “existential threat,” but insisted that Brexit doesn’t mean “the disintegration of the European Union.” He also said the U.K. could not expect access to the EU’s internal market without the free movement of people.

European officials will unveil new technology rules today aimed at reining in many of the world’s largest tech firms. Under the proposals, which will take years to complete, European publishers may be given powers to charge internet companies whenever their content shows up in online results or other services. Chat apps will also be more heavily policed by extending rules which currently only cover telecoms providers.

With plans to launch by the end of October, Facebook and Twitter have joined a network of over 30 companies to tackle fake news and improve the quality of reporting from social media. Google-backed First Draft Coalition will create a voluntary code of practice, promote news literacy among social media users, and establish a platform where members can verify questionable stories.

Walmart is working on a self-driving shopping cart that customers would be able to hail like an Uber – possibly through a smartphone app. Not only has the retailer filed a patent for a cart that has a motor and video cameras, but it would be able to return itself from customers’ cars to the store. The system may also help Walmart manage inventory by scanning store shelves to ensure products are there.

Ford Motor CEO Mark Fields says that all of the company’s small-car production would be leaving U.S. plants and heading to lower-cost Mexico. Ford also rolled out plans today to expand into robo-taxi fleets and other autonomous-car services. Ford says the move into new business services will deliver 20% profit margins once rolled out — far higher than the low single-digit return typical for car manufacturers. Ford told investors that its 2017 financial performance would decline from this year’s levels.

Uber launched its self-driving pilot program in Pittsburgh today; the unveiling of the company’s secretive work in autonomous vehicles and the first time self-driving cars have been so freely available to the U.S. public. But it is not as if robots are taking over the Steel City. There will be only four self-driving vehicles available to passengers, to start, and two people will sit in the front to take over driving when the car cannot steer itself.

Uber’s Pittsburgh fleet consists of Ford Fusion cars outfitted with 3D cameras, global positioning systems (GPS) and a technology called lidar that uses lasers to assess the shape and distance of objects, mounted somewhat crudely to the vehicle’s roof. The company is also outfitting Volvo SUVs that will be added to the fleet.

SpaceX hopes to start launching its rockets again in November, a mere three months after the company’s Falcon 9 exploded on a launch pad at Cape Canaveral. But given the significant repairs needed for Launch Complex 40 – the site of the explosion – SpaceX’s next flight will likely take off from the Vandenberg Air Force Base or an alternate launch site at the Kennedy Space Center.

The Hanjin Shipping Co. terminal at South Korea’s largest port used to be one of the world’s busiest. Dozens of container carriers would line up to ferry boxes to and from the giant cranes that loaded and unloaded the world’s biggest ships. Last week the terminal, as big as 100 football fields, came to a virtual standstill. Whatever capital is tied up in those containers isn’t moving, any more than the container are. Hanjin is not alone. Of the biggest 12 shipping companies that have published results for the past quarter, 11 have announced huge losses. Several weaker outfits are teetering on the edge of bankruptcy.

Apple’s stock hit a 2016 high today, with its market value peaking above $600 billion for the first time since April. Reports of strong early orders for the iPhone 7 as well as arch-rival Samsung Electronics’ widely-publicized recall of potentially exploding Galaxy Note 7 smartphones, pushed shares of Apple up 10 percent in the past three days.

JPMorgan is now the biggest bank in the world by market capitalization. Shares of Wells Fargo slid 3.3% on Tuesday, giving the company a market capitalization of $239.7 billion, compared with JPMorgan’s $242.8 billion. Federal prosecutors are investigating Wells Fargo in connection with the bank’s sales practices after it agreed to pay $185 million in fines for opening more than 2 million unauthorized accounts. According to a report in the Wall Street Journal, the probe by U.S. Attorneys in New York and San Francisco is in its early stages and could lead to a criminal inquiry

Financial Review

M&A Boatload

Sinclair Noe — September 6, 2016

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DOW + 46 = 18,538
SPX + 6 = 2186
NAS + 26 = 5275
10 Y – .05 = 1.54%
OIL – .06 = 44.38
GOLD + 22.70 = 1350.40

Stocks posted modest gains but it was good enough for a record high close for the Nasdaq Composite. Also, the Russell 2000 index briefly touched a 52-week high of 1,254, and closed up fractionally just above 1,253.

We have a boatload of M&A activity:
Bayer has raised its offer for Monsanto to $127.50 a share, bringing the total value of the potential deal to over $65 billion, which would be the largest all cash takeover on record. It’s the second time Bayer has raised its bid, having started at $122 a share back in May before offering $125 in July.

Any merger would still be subject to regulatory approval.  It’s also the latest in a string of deal activity in the chemical sector: ChemChina looks to buy Syngenta for about $43 billion, while Dow Chemical and DuPont are in the process of a $130 billion tie-up.

ChemChina has secured commitments from 17 lenders on a $12.7 billion loan for its purchase of Syngenta. ChemChina agreed to buy Syngenta for $43 billion earlier this year in a deal that would transform it into the world’s largest supplier of pesticides and agrochemicals. It received takeover approval from the U.S. last month, though the deal is still subject to antitrust review by regulators worldwide.

General Electric has agreed to acquire two European 3-D printing companies for a combined $1.4 billion, tapping into manufacturers’ growing demand for digital technologies. Both Arcam and SLM Solutions make machines that can print metal parts used in aircraft components such as turbines. While GE’s Aviation unit has so far been the most active in using the 3D printing technology, parts are also being designed in its Power, Oil & Gas and Healthcare units, as well as across GE’s services businesses.

Volkswagen’s trucks division announced a partnership with Navistar. VW plans to invest $256 million in Navistar at $15.76 a share — a 12% premium to Friday’s closing price — for a 16.6% stake in the company. Navistar said cost savings will come from procurement and technology collaboration, rather than job cuts.

Enbridge, Canada’s largest pipeline company, said it would buy Spectra Energy Corp in an all-stock deal valued at about $28 billion to create the largest North American energy infrastructure company. Enbridge’s biggest-ever deal comes as the company has been steadily expanding its North American pipeline network, which carries the bulk of Canadian crude oil to the United States.

EOG Resources said it would buy privately held Yates Petroleum Corp for $2.5 billion in stock and cash, acquiring acreage in the Permian Basin, one of the country’s most cost-effective oil fields.

Danaher Corp said it would buy molecular diagnostics company Cepheid in a deal valued at $4 billion, including debt, to strengthen its diagnostics business. Danaher will pay $53 per share in cash, a premium of 54 percent to Cepheid’s closing share price on Friday. Danaher develops technology for the dental, life sciences, diagnostics and environmental industries. Sunnyvale, California-based Cepheid develops molecular systems and tests for institutions to perform genetic testing for organisms and genetic diseases.

Navidea Biopharmaceuticals shares jumped as much as 76% this morning after the company said it had agreed to sell its Lymphoseek product to Cardinal Health for all current and future oncology diagnostic applications in North America. Under the deal, Navidea will receive additional payments of up to $310 million, tied to Lymphoseek sales.

Avolon Holdings, part of China’s acquisitive HNA Group is nearing a deal to buy the aircraft leasing assets of U.S. lender CIT Group for between $3 billion and $4 billion. CIT’s commercial air unit is one of the world’s top 10 lessors with about 330 aircraft.

Carl Icahn is buying out Federal-Mogul Holdings, the maker of Champion spark plugs. Icahn Enterprises already owns 82% of the company. The price of $9.25 a share is 86 percent more than Southfield, Michigan-based Federal-Mogul’s closing share price of $4.98 on Feb. 26, the day before Icahn Enterprises’ original proposal of $7. The bid was increased to $8 in June. Icahn also owns service and retail chains Pep Boys and Auto Plus.

