Financial Review

A Quiet Friday in August

Sinclair Noe — August 25, 2017

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DOW + 30 = 21,813
SPX + 4 = 2443
NAS – 5 = 6265
RUT + 3 = 1377
10 Y – .02 = 2.17%
OIL + .43 = 47.86
GOLD + 5.00 = 1291.80
BITCOIN – 1.09% = 4360.42 USD
ETHEREUM – 0.90% = 328.87

For the week, the Dow rose 0.65 percent, the S&P 500 gained 0.72 percent and the Nasdaq climbed 0.79 percent. The weekly gains for equities snapped a two-week skid of declines for the Dow and S&P 500 and a four-week drop for the Nasdaq.

Hurricane Harvey projected to make landfall around Corpus Christi, Texas between 10 PM and midnight but it is now hitting the Texas coast with heavy wind and rain. The storm is more accurately stretched along a wide swath of the coast, with heavy rains as far east as New Orleans and inland beyond San Antonio.

Harvey is now a Category 3 storm, meaning the government now classifies it as a “major” hurricane with 120-mph winds and gusts over 150-mph. Harvey, the strongest storm to hit the U.S. since Wilma in 2005, is forecast to inundate Houston, Corpus Christi and Galveston, cities with more than 2.6 million people combined, with drenching rain and dangerous flooding. Texas Governor Greg Abbott declared a state of disaster for 30 counties. The storm may generate $1.9 billion of economic losses and $1.3 billion in insured losses.

The problem with this hurricane is they don’t see it trailing off in any direction so it’s just going to hover Harvey could deliver a one-two punch that could also spell trouble for the Houston Ship Channel. One forecast model shows the storm returning to the Gulf of Mexico before making a second landfall closer to Galveston, sending a storm surge into the channel, which carries more than 163 million tons of cargo per year.

The surge, coupled with the rains, could bring about water levels higher than ever recorded in the Houston metropolitan area. A storm surge of up to 12 feet may occur near the Padre Island National Seashore. Storm surges account for close to half of all hurricane deaths. It is going to be an issue for the ship channels.

Harvey may dump as much as 35 inches of rain on areas of Texas over the next week. Usually, you don’t get peak rainfall and peak surge at the same time. If the forecast holds for Houston, rainwater would be running down streams and rivers while ocean water is surging up to meet it. In other words, that unprecedented amount of rain will have nowhere to go.

A large metro area like Houston is also particularly vulnerable to flooding. Large swathes of the city are concrete and asphalt, which prevents rainwater from properly draining. It doesn’t help that Houston is naturally a low-lying city with clay soil that doesn’t drain well anyway. Sewage drainage will probably be a problem and clean water may also be affected. And not just humans are affected – all sorts of wildlife will be moving to higher ground.

The Federal Emergency Management Agency is sending staff and supplies to the region. Flooding will probably close roads and inundate power plants, while strong winds may disrupt utilities’ systems and knock out power to hundreds of thousands of homes and businesses. Anadarko Petroleum, Exxon Mobil and Royal Dutch Shell are among the energy explorers that have shut platforms in the Gulf of Mexico.

Midstream LP shut natural gas capacity in south-central Texas; and Enbridge evacuated non-essential workers from some platforms. BNSF was halting traffic from Galveston Island late Thursday and holding Galveston-bound trains until further notice. Cameron LNG begins evacuating workers ahead of Hurricane Harvey.

Gasoline futures hit a 4-month high in intraday trade. It is estimated the hurricane will push gas prices up by about 10-cents per gallon in the short-term. One of the worst things that can happen to a wind farm is too much wind. The storm could knock out between 2.1 and 3.6 gigawatts of power near the Texas coast.

The weather is fine in Jackson Hole, Wyoming. It’s a nice place to go fly fishing. This morning, Janet Yellen delivered what is probably her final speech to the Jackson Hole Economic Summit, an annual gathering of central bankers.

Yellen defended the government’s response to the 2008 financial-market meltdown while outlining some areas that regulators could review to improve efficiency in the financial system. Yellen focused on financial regulation and veered away from monetary policy. Yellen said reforms put in place after the 2007 to 2009 crisis have strengthened the financial system without impeding economic growth and any changes to these rules should remain modest.

That pretty much signals that she is not expecting to be re-nominated when her term expires in February.