MasterCard is expanding its deal with payment processor PayPal Holdings. PayPal’s partnership follows a similar deal with MasterCard’s larger rival Visa in July. PayPal will allow users to select a credit or debit card as the default payment method and share data on transactions made through MasterCard’s tap-and-pay feature, which allows the shopper to wave a card or mobile phone over a reader to pay. As part of the deal, MasterCard will allow PayPal users to withdraw cash from their accounts using a debit card and also waive the digital wallet fee it currently charges PayPal.

Last week, the ISM’s August report on the manufacturing sector came in weak, with the index falling below the 50 mark that delineates expansion from contraction. This morning the ISM’s nonmanufacturing index fell to 51.4 in August from 55.5 in July, and while it remained above the 50 mark, it was a sharp drop and the lowest reading since 2010.

The ISM reports undercut the whole theory of a second half rebound and it’s also undercutting the odds of a Fed rate hike in September. The Atlanta Fed’s GDPNow tracker pegs third quarter GDP at 3%, but the ISM report implies GDP for the quarter at about 0.5%. There is still plenty of talk that the Fed should not keep rates at emergency levels but the data makes that a tough move.

Congress returned from a seven-week recess today with only a few weeks to pass a stopgap spending bill to keep the government running before funding runs out on September 30. So, 3 weeks to come up with a budget – what could go wrong?  Lawmakers will likely clash over money to fight the Zika virus, as well as a bill to restore full lending authority to the U.S. Export-Import Bank.

The Reserve Bank of Australia held rates unchanged overnight in what was Glenn Stevens’ final meeting after 10 years as governor of the central bank. The Aussie dollar rose after the decision. On Thursday the European Central Bank is due to make its latest monetary policy decision, and expectations are low for any meaningful change in policy.

The ECB has passed the €1-trillion-euro mark for its purchases of government bonds, putting pressure on policymakers to address the scarcity of available assets when they meet in Frankfurt this week. Despite being well beyond the halfway point of the €1.7-trillion-euro program, inflation remains virtually non-existent. The latest figure from Eurostat showed euro area prices rising by 0.2% in the year to August – well below the central bank’s inflation target of just under 2%.

South Korea’s Hanjin Shipping plans to file for court protection in about 10 countries, including Canada, Germany and the U.K., this week, and later expand that to 43 jurisdictions to protect its ships from being seized by creditors. The world’s seventh-largest container operator by capacity filed for bankruptcy protection on Friday in the U.S. under Chapter 15, which deals with international insolvency matters. Hanjin’s court hearing is scheduled for today.

ITT Educational Services has shut down its for-profit technical schools, closing more than 130 campuses and leaving as many as 40,000 students stranded in one of the largest college closures in American history. ITT has been under investigation for misleading students. Last month, the feds demanded the company produce an additional $153 million in collateral, nearly double its $78 million in cash on hand, to cover possible losses that the government might incur if the company were to suddenly fail. ITT said it terminated the “overwhelming majority” of its more than 8,000 employees.

Students now enrolled at the company’s technical schools will be able to cancel any federal student debt they incurred for their education if they decide against transferring their credits elsewhere. Other former students are pushing to have their debts canceled by alleging that the company defrauded them into taking out the debt by advertising false job-placement rates.

21st Century Fox said it has settled a lawsuit with former anchor Gretchen Carlson, whose allegations that former Fox News chief Roger Ailes sexually harassed her led to his exit from the company. Terms of the settlement weren’t disclosed, but it is believed the settlement is in the range of $20 million. Also it is reported that a “handful” of settlements with other women who came forward alleging harassment have also been reached.

An Ohio woman has filed a proposed class action lawsuit against Mylan Pharmaceuticals in an Ohio county court, claiming sharp price hikes for the company’s EpiPen device violated the state’s consumer protection law and amount to price gouging. Mylan has raised the US price of EpiPen from less than $100 when it acquired the product in 2007 to more than $600

Apple has a big event scheduled for tomorrow; they are expected to unveil their new iPhone 7; they will do this amid much fanfare and hoopla. The new iPhone 7 will have several new features but still be very similar to the iPhone 6, with the major exception that it will be new and shiny.

A new skyscraper in downtown Los Angeles has become the tallest building west of the Mississippi River. Construction workers on Saturday placed a 10-ton spire atop the Wilshire Grand Tower. The spire looks like scaffolding, or maybe a radio tower, but it adds 160 feet to the 73-story building, making it 1,099 feet high. The tower is 81 feet higher than the nearby US Bank Tower, which had held the tallest building record since 1989.

The Wilshire Grand still has some construction work scheduled. When the $1billion building opens in early 2017, it will include an observation deck, a shopping mall, an Intercontinental Hotel, several luxurious high-altitude restaurants and office space.

Really tall buildings, earthquakes – brilliant.

Financial Review

Dilma’s Demise

Sinclair Noe — August 31, 2016

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DOW – 53 = 18,400
SPX – 5 = 2170
NAS – 9 = 5213
10 Y + .01 = 1.58%
OIL + .20 = 44.90
GOLD – 2.00 = 1309.50

Since the Dow Jones Industrial Average was created in the late 1890s, September has produced an average loss of 1.1%. The 11 other months of the calendar, in contrast, have produced an average gain of 0.8%. September has an impressively consistent record at or near the bottom of the rankings, not just one or two really horrible years. Just a reminder – correlation is not the same as causation.

The S&P 500 lost 3 points for the month of August. The Dow Industrials dropped 56 points for the month, but both indices hit record highs during the month. Speculative long contracts, or bets that stocks are going higher, on the Dow at the Chicago Board of Trade recently hit a record of 38,382; with long bets on the S&P 500 rising to the highest level in three years.

Gold fell again today, holding ground at the lowest levels in two months and down about $40 for the month, the first monthly loss since May.

Oil futures slid to their lowest levels in nearly three weeks, then recovered to post a small gain at the close. Data by industry group American Petroleum Institute late Tuesday showed U.S. crude stocks rose by 942,000 barrels in the week ended Aug. 26.

The EIA report Wednesday showed crude-oil and product exports totaling an estimated 4.976 million barrels a day, up from 4.578 million a week earlier. The report also showed a bigger-than-expected rise in crude supplies.

U.S. Treasuries posted their largest monthly loss since June 2015 after a slew of hawkish rhetoric from Fed officials almost doubled the probability of a September rate hike to 34% in the futures market. Fed Vice Chairman Stanley Fischer said that any increase will be data dependent, having previously pointed to employment figures on Friday as being of key importance.

ADP reports private-sector hiring stayed strong in August, as employers added 177,000 jobs.  ADP’s data gives us a hint about the Labor Department’s employment report, which will be released Friday and covers government jobs in addition to the private sector. The ADP report is not an exact match to the government report, and there can be significant differences in any given month, but they are usually pretty similar.

Fed Chair Yellen cited 190,000 as a three-month average in her speech and is likely a key number needed to see a rate hike in September. On August 5, just before the release of the July Jobs Report, the Wall Street Journal, reported the following: “The magic number in Friday’s jobs report is 200,000.

If the Labor Department reports that employers expanded payrolls by 200,000 or more in July, then that will likely keep alive the possibility of a Federal Reserve interest rate increase at its September policy meeting.”

We know the jobs reported last month came in way above 200,000 at 255,000. If above 200,000 for July’s NFP had a rate hike “alive” then another 200,000 for an additional month (August) should have it as a near “lock.”

The National Association of Realtors reports its pending home sales index rose 1.3% in July. It’s 1.4% above year-ago levels and the second-strongest reading since April. The index for the west rose to the highest level in over three years. A sale is listed as pending when the contract has been signed but the transaction has not closed.

The pending-home sales index typically represents about 20% of the transactions for existing-home sales so is a leading indicator for that series. The NAR forecast that existing home sales will reach 5.38 million this year, up 2.8% and the highest level since 2006.

Consumer price inflation in the Eurozone was stuck at 0.2% in August, leaving the ECB no closer to its inflation target than when it launched the first of a series of stimulus measures more than two years ago. Other data released by Eurostat showed the bloc’s unemployment rate unchanged at 10.1% (more than double the U.S.). The figures could push the ECB to launch additional stimulus at its next policy meeting on Sept. 8, like extending the duration of its bond-buying program by at least another six months.

Donald Trump will deliver his immigration policy in a speech in Phoenix later today. Earlier today he traveled to Mexico City to meet with Mexican President Enrique Peña Nieto. Standing on stage with Mexican President Enrique Peña Nieto after their brief meeting, Trump described the encounter between the two men as a “great honor” and sang the praises of Mexican-Americans.

Trump ticked off a list of five things that he described as shared goals between the US and Mexican governments. For his part, Peña Nieto emphasized the importance of the historic alliance, but did not hesitate to acknowledge the areas where the two leaders differ. In response to questions from reporters, Trump said, “We did discuss the wall. We did not discuss payment of the wall.”

Brazil’s Senate voted to impeach suspended President Dilma Rousseff. Rousseff is accused of mishandling Brazil’s budget and misrepresenting the state of the economy. Some of her accusers, as Rousseff noted in her testimony, are themselves accused or convicted of serious corruption charges.

She testified for 14 hours straight on Monday. Rousseff defended her innocence and characterized the impeachment as a coup. The most remarkable aspect of all of this – and what fundamentally distinguishes this process from impeachment in, say, the US – is that Dilma’s removal results in the empowerment of a completely different party that was not elected to the presidency.

Michel Temer the interim president who served as Ms. Rousseff’s vice president before breaking with her this year, is now expected to remain in office until the end of the current term in 2018. Several of the men Temer named to his cabinet have already resigned under the cloud of scandal, including his anticorruption minister and his planning minister, because of claims that they were trying to stymie investigations into the bribery engulfing the national oil company, Petrobras.

Temer is accused of accepting bribes and was recently found guilty of violating campaign finance limits, a conviction that could make him ineligible to run for office for eight years.

The first regularly scheduled commercial flight between the U.S. and Cuba since 1961 is set to fly today, as a JetBlue plane departs Fort Lauderdale for Santa Clara. Transportation Secretary Anthony Foxx will be on board. Other U.S. air carriers that are planning to begin airline service to Cuba include American Airlines, Frontier Airlines, Silver Airways, Southwest Airlines and Sun Country Airlines.

A seven-member board has been appointed to oversee a financial restructuring for Puerto Rico, which has been crippled by a $70 billion debt crisis. The idea of a fiscal control board, known colloquially as La Junta in Puerto Rico, is largely reviled on the island, which has a 45 percent poverty rate and whose chronic economic slump has helped spur rampant out-migration.

The board was created under the federal law known as PROMESA, passed earlier this year, which will bring Puerto Rico’s finances under federal oversight and give it the authority to restructure some of its debt. The board will be tasked with assessing and certifying annual budgets and a fiscal recovery plan presented by the island’s government, as well as facilitating debt restructuring talks on the island, possibly through a bankruptcy-like process.

SWIFT has disclosed new hacking attacks on its member banks as it pressured them to comply with security procedures instituted after February’s $81 million heist at the central bank of Bangladesh. The global financial messaging system said it might report institutions if they failed to meet a November 19 deadline for installing the latest version of software which includes a host of new security features.

A former Monsanto executive who tipped the Securities and Exchange Commission to accounting improprieties involving the company’s top-selling Roundup product has been awarded more than $22 million from the agency’s whistle-blower program. The award was tied to an $80 million settlement between the SEC and Monsanto in February.

The SEC said Monsanto lacked sufficient internal controls to account for millions of dollars in rebates that it offered to retailers and distributors. It ultimately booked a sizeable amount of revenue, but then failed to recognize the costs of the rebate programs on its books. That led Monsanto to “materially” misstate its consolidated earnings for a three-year period.

For-profit educator ITT Technical Institute announced today that it will no longer accept any new enrollments. The news came four days after the US Department of Education imposed sanctions on ITT Education Services, the college chain’s parent company, barring the school from enrolling students who use federal financial aid and requiring ITT to provide a letter of credit showing it’s sufficiently funded.

The sanctions prohibiting the enrollment of students who use financial aid struck such a blow to ITT Tech because, like most for-profit colleges, it’s highly dependent on federal aid. Last year, ITT fell into hot water with the Education Department because of its refusal to provide the proper accounting of federal grants it distributes to students dating back to 2009. The department then placed restrictions on federal financial aid at ITT. ITT Tech is under multiple federal and state investigations relating to the way the for-profit organization runs its operations.

“All hands on deck” may soon be a thing of the past. Ship designers, their operators and regulators are gearing up for a future in which cargo vessels sail the oceans autonomously with minimal or even no crew. British engine maker Rolls-Royce is among those leading the pack, with its Advanced Autonomous Waterborne Applications initiative involving other companies and universities. It predicts unmanned shipping to cut transport costs by 22%.

Financial Review

Hat Trick

Sinclair Noe — July 14, 2016

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

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DOW + 134 = 18,506
SPX + 11 = 2163
NAS + 28 = 5034
10 Y + .07 = 1.54%
OIL + .75 = 45.50
GOLD – 7.70 = 1335.60

The S&P and Dow closed at record highs. The S&P hit 2,168.99, its fourth straight intraday record peak, while the Dow hit 18,537.57 to mark its third straight intraday record high.

The Bank of England took markets by surprise, making no change to interest rates. The call to leave rates unchanged at 0.5% was largely unexpected by investors, as traders had priced in a more than 80% chance of a rate cut to a record low of 0.25%. The BOE said in a statement that most of the policymakers expect to loosen monetary policy by August; apparently they just need a little more time to put together a package of measures to stimulate growth. Maybe they are just trying to keep their powder dry.

U.S. producer prices jumped 0.5% in June — the biggest increase in more than a year — largely owing to higher oil prices and margins for financial services. Yet inflation overall remains muted. In the past 12 months, the producer price index has advanced 0.3%, the first year-over-year increase since the end of 2014. Core prices – stripping out food, energy, and trade margin categories – core prices rose a smaller 0.3% in June.

The number of applications for U.S. unemployment benefits last week held at the lowest level since mid-April. Jobless claims were unchanged at 254,000 in the week ended July 9. Companies having trouble finding qualified and skilled workers are hesitant to dismiss employees. Weekly claims have been below 300,000 for 71 straight weeks, the longest period since 1973 and consistent with robust employment conditions.

Sales of new single-family homes likely grew at a seasonally adjusted annualized rate of 530,000 units in June, up 8.6 percent from a 488,000 annualized pace in May. The Mortgage Bankers Association said June’s estimated pace of sales was up 7 percent from a year earlier. Without adjusting for seasonal factors, there were likely 47,000 new homes sold last month, unchanged from May.