European Central Bank president Mario Draghi also spoke at Jackson Hole. Draghi said he still is not seeing much inflation in the Eurozone and “a significant degree of monetary accommodation is still warranted.” Draghi said protectionist policies pose a “serious risk” for growth in the global economy.

Gary Cohn, who was president of Goldman Sachs before accepting a position in the Trump administration as head of the White House national economic council, is considered the front-runner to replace Yellen as the next Chair of the Federal Reserve.

Today Cohn said he had come under “enormous pressure” to resign after Trump equivocated in his denunciation of white supremacist groups, saying there had been “very fine people on both sides” at the demonstrations. The economic adviser said he had considered stand down but decided to stay on after discussions with the president. The New York Times reported he had gone as far as drafting a letter of resignation.

Treasury Secretary Steven Mnuchin said on Friday the nation’s debt ceiling will be raised in September and that after talks with congressional leaders from both parties everyone is “on the same page.” Mnuchin says he’s hopeful about getting a tax-code overhaul done by the end of this year after flatly stating he was “wrong” about finishing a deal by August.

Investors are fleeing U.S. stocks in a way they haven’t since 2004. According to a new Bank of America Merrill Lynch, for 10 straight weeks a total of $30 billion has left U.S. stocks, marking the longest streak of outflows since 2004.

Investors turned instead to emerging markets and European and Japanese stocks, which saw $36 billion in inflows over the last 10 weeks. The 10-week outflow from U.S. stocks comes despite the S&P 500’s nearly 1 percent gain this quarter and a record high on Aug. 8.

Some of the top sectors of the year have seen significant outflows, including tech, financials, and the consumer sectors. The only sector that has seen inflows – defense stocks. By investing style, investors withdrew $1.6 billion from U.S. growth stock funds and $1.1 billion from U.S. value stock funds

A South Korean court found Lee Jae-yong, heir to the Samsung empire and its de facto leader, guilty on charges of bribery and embezzlement, and other crimes. The court sentenced Lee to five years in prison. That’s less than the 12-year term prosecutors were hoping for. But it’s long enough to ensure that he will spend time behind bars.

Lee’s father, Lee Kun-hee, himself was once convicted for tax evasion, but he never served prison time because sentences of up to three years can be suspended. The ruling puts a cap on months of proceedings that tied the country’s single most important company to a corruption scandal revolving around former president Park Geun-hye. Park was impeached in March and is herself separately on trial.

The court found Lee guilty of providing $6.3 million in bribes to Park’s personal confidante, to secure approval for a merger between two Samsung subsidiary companies that gave Lee more power at the expense of other shareholders. Lee will appeal the conviction.

The conviction also marks a win for Koreans hoping to hold accountable the country’s chaebol—the country’s family-run conglomerates, which the public has increasingly resented for their corruption and grip on the economy. Newly-elected president Moon Jae-in made chaebol reform a key part of his campaign platform.

From exploding phones to execs charged with embezzlement, it has been an eventful year for Samsung, and none of those problems seem to matter. Samsung shares have gained 40% over the past year, a rise worth some $85 billion in market cap.

YouTube has expanded the internet-delivered YouTube TV subscription service into 14 new U.S. markets, which makes it available to half of all U.S. households. YouTube added the Phoenix market in July. According to Google, YouTube TV now offers the most markets with live local broadcast feeds from the four major broadcasters — ABC, CBS, Fox and NBC — than any over-the-top competitor.

Rivals in the space include AT&T’s DirecTV Now, Dish Network’s Sling TV, Hulu, Sony’s PlayStation Vue and FuboTV. However, the YouTube TV “skinny bundle” is missing big chunks of the cable dial. Unavailable on the service: networks from Turner, including CNN, TBS and TNT; Viacom; Discovery Communications; and Scripps Networks Interactive. HBO also isn’t available as an option, but Showtime is.

How much traction YouTube TV has gained to date isn’t fully clear; Google hasn’t released any subscriber numbers. But the service, and the other OTT contenders, are clearly appealing to a consumer segment that’s looking for a cheaper alternative to cable, satellite and telco TV — and traditional pay-TV customers are continuing to dwindle.

After weeks of relative slumber, gold traders were rudely awoken to a surge in volume and volatility. In a span of one minute, gold futures contracts equaling more than 2 million ounces traded. Prices spike, then dropped just as fast, and gold settled slightly higher for the session.

We don’t know who or why. But so much for a quiet Friday in late August.