JPMorgan Chase reports second quarter profit slipped 1% versus the same period a year earlier, but that beat estimates. JPMorgan’s second-quarter net income slipped to $6.2 billion in the second quarter ended June 30 from $6.3 billion a year earlier. Net revenue rose 3 percent to $25.2 billion from $24.5 billion. Six major banks report earnings on Friday.

BlackRock, the world’s largest money manager, said second-quarter profit fell 3.7 percent as performance fees declined and clients shifted money from stocks to lower-fee fixed income and cash investments. Net income in the three months through June declined to $789 million, or $4.73 a share, from $819 million, or $4.84 a share, a year earlier.

BlackRock is the first big U.S. money manager to report second-quarter earnings, giving a glimpse of how firms navigated financial markets that were rattled by Britain’s vote to leave the European Union.  Larry Fink, chairman and CEO of BlackRock, weighed in on the recent stock market rally, saying the data on fund flows don’t support the moves. He said the recent rally has been supported by institutional investors covering shorts.

That is probably an oversimplification of what we are seeing. Institutions bet big before the Brexit vote that the markets would skyrocket and that the UK would not leave the EU and unfortunately the exact opposite result happened, forcing these same institutional players to then scramble and go short the market. Well everyone went short at the same time and thus whenever markets move in a herd mentality, one way or the other, it creates opportunities for others to take advantage of the situation.

Certainly short covering is part of the story, but I think we are also seeing a long term bull that went through 13 months of sideways action, or consolidation, and now is breaking out on a bit of decent news. Consider that Brexit did not result in a Lehman moment; central bankers around the globe are pumping money into the system; the Federal Reserve is not hiking rates; the June jobs report showed a strong rebound; earnings season will beat expectations even if it is slightly negative for a fifth consecutive quarter.

The market has been running, a full-fledged sprint to record highs. And even though overbought indicators are flashing a warning sign, remember that the market climbs a Wall of Worry. In situations like this, the market can surprise and just keep running.  Eventually and inevitably, there will be a pause, maybe even a pullback, but I don’t know when; maybe tomorrow, maybe two weeks, maybe longer. Sure, there is plenty that could go wrong but they aren’t going wrong right now.

KFC owner Yum Brands rose 3 percent to $88.27 a day after its key China business showed signs of strength.

Delta’s higher-than-expected quarterly profit sent its shares 3.6 percent higher. An airline industry index has risen almost 12 percent over the past six sessions.

Line Corp. rose in its U.S. trading debut after the Japanese messaging company raised more than $1 billion in the biggest technology initial public offering of the year. Shares opened at $42, after pricing at $32.84 apiece. The company, which is listing shares in Japan and the U.S., will start trading in Tokyo on Friday. Shares closed up 26.6 percent at $41.58.

Monsanto is considering a deal with BASF. The seed giant is considering the acquisition of BASF’s agriculture-solutions unit. While the price tag of the potential deal is unknown, Monsanto would probably pay in newly issued shares. The talks come after Monsanto rejected a $62 billion takeover bid by Bayer in May, and today Bayer sweetened the offer to $64 billion. Global agrochemicals companies are racing to consolidate, partly in response to a drop in commodity prices that has hit farm incomes.

The Federal Communications Commission voted unanimously today to open nearly 11 gigahertz of high-frequency spectrum for mobile, flexible and fixed-use wireless broadband; that made the United States the first country to set aside an ample amount of airwaves for so-called 5G wireless applications and networks. New 5G networks are expected to provide speeds at least 10 times and maybe 100 times faster than today’s 4G networks.

5G technology could have a broad impact beyond things like speeding up movie downloads. It could also improve road traffic by monitoring sensors in streetlights, roadside architecture and cars. It could even help detect air pollution using sensors in trees. In other words, this is the platform for the Internet of Things. Verizon and AT&T have said they will begin deploying 5G trials in 2017, and the first commercial deployments at scale are expected in 2020.

California regulators have again rejected Volkswagen’s plan to fix diesel vehicles that were programmed to cheat on air pollution tests, saying the idea was “incomplete” and “substantially deficient.” The proposal would have covered about 16,000 3.0-liter diesel cars for model years 2009 to 2016. About 85,000 VW 3-liter diesel vehicles that cheat on emissions are on roadways nationwide.

Google faces a new antitrust attack from European Union regulators who allege the search engine skews results in its own favor and unfairly restricts rival online advertising platforms. The European Commission announced a new round of charges against Google, claiming that some of the company’s advertising products restricted consumer choice. The new charges relate to some of Google’s online advertising tools — the main engine for $75 billion in annual revenues — and parts of the company’s search business linked to online shopping.

Financial Review

Go Figure

Sinclair Noe — May 24, 2016

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

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DOW + 213 = 17,706
SPX + 28 = 2076
NAS + 95 = 4861
10 Y + .02 = 1.86%
OIL + 1.02 = 49.10
GOLD – 21.30 = 1227.90

Yesterday, Wall Street couldn’t figure out which way to go; today stocks rallied for their best day since March 11. The S&P 500 rallied back above its 50 day moving average; we’ll have to see if it can hold on.

What was behind the rally? Who knows? Jeffrey Gundlach, CEO of DoubleLine Capital, said the rally feels like a short squeeze and characterized U.S. stocks as “dead money.” Gundlach says the market is not healthy and earnings have come in weak. On the Federal Reserve, Gundlach says the odds of a rate hike in June are 50-50, and it is Janet Yellen’s opinion that matters the most.

Expectations are rising for a rate hike next month after Philly Fed President Patrick Harker reinforced the central bank’s message that it’s getting ready to act now that the U.S. economy has recovered from a weak winter. Harker says he “can easily see the possibility of two or three rate hikes over the remainder of the year,” he told an audience in Philadelphia. “If the data comes in… I think a June rate increase is appropriate.” Markets are also awaiting this week’s main event – a speech from Janet Yellen on Friday.

The Census Bureau reports New Home Sales in April increased to a seasonally adjusted annual rate of 619,000 – an 8 year high; that’s an increase of 16.6% from March, and a 23.8% increase from April 2015. The median price also jumped, rising 9.7% from 12 months ago to $321,100. The big increase in sales took supply sharply lower. At the current pace, it would take 4.7 months to exhaust all inventory.

French investigators raided Google’s Paris headquarters this morning as part of a tax evasion inquiry. Google has based its regional headquarters in Dublin where corporate tax rates are lower than elsewhere in Europe. The company, now part of Alphabet, has been under pressure in recent years over its practice of channeling most profits from European clients through Ireland to Bermuda, where it pays no tax on them.

The raid was part of an investigation to determine if Google Ireland Ltd has a permanent base in France and if, by not declaring parts of its activities carried out in France, it failed its fiscal obligations, including on corporate tax and value added tax.  The raid was carried out as part of an investigation into aggravated tax fraud and the organized laundering of the proceeds of tax fraud. If Google is found guilty, it could face fines up to 10 million euros or a fine of half of the value of the laundered amount involved.

Separately, attorneys for Oracle and Google presented their closing arguments in a lawsuit over Google’s use of Java APIs owned by Oracle in Android. Oracle accused Google of stealing a collection of APIs, while Google suggested that Android transformed the smartphone market and Oracle sued out of desperation when its own smartphone attempts failed to launch. If the jury finds that Google did indeed steal code from Oracle, it could disturb the way engineers at small startups build their products and expose them to litigation from major companies whose programming languages they use.

By the way, API refers to application program interface, which is the set of tools for building software applications. Google has argued that Sun Microsystems, which created Java, always intended for its programming language and accompanying APIs to be used freely. Oracle purchased Sun in 2010 and claimed that Sun executives believed Google had infringed their intellectual property and simply hadn’t brought legal action.

An appeals court has already decided that the Java APIs in question are copyrightable. This case, which has stretched over two weeks in a district court in San Francisco, aims to determine whether Google’s implementation of the APIs can be considered fair use. Now we wait for the jury.

The head of SWIFT will present a plan today to fight back against a wave of recent cyber thefts at members of the world’s top payments network. The speech follows three high profile hacks since the beginning of last year: an $81 million heist at the Bangladesh central bank, a $12 million theft from Banco del Austro in Ecuador, and an attack on a Vietnamese lender that was unsuccessful.

Deutsche Bank was downgraded. Moody’s cut Deutsche Bank’s credit rating to “Baa2,” down from “Baa1.” The credit-rating agency said the downgrade was a result of the bank’s difficulty in stabilizing itself amid a world of low growth and low interest rates. Moody’s said, “Deutsche Bank’s performance over the last several quarters has been weak, and substantial operating headwinds, including continuing low interest rates and macroeconomic uncertainty, will challenge the firm.”

Monsanto has rejected Bayer’s $62 billion takeover offer as too low while saying it’s still open to further deal talks. Bayer will likely come back with a higher bid. Buying Monsanto would create the world’s biggest supplier of farm chemicals and seeds, so even if they can agree on a price, they face regulatory scrutiny and will likely have a hard time making the case that this deal will make for a more competitive market. The consolidation of two big industry players may also limit farmer choice and bargaining power, with increasing seed prices expected to be passed on to the grocery aisles.

There is also a question about biodiversity and the potential risks to food safety. As Monsanto rejected the Bayer bid, they left the door open, saying they “believe in the substantial benefits an integrated strategy could provide to growers and broader society, and we have long respected Bayer’s business.”

ExxonMobil will face a revolt from some of its biggest and most influential shareholders on Wednesday as they fight to force the world’s largest oil company to open up about the effect of climate change on its future profits. Investors, including pension funds of the governments of Norway, Canada, California, New York, and even the Church of England are expected to vote in favor of a resolution calling on Exxon to “publish an annual assessment of long term portfolio impacts of public climate change policies.” The resolution is also supported by ISS and Glass Lewis, the world’s leading proxy advice services which advise institutional investors how to vote on such issues.

The resolution states that the company “should analyze the impacts on ExxonMobil’s oil and gas reserves and resources under a scenario in which reduction in demand results from carbon restrictions and related rules or commitments adopted by governments consistent with the globally agreed upon 2-degree target”. ExxonMobil has tried to block the resolution.

Exxon is currently under investigation by New York’s attorney general over claims that it lied to the public and shareholders about the risks of climate change. It follows reports that internal company documents from the 1980s and 90s show Exxon’s in-house scientists were warning company executives about the dangers of climate change, while Exxon was publicly claiming that climate science was not proven.

The strongest El Nino in nearly 20 years has ended, according to the Australian Bureau of Meteorology, as sea surface temperatures across the Pacific Ocean cool to their neutral levels. El Niño led to damaged crop production (such as wheat, palm oil and rice) due to scorching weather across Asia and east Africa, and heavy rains and floods in South America. A majority of climate models suggest that the climate pattern La Niña will develop in the wake of El Niño, according to the Bureau of Meteorology. La Niña—a climate phenomenon characterized by significantly below-average temperatures in the Equatorial Pacific—brings dry and warm weather to the southern U.S. and Mexico, and wet weather throughout much of the Pacific.

Mandatory evacuation orders were lifted yesterday for the last of Alberta’s oil sands production sites endangered by wildfires, starting the process of inspections by forestry and health officials to make sure the facilities are safe for workers to return. Since late Friday, Alberta has removed orders that had prevented all but critical staff from remaining on sites.

Deere & Co. is tightening conditions for renting equipment as a slump in farming incomes has led customers to prefer leasing rather than buying its agricultural machinery. In the face of lower crop prices, farmers in the U.S., South America and elsewhere have cut back sharply on equipment spending despite planting big crops.

For nine straight quarters, the slump has eaten into Deere’s sales and profits, and it is now bleeding into the company’s customer-finance arm. Leases now account for about a quarter of Deere’s customer-financing deals, compared with about 15% in the past. But Deere’s finance unit and dealers have been burdened with used equipment as customers walk away when short-term leases expire. That has forced the company to tighten the terms for renting equipment that has rapidly depreciated in value.

Deere took a write-down on used equipment in the latest quarter. It is restructuring leases to share more of the risk of further declines with dealers and new leases will likely cost farmers more as the company lowers residual equipment values at the end of the leases to reflect the depressed prices for used equipment.

Toyota is recalling almost 1.6 million additional American vehicles for front passenger side Takata air bag inflators that could rupture. Toyota said the new recall includes some but not all Corolla, Matrix, Yaris, 4Runner, Sienna, Scion xB, Lexus ES, GX and IS vehicles built between 2006 and 2011. Other reports from 17 automakers recalling Takata’s faulty devices are also due this week.

Financial Review

Libor Antitrust Claims Revived

Sinclair Noe — May 23, 2016

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

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DOW – 8 = 17,492
SPX – 4 = 2048
NAS – 3 = 4765
10 Y – .01 = 1.84%
OIL – .33 = 48.08
GOLD – 3.70 = 1249.20

If you were actively trading the markets today – well, you were probably falling asleep. It was like watching paint dry. The S&P 500 index traded in an 8-point range for the session, drifting from positive to negative without conviction.

Including today, we’ve had 98 trading days this year. On 20 of these days, the S&P moved 0.1% or less. That’s just over 20% of the time. In the prior 10 years, there was a total of 2517 trading days. And the S&P had a total of 288 moves of 0.1% or less. That’s just over 11% of the time. There has been plenty of volatility but it has been interspersed with indecision.

John Williams, president of the Federal Reserve Bank of San Francisco, said Sunday the presidential election wouldn’t prevent the central bank from raising interest rates later this year. Mr. Williams has said that he favors raising rates two or three times this year.

St. Louis Fed President James Bullard said today that the strength of the U.S. labor market, inflation levels that are closer to the Federal Reserve’s target of 2% and easing international pressures are three factors that support the Federal Open Market Committee’s aim for a slow normalization of interest rates. According to FOMC member and Boston Fed President Eric Rosengren the U.S. is on the verge of meeting most of the economic conditions the Fed has set to increase interest rates next month.

The market is trying to digest last week’s Fed minutes and the jawboning from policymakers. Everyone will be following the economic data closely over the next 3 weeks. Meanwhile, the bond market has done some of the work for the Fed; since last Wednesday’s release of FOMC minutes yields have jumped, but the Fed can’t just talk about raising rates and then fail to do the deed without a severe loss of credibility.

Bayer has confirmed its offer to acquire Monsanto with a $122 per share all-cash bid that values the U.S. agribusiness at $62 billion. The drug and chemicals giant anticipates annual earnings contributions from synergies of around $1.5 billion after three years, and said it would finance the deal through a combination of debt and equity.

Bayer said a deal would boost earnings per share by a “mid-single-digit percentage” in the first full year after completion, and by more than 10 percent thereafter. Bayer would likely abandon the Monsanto name following the purchase, which would help distance Bayer from Monsanto’s link to genetically modified foods.