Financial Review

Peace Out

Sinclair Noe — February 17, 2017

DOW + 4.28 = 20,624
SPX + 3.94 = 2351
NAS + 23.68 = 5839
RUT + .73 = 1399
10 Y – .03 = 2.42%
OIL + .04 = 53.37
GOLD – 5.60 = 1236.00

Starting Presidents’ Day a bit early, so today’s review is a bit on the light side. Thanks for your patience.

US stocks have spent the past week setting new record after new record. The S&P 500 and the Nasdaq posted 5 consecutive record high sessions before slipping yesterday. The Dow managed to hang on for a small gain and a sixth straight record.  European markets are sinking in early trading. The majority of Asian markets closed the week with small losses.

Samsung’s chairman is in jail. Jay Y. Lee will be indicted tomorrow, per South Korea’s special prosecutor, after he was arrested over his alleged role in the nation’s widening corruption scandal. It throws the firm into a leadership crisis for the first time in its corporate history, and is a huge blow to Samsung Electronics, the key unit where Lee serves as vice chairman. Other Samsung executives may also be arrested.

All that remains of Hanjin Shipping will be liquidated following a South Korean court order which pulled the plug on the company. Previously the world’s seventh-largest container shipper, Hanjin applied for court receivership in late August after its creditor banks halted further support.

Eurozone finance ministers and the International Monetary Fund seem likely to miss next week’s deadline to agree on a €7-billion-euro bailout for Greece. The two sides remain at loggerheads over an IMF demand that Athens be granted debt relief and easier surplus targets, meaning a pact may now be months away. While Greece won’t face bankruptcy trouble until July, Eurozone officials were racing to strike a deal so the drama wouldn’t be forced into the upcoming Dutch and French elections.

Complications in restructuring Saudi Arabia’s state-owned oil company and segregating its finances from those of the government are slowing the march toward what is expected to be the biggest IPO in history. The Wall Street Journal reports the listing of a minority stake in Saudi Aramco is now unlikely to happen until late 2018 at the earliest.

S&P Global said it could cut its rating of Toshiba credit by several notches should the Japanese firm receive financial support that includes debt restructuring.

Unilever has rejected a proposed $143 billion-dollar merger offer from Kraft Heinz, saying the bid was too low and it fundamentally undervalues the company.

Mmm, Mmm, NOT good. Campbells Soup said earnings for the latest quarter fell to $205 million, or 33 cents per share, from $414 million, or 85 cents per share in the year-earlier period. Revenue also fell. Topline was a miss; bottom line was a beat.

Deere & Company posted better than expected earnings, even as revenue slipped. Agriculture and turf and construction and forestry sales topped expectations. Deere shares have rallied about 20% in the past 3 months.

Wells Fargo will give investors a peek into its efforts to rebound from its fake account scandal when it releases monthly customer account numbers and holds a conference call later today. The bank has reported a dramatic decline in consumer checking account openings in recent months. It’s now looking to shut more than 400 branches.

The Justice Department has joined a 2011 lawsuit accusing UnitedHealth of gaming the Medicare program and fraudulently collecting hundreds of millions of dollars by claiming patients were sicker than they really were.

The five-year investigation, unsealed yesterday says UnitedHealth, the nation’s largest Medicare Advantage insurer, allegedly collected payments from false claims that it treated patients for conditions they didn’t have, for more severe conditions than they had, conditions that had already been treated, or diagnoses that didn’t meet the requirements for risk adjustment.

General Motors chief Mary Barra visited Opel’s German headquarters and gave assurances the GM unit would remain independent and current management would remain in place in any deal with Peugeot parent PSA Group. The two companies previously said they were in talks regarding a PSA purchase of GM’s European car operations.

AT&T opened its unlimited wireless data plan to all customers, a few days after a similar move by Verizon. Previously, AT&T had only offered such plans to customers of its DirecTV service. The move leaves all four national wireless carriers, including T-Mobile and Sprint, offering similar unlimited plans and leaving price and network claims as the major differences.

A muzak-streaming service launched its global offensive. The Spotify-backed “Soundtrack Your Brand” plans to push into global markets with its own music catalog and $22 million in fresh, outside funding. It already has deals to pipe its music into McDonald’s and Tag Heuer stores, and is now going up against Canada’s Mood Media, the market leader in commercial background music.