The kind of genetically modified seeds that Monsanto started to sell two decades ago now account for the majority of corn and soybeans grown in the US. But that doesn’t mean you want to bet the farm on GMOs. In the United States organic food sales have grown steadily at around 10 percent a year since the Great Recession (and at higher rates before that), which puts the stock market to shame.

In 2015 organic product sales revenue grew 11 percent, while the rest of the food market grew at a rate of 3 percent, according to the Organic Trade Association’s annual survey of the industry. Total sales reached $43.3 billion, which makes the organic industry a force to be reckoned with. For comparison, Monsanto brought in just under $15 billion in revenue last year.

Anthem and Cigna are quarreling and could delay their merger. The Wall Street Journal reported that disagreements could delay antitrust approvals, which would make the $48 billion deal possible. The report said the two health insurers accused each other of violating the terms of their agreement announced last July. A deal would create America’s largest health insurer by members.

Tribune Publishing rejected Gannett’s latest $864 million takeover offer, saying the$15 per share in cash was inadequate, and they have a turnaround plan in place. Tribune Publishing, the owner of the Los Angeles Times and the Chicago Tribune, said billionaire Patrick Soon-Shiong invested $70 million in the company, becoming its second largest shareholder. Still, Tribune said it had invited Gannett to an agreement under which the companies could engage in discussions to see whether a transaction was in the best interests of Tribune and Gannett shareholders.

Ares Capital Corp, an investment and finance company focused on mid-sized firms, is buying smaller rival American Capital Ltd in a cash-and-stock deal valued at $3.4 billion to better fill the credit gap created as big banks turn cautious. The deal, which does not include American Capital’s mortgage management unit, comes about five months after American Capital said it would solicit offers. Ares is the biggest BDC, or Business Development Company, in the United States by assets while American Capital, in addition to operating as a BDC, has a large asset management business.

Due to the U.S. crackdown on tax inversions, CF Industries is calling off an $8 billion deal to acquire several European and North American operations from OCI of the Netherlands. The two said that they were unable to restructure the acquisition, which would have created the world’s largest publicly traded nitrogen company, in a way that would be attractive to their shareholders.

Sixteen of the world’s largest banks must face antitrust lawsuits accusing them of harming investors who bought securities tied to Libor by rigging the interest-rate benchmark, a ruling that an appeals court warned could devastate them.

The appellate judges reversed a lower-court ruling on one issue, whether the investors had adequately claimed in their complaints to have been harmed, while sending the cases back for the judge to consider another issue: whether the plaintiffs are the proper parties to sue, in part because their claims, if successful, provide for triple damages that could overwhelm the banks.

About a dozen firms have paid almost $9 billion in fines to resolve government investigations around the world into rigging of the key benchmark. The ruling by a three-judge panel opens the possibility the banks may have to pay billions more. Libor, or the London Interbank Offered Rate, underpins hundreds of trillions of dollars of transactions and is used to set rates on credit cards, student loans and mortgages. It is calculated based on submissions by banks.

In their lawsuits, the plaintiffs claim that beginning in 2007 the banks colluded to depress the Libor rate to minimize the amount they had to pay out on investments linked to the benchmark. The Libor-tied investments included asset swaps, collateralized debt obligations and forward rate agreements. The appeals court overturned a 2013 ruling which said the investors had failed to show that they were harmed in a way that would permit them to sue under U.S. antitrust law. Last year, the U.S. Supreme Court permitted the bondholders to appeal the dismissal of their antitrust claim.

The Second Circuit reinstated the lawsuit today, ruling that the alleged horizontal price-fixing constitutes an antitrust violation, basically the district judge got it wrong by adopting a categorical rule that because the banks were cooperating in setting Libor they could not be violating antitrust rules. That argument is that since banks operate as both borrower and lender in Libor transactions, any conspiracy to gain as a borrower would be offset by losses as a lender. However, there might be another argument: that the banks suppressed Libor during the financial crisis to boost earnings or make their finances appear healthier.

The New York-based appeals court remanded the case so that the lower court could reach the second component of standing for asserting an antitrust injury – whether the bondholders are efficient enforcers of antitrust law; in other words, the lower court could dismiss the case again, for new reasons.

Greece’s parliament has approved a raft of fresh taxes and austerity measures needed to unlock further rescue loans, as the country’s most influential creditors – Germany and the IMF – remain deadlocked over debt relief. “Greeks have already paid a lot, but this is probably the first time that the possibility of these sacrifices being the last is so evident,” Prime Minister Alexis Tsipras told lawmakers. Athens hopes the measures will bolster sentiment ahead of tomorrow’s key Eurozone finance ministers meeting.

Holders of bonds from Puerto Rico’s Government Development Bank are suing to challenge aspects of a debt-moratorium law that island officials say is crucial to maintaining essential services. The federal lawsuit names Puerto Rico’s Governor and Treasury Secretary as well as an unidentified bank receiver. It argues that amendments give preferential treatment to local creditors at the expense of others in violation of American and Puerto Rican law.

The U.S. will fully lift the decades long ban on sales of lethal arms to Vietnam. Speaking in Hanoi, President Obama said lifting the arms embargo would remove one of the last vestiges of the Cold War, it also opens up non-military markets. Vietnam’s VietJet has agreed to order 100 Boeing 737 MAX 200 airplanes, in a deal worth $11.3 billion based on list prices. Delivery of the planes will run for four years beginning in 2019, and will make the airline one of the fastest growing low-cost carriers in the region.

More than 38 million Americans—the most since 2005—are expected to travel during this year’s Memorial Day holiday period, May 26 through Monday, May 30 – and about 90% are expected to drive.  AAA reports gasoline prices are the lowest they’ve been this time of year since 2005. The national average price is $2.26 for a gallon of gasoline; that’s up significantly from the $1.70 a gallon that regular grade gas hit in February but down 40-cents from the average price last Memorial Day. Prices are expected to inch higher over the next few days, heading into the holiday. Meanwhile, truckers will pay about 50-cents per gallon less for diesel versus last year.

Financial Review

No Argument for Bulls

Sinclair Noe — May 19, 2016

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

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DOW – 91 = 17,435
SPX – 7 = 2040
NAS – 26 = 4712
10 Y – .03 = 1.85%
OIL – .03 = 48.16
GOLD – 3.50 = 1255.50

Fed rate-hike probabilities have been pulled forward. The April Federal Open Market Committee minutes were released yesterday, and they suggested that if conditions are right, the Fed may raise rates in June. While this was not particularly new, it sent shivers through the fed fund futures market.

Traders had been pricing in a minimal chance of a June rate hike and a just-over-50% chance the next hike would occur in December. After the minutes’ release, however, markets now see a 60% chance of a rate hike in either June or July. So we had a complete turnaround in conventional wisdom from no hike in June to an almost certain hike in June.

This morning Federal Reserve Vice Chairman Stanley Fischer said we are near full employment and inflation is approaching the Fed’s target of 2%, but he says he wants to see faster potential growth. Fischer did not comment on the likelihood the Fed will raise interest rates again in June. Fischer said more study should be devoted to finding ways to boost the so-called equilibrium real interest rate, which is the level of borrowing costs associated with stable inflation and full employment.

Also this morning William Dudley, President of the New York Fed said it would be appropriate to raise interest rates again at either the June or July meeting as long as the economy rebounds from a weak first quarter as expected.

Also this morning, Richmond Fed President Jeffrey Lacker, who doesn’t have a vote and has been itching for an interest-rate hike, did allow that if markets were rocky enough by June 15 – just over a week before the U.K. gets to vote on leaving the European Union – he could be persuaded not to support a rate increase. But it looks like Fed policymakers feel confident they will have a handle on the Brexit vote by the time they convene the next FOMC meeting.

Now, all the jawboning from Fed officials does not guarantee a rate hike, the economy might wobble, job creation could dry up, GDP growth could wither, the Brits might Brexit; but if they do raise rates, what does it mean for stocks? Well, higher rates increase corporate borrowing costs at a time of lofty stock valuations and declining forward-earnings estimates; it would also curtail stock buybacks. And consider the economic outlook of higher inflation and something near full employment, which would mean wage pressures.

A rate hike would almost certainly result in a stronger dollar which would mean reduced sales for multinational companies when money is repatriated from a country with a weaker currency. Then go to the charts. The S&P 500 index added 270 points off the February lows, but that was not enough to clear resistance around 2100, not enough to hit new highs, and a lower high than last October. Also, the February lows were lower than the August lows, so we have lower lows and lower highs.

It looks like a failed rally and a double top (you could argue it is a triple top). The S&P has now dropped below its 50 day moving average and is dropping below its 100 day moving average. Add in the seasonal tendency to “sell in May” and it is difficult to make a bullish argument.  Meanwhile, don’t forget the bond market, which has seen a big sell-off following the Fed minutes.

The number of Americans who applied for unemployment benefits in mid-May fell by 16,000 to 278,000, with most of the drop concentrated in New York. Initial jobless claims had risen three straight weeks to a 14-month high, capped off by sharp 20,000 increase in the first week of May. The recent spike in claims can be traced to an unusual law in New York that allows bus drivers, cafeteria workers and similar school employees to seek benefits for the week of work they miss during spring break for students.

Moody’s Investor Service cut its 2016 growth forecast for the U.S. economy to 2% from 2.3%, citing subdued global demand and weak business investment. Moody’s 2016 growth outlook for advanced markets is 1.7% in 2016, down from 1.9% in 2015. According to the agency’s Global Credit Research report, “The global recovery has weakened further and the outlook across countries remains uneven and largely weaker than in the previous two decades.” Moody’s said a more pronounced slowdown than expected from China’s economy is currently one of the biggest risks to the global economy.

Arizona’s seasonally adjusted unemployment rate increased one-tenth of a percentage point from 5.4% in March to 5.5% in April; still running higher than the national rate of 5%. Arizona gained 7,500 Nonfarm jobs in April, slightly below average. Professional and business services added the most jobs, while mining lost.

German drug and chemicals giant Bayer has made an unsolicited takeover offer for Monsanto. Terms were not disclosed. Monsanto’s market cap is about $42 billion, and the bid is likely to top the $43 billion that ChemChina paid for its rival Syngenta in February. A tie-up would result in the world’s largest seed and crop-chemical company, with $67 billion in annual sales. Monsanto said in a statement its board is reviewing Bayer’s proposal, which will surely come under regulatory scrutiny.

Walmart reported a higher-than-expected quarterly profit as increased drug prices and solid demand for basic apparel items boosted sales, and its shares jumped more than 7 percent. The company’s performance bucked a string of weak results from competitors. Earnings per share of 98 cents beat the analysts’ average estimate of 88 cents. Sales at U.S. stores open at least a year rose 1.0 percent.

Clothing retailer Gap posted earnings that matched estimates while revenue missed. Same store sales dropped 5%. Gap announced it will close 75 Banana Republic and Old Navy stores worldwide, with most of the closures in Japan.

Network equipment maker Cisco Systems reported better-than-expected results and gave an upbeat forecast for the current quarter. The company has been beefing up its wireless security and datacenter businesses. Results in the latest reported quarter were mainly driven by a 17 percent jump in sales in its security business.

The SEC has charged a former chairman of Dean Foods and a professional Las Vegas gambler with engaging in a years-long insider trading scheme, which included a tip that benefited professional golfer Phil Mickelson. William “Billy” Walters, who has built a multi million-dollar fortune as a Las Vegas sports bettor, and Thomas Davis, Dean Food’s former chairman, were criminally charged in a case brought by federal prosecutors in Manhattan. Mickelson was not criminally charged, but was named as a relief defendant in a civil lawsuit by the U.S. Securities and Exchange Commission, which said he also traded in Dean Foods stock. A relief defendant is not accused of wrongdoing but has received ill-gotten gains as a result of others’ illegal acts.

In a statement via his attorney, Mickelson said he had no desire to benefit from any transaction that the SEC viewed as questionable and that he takes “full responsibility” for having become part of the probe. In 2012, Mickelson took positions in Dean Foods totaling about $2.4 million, and he pocketed a profit of more than $900,000 in about a week’s time. Mickelson has agreed to return gains from that trade. But that doesn’t mean the matter is closed. You might be wondering why a successful golfer was involved in an insider trading scheme in the first place. The answer is that “Lefty” the golfer owed “Billy” the gambler gambling debts; which means Mickelson was betting and losing – possibly in violation of PGA rules.

General Motors plans to compensate about 130,000 American owners of SUVs that had inflated fuel economy labels, revealing itself as the latest automaker to misstate gas mileage. GM will disclose a program to reimburse the owners for the difference in miles per gallon in the coming week, and will temporarily halt sales of about 60,000 new 2016 U.S. vehicles.

Tesla will sell $2 billion in stock to help it ramp up production of its new Model 3 electric car over the next two years. Tesla unveiled the Model 3 in March and already has 375,000 pre-orders. Now they have to ramp up their manufacturing capability. Of the stock Tesla plans to offer, about $1.4 billion will be new shares. The remaining amount will be sold by Elon Musk to cover tax expenses stemming from 5.5 million stock options he has exercised.

The bankrupt operating unit of Caesars Entertainment has unveiled a new proposal to emerge from Chapter 11 that includes a $4 billion contribution from its parent corporation. A smaller initial agreement was widely opposed by creditors, who are collectively owed more than $18 billion. They allege that Caesars Entertainment stripped away many of the best hotel casinos and put them out of reach for debt collecting.

Microsoft has unveiled a magic mirror – or a smart mirror that can recognize and greet users, read their emotions and display the weather, time and other information. All the while looking just like a regular mirror. The Magic Mirror has a hidden facial-recognition camera that can detect eight human emotions, including anger, happiness and surprise. Microsoft plans to expand the mirror’s features, allowing it to show app-fed news as well as Facebook and Twitter feeds in a display panel. No word yet on when, if ever, Microsoft will produce the magic mirror. Until then, if you need to see what kind of human emotion is displayed on your face, you’ll just have to look in a regular mirror.

S&P Closes At Highest Level In 3 Weeks, Oil Jumps

Financial Review

Close Calls

Sinclair Noe — October 7, 2015

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

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DOW + 122 = 16,912
SPX + 15 = 1995
NAS + 42 = 4791
10 YR YLD + .03 = 2.06%
OIL – .47 = 48.06
GOLD – 1.80 = 1146.80
SILV + .17 = 16.15

The S&P 500 closed at its highest level in three weeks. The S&P 500 has been up for 6 out of the past 7 sessions.  The S&P is down 3.09 percent for the year and the Dow is off by 5.11 percent ytd.