Amazon was awarded a patent earlier this week for a system in which a package would be “forcefully” propelled from a drone, and would be helped to land by measures including a parachute.

SpaceX launches a Falcon 9 rocket on Saturday. The mission, taking off from the Kennedy Space Center in Florida, will carry a Dragon supply ship to the International Space Station.

US markets will be closed Monday in observance of Presidents Day.

Financial Review

Turkey, Again

Sinclair Noe — February 14, 2017

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

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DOW + 92 = 20,504
SPX + 9 = 2337
NAS + 18 = 5782
RUT + 4 = 1396
10 Y + .04 = 2.47%
OIL + .28 = 53.71
GOLD + 3.30 = 1229.00

Four consecutive trading sessions with record highs.

Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee this morning, part of her semi-annual two-day testimony to Congress. Yellen said the labor market is basically where the Fed wants it to be, and inflation is just a little lower than their target. She said, “Waiting too long to remove accommodation would be unwise, potentially requiring [the Fed] to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.

“At our upcoming meetings [we] will evaluate whether employment and inflation are continuing to evolve in line with [the Fed’s] expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

She said the Fed expected three rate increases this year, and they might hike in March, maybe. That doesn’t mean the Fed will raise rates in March, but the Fed wants that option. Normally, Yellen talks about downside risks, today she seemed more concerned about the upside risk.

“The economic outlook is uncertain, and monetary policy is not on a preset course,” she told members of the Senate Banking Committee, adding that “changes in fiscal policy or other economic policies could potentially affect the economic outlook,” she said, adding that “it is too early to know what policy changes will be put in place or how their economic effects will unfold”. We know that President Trump has promised details on his “phenomenal” tax reform plan within the next couple of weeks. Fed economists will surely pay attention.

Yellen rebutted President Trump’s claims that banks aren’t lending. Trump has targeted the Dodd-Frank Act as part of his quest to roll back regulations, claiming the regulatory reform prevents banks from lending.

Yellen shot down those claims, saying commercial and industrial lending specifically surged after the crisis, rising 75 percent since 2010. Yellen mentioned a recent survey from the National Federal of Independent Business, in which only 2 percent of respondents cited access to capital as their greatest obstacle.

She said US banks are stronger than their foreign counterparts, which makes them more competitive, and it is reflected in record earnings for US banks. Dodd-Frank is making life difficult for banks, but the truth is, banks are lending plenty of money, and companies are not starved for capital.

The two-year note yield jumped to as high as 1.25 percent from a low of 1.18 percent earlier in the day. The 10-year yield rose to 2.50 percent from 2.43 percent before her remarks were released. The dollar rose after Yellen’s comments, hitting a high last reached on Jan. 20. During Yellen’s testimony, stocks flipped between small gains and losses but started carving out fresh intraday highs as the testimony wrapped up.

Richmond Fed President Jeffrey Lacker, a long-time proponent of tighter monetary policy, says the Federal Reserve will likely have to raise interest rates more rapidly than financial markets currently expect given that any new policies by the Trump administration, while uncertain, will force the Fed’s hand.

Producer prices, or prices at the wholesale level, rose more than expected in January, recording their largest gain in more than four years.  The producer price index for final demand jumped 0.6 percent last month. That was the largest increase since September 2012 and followed a 0.2 percent rise in December. Despite the surge, the PPI only increased 1.6 percent in the 12 months through January. The gains in PPI last month largely reflected increases in the prices of commodities such as crude oil.

National Security Adviser Michael Flynn resigned his position, apologizing to Vice President Mike Pence for misleading him about his conversations with Russia. Retired Army Lt. Gen. Keith Kellogg has been named as acting national security adviser in his stead.

In better news for the Trump administration, Steven Mnuchin was confirmed as U.S. Treasury secretary after winning a Senate vote 53-47. Mnuchin‘s  to-do list includes tax reform and how to handle economic cooperation efforts with China, Mexico and other trading partners.

Tens of thousands of Northern California residents are in shelters as engineers worked to shore up a crumbling overflow channel and drain the rain-swollen reservoir at the Oroville Dam before new storms sweep the region. Residents below the dam were ordered from their homes on Sunday when an emergency spillway that acts as an automatic overflow channel appeared on the brink of collapse from severe erosion.