Yesterday, oil prices jumped nearly 5% as the American Petroleum Institute reported a 1.2 million barrel decrease in crude stocks last week. The International Energy Agency has said it expects world oil demand to increase by around 1.7 million barrels per day this year, one of the fastest rates for years as consumers respond to much lower fuel prices. The tightening market balance comes as U.S. production starts to decline. This morning, the Energy Information Administration reports global oil demand should increase by its fastest rate in six years in 2016, suggesting a surplus of crude is easing more quickly than expected. The EIA forecasts U.S. oil output will fall to 8.8 million barrels per day from an average of 9.25 million in 2015. But the EIA report also showed U.S. crude inventories rose by 3.1 million barrels in the last week, compared with analysts’ expectations for an increase of 2.2 million barrels.

The Bank of Japan has held off on expanding its record stimulus, signaling a belief that inflation will hit a 2% target despite troubling signs in the economy. Although the central bank left its annual asset purchases at ¥80-trillion-yen, they could still announce additional easing at a policy meeting on October 30, when the Bank of Japan is expected to cut its long-term economic and price forecasts.

China’s foreign exchange reserves posted their largest quarterly decline on record in July-September, as the central bank intervened to stabilize the yuan after its unexpected devaluation jolted global markets. The country’s foreign reserves, the world’s largest, dropped $43 billion to $3.5 trillion last month (the lowest since July 2013), and were down by about $180 billion for the third quarter.

The International Monetary Fund has published its Global Financial Stability Report and they are warning emerging market economies to protect their financial systems from possible instability as the U.S. Federal Reserve prepares to raise interest rates, saying shocks or policy missteps risk derailing the global economy and triggering equity market sell-offs. Meanwhile, problems lingering from the financial crisis still pose risks to advanced nations, including elevated public and private debt, and the risk of insufficient liquidity in the bond market when interest rates rise.

Tomorrow afternoon the Fed will release the minutes of their September FOMC meeting where the Fed did not raise interest rates. That decision has been described as a close call. Tomorrow we’ll get a better idea just how close.

One more day until Alcoa’s third-quarter results; marking the unofficial start of earnings reporting season. They could kick off the weakest set of earnings reports in six years. S&P 500 companies are now expected to report a 4.4 percent fall in third-quarter profit, according to Thomson Reuters data. The index is trading around 15.5 times expected earnings.

The world’s biggest smartphone maker by shipments, Samsung, handed out some positive guidance, suggesting its earnings may have bottomed out. While the mobile phone business isn’t likely to see a significant rebound as growth in global demand for smartphones cool amid saturated markets, Samsung’s earnings are being powered by strong growth in its chip business due to tight supply and firm pricing.

Monsanto, one of the world’s largest seed and agrichemical companies, said it will cut 2,600 jobs and restructure operations to cut costs in a slumping commodity market that it expects to squeeze results well into 2016. At the same time the company announced a $3 billion accelerated share repurchase program.

Volkswagen’s supervisory board held crisis talks today, facing deadlines from German regulators to explain its rigging of diesel emissions tests and what it is doing to tackle the scandal. The U.S. congress has launched its own investigation. The company has said it may have to refit up to 11 million cars and vans worldwide. Recalls are expected to start in January and would be completed by the end of 2016.

United Auto Workers members are planning a strike at U.S. manufacturing plants of Fiat Chrysler Automobiles ahead of the current four-year contract extension expiration at midnight.

Anheuser-Busch InBev  is raising its bid for SABMiller to $104 billion. This marks the third takeover proposal to combine the two biggest beer brewers in the world. And it looks like SABMiller will reject this latest offer.

Ahead of its annual Adobe MAX conference yesterday, Adobe issued an outlook for its coming fiscal year that was way lower than Wall Street expected.

Twitter and Alphabet have launched an open source code that allows faster loading of content-heavy Web pages on smartphones and tablets. The code, called accelerated mobile pages, or AMP, will help load content with heavy content such as video, animations and graphics faster.

Pure Storage made its trading debut today on Wall Street. Ticker symbol is PSTG. The flash storage company’s initial public offering price was $17 a share, but it actually opened around $16.74 then slipped lower throughout the session.

American Apparel is planning to revamp its struggling fashion business under a restructuring plan that would give ownership to Standard General, the same hedge fund involved in the RadioShack bankruptcy earlier this year. Shares in American Apparel, the country’s largest “Made in the U.S.A” brand, were suspended from trading on Tuesday ahead of their delisting from the NYSE.

Deutsche Bank expects to report a third-quarter net loss of $7 billion and may eliminate its dividend for the year after writing down the value of its two biggest divisions and boosting its reserve for legal costs. The German bank reports earnings October 29.

Pharmacy benefits manager Express Scripts has settled an investor debate about which pricey cholesterol drug it will cover – by saying it will cover both of them. Regeneron and Sanofi’s Praluent and Amgen’s Repatha will now both be included on Express Scripts’ formulary. Each of the PCSK9 inhibitors is at least $14,000/year, significantly higher than the cost of generic statins.

In theory, 3D printing offers a future where you could easily print just about anything you want. In reality, we’re not there yet. Eric Sprunk, Nike’s COO, recently attended a summit held by tech news site GeekWire, and based on what Nike is already doing Sprunk says the ability for consumers to 3D print a pair of sneakers is close at hand. The way it might work goes something like this: You could head to Nike’s website, customize a sneaker to your specifications, and buy a file containing the instructions for the 3D printer. If you have a printer at home, you could print it yourself and have a new pair of sneakers in a matter of hours. If you don’t, you could take the file to a Nike store and have them print it for you.

Airbus has called off talks with Bombardier over supporting the troubled CSeries jet, leaving the Canadian plane maker with few options to break into the 100-160 seat airplane market. Under a proposed tie-up, Airbus would have helped Bombardier complete development of the troubled CSeries in exchange for a controlling stake in the program. Bombardier, which has so far received a total of 243 firm orders for the jet, was unable to win a single order for the plane at the Paris airshow in June.

American Airlines Group is joining the Dow Jones Transportation Average effective October 15. The Dow Transports will then include 6 airline companies: United, Southwest, Delta, JetBlue, and Alaska Air. American Airlines replaces Con-way, the trucking firm being acquired by XPO Logistics.

Headed out of town for the holidays? Better book now. Whether you’re taking to the skies for Thanksgiving, Christmas or New Year’s, one week is better than any other to purchase your airfares – and according to Orbitz.com – this is the week. The online airfare booking site suggests that flights booked this week are 5 percent cheaper than regular fares. Using data from past holidays, the report also projects that Christmas fares should be purchased on Oct. 9 for the best price and flights for a New Year’s holiday are cheapest on Oct. 10.

DuPont was found liable for a woman’s kidney cancer in the first of 3,500 lawsuits over a toxic Teflon ingredient found in Ohio and West Virginia water. A federal jury in Ohio found that DuPont was liable for negligence and infliction of emotional distress and should pay $1.6 million in damages. The jury found the company didn’t act with actual malice in the way it handled C-8, the toxic chemical used to make Teflon at the company’s plant in West Virginia, which eventually was dumped into the Ohio River. Dupont won’t actually pay damages; they spun off the Teflon business and associated liabilities, to a company they call Chemours.

Last week we learned T-Mobile had been hacked and 15 million customers’ data had been breached. Cue the lawyers; at least five lawsuits are under way against T-Mobile and Experian, all seeking class-action status to represent everyone affected by the breach. A sixth lawsuit named only Experian. Experian Information Solutions held the data on its servers to perform credit checks on current and potential T-Mobile customers. The hackers stole names, addresses and Social Security numbers. People who submitted credit applications from Sept. 1, 2013, to Sept. 16, 2015, were affected. The great irony here is that Experian holds itself out as an expert in the field of data protection; they took in $4 billion in revenue last year to protect customers’ data.