Aetna ended its $37 billion takeover of Humana, after deciding not to appeal a ruling by a federal judge who blocked the health insurers’ combination on antitrust grounds. The companies came to a mutual agreement to terminate the deal, and Aetna will pay Humana a $1 billion breakup fee, or about $630 million after taxes.

Cigna and Anthem filed the paperwork to terminate their proposed merger. Then Cigna filed suit against Anthem, seeking a $1.85 billion reverse termination fee and more than $13 billion in additional damages, which includes the amount of premium Cigna shareholders did not realize.

Hologic said it would acquire medical aesthetics company Cynosure for $1.65 billion. The deal comes a day after Botox maker Allergan said it would buy Cynosure’s rival Zeltiq Aesthetics for about $2. 5 billion. Cynosure makes products used in non-invasive body contouring, hair removal, skin revitalization and women’s health.

Restaurant Brands International, owner of the Burger King and Tim Hortons fast-food chains, has approached Popeyes Louisiana Kitchen about a possible acquisition. Popeyes shares jumped 14 percent in New York. Restaurant Brands and Popeyes have yet to agree on a deal price, and there is no certainty that negotiations will continue.

PSA Group, the French automaker of Peugeots and Citroëns, said it was in discussions about a potential acquisition of the European brands Opel and Vauxhall from General Motors. PSA and GM already produce some vehicles together.

A South Korean special prosecutor’s office is seeking an arrest warrant for Samsung leader Jay Y. Lee. He was questioned for 15 hours yesterday as part of an investigation into a graft scandal that could topple President Park Geun-hye. In January, the special prosecutor wanted to arrest Lee for paying bribes to win the state pension fund’s support for the merger of Samsung C&T and Cheil Industries.

Japan’s Toshiba said its chairman will step down, and the company booked a $6.3 billion write-down to its US nuclear unit, a write-down that wipes out its shareholder equity and will drag the group to a full-year loss.  Toshiba rattled investors by failing to release its earnings on schedule, saying initially it was ‘not ready’ and then announcing later it needed more time to probe its Westinghouse nuclear business after internal reports uncovered potential problems.

Credit Suisse announced a big loss –  $2.3 billion – when considering the $5.3 billion settlement with the US Justice Department tied to its dealing in mortgage-backed securities in the period leading up to the financial crisis. Credit Suisse says it will eliminate up to 5,500 jobs in 2017.

Phoenix-based Freeport McMoRan is cutting production at the world’s second-largest copper mine in Indonesia. That follows new restrictions on copper concentrate exports imposed by that country.

T-Mobile, the No.3 U.S. wireless carrier, reported quarterly profit and revenue above estimates as promotional offers helped add more subscribers. The company has been gaining share from bigger rivals Verizon and AT&T in an over-saturated U.S. wireless market. T-Mobile had several promotional offers in the fourth quarter, including a free iPhone 7 offer with eligible trade-in.

Apple closed on Monday at $133.29 a share, surpassing its record closing high price of $133, set in February 2015. That was enough to push the market cap above $700 billion. The stock is up more than 15 percent in 2017, gaining nearly $100 billion in market cap in just six weeks. It’s also just points away from a split adjusted price of $1,000 a share.

Perhaps what’s even more impressive is the move from its 52-week low in May. The stock has rallied nearly 50 percent and gained more than $200 billion in market cap in just nine months. There is speculation Apple will soon come out with big updates for the iPhone 8, which would also coincide with a 10^th anniversary of the iPhone. Strong sales of the iPhone 6S two years ago, have left a larger-than-normal base of customers ready to upgrade. Guesstimated launch date is September.

Also hitting a new high today, a much smaller company called Lumentum, whose core business is optical communications, late today the company reported mixed fiscal Q2 results and guidance. They also recorded their first 3D sensing consumer revenues, which might be part of an order for final qualification to provide 3D sensing for the new Apple iPhone 8, which will probably include a 3D-sensing module to enable augmented-reality applications. There is no confirmation on an Apple deal just yet.

Financial Review

T Minus One

Sinclair Noe — January 19, 2017

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

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DOW – 72 = 19,732
SPX – 8 = 2263
NAS – 15 = 5540
RUT – 12 = 1345
10 Y + .07 = 2.46%
OIL + .33 = 51.41
GOLD + .50 = 1204.50

The Dow Industrials erased its gains for 2017 as it fell for the fifth day in a row. The Russell 2000 also turned negative year to date.

The European Central Bank left its quantitative-easing program unchanged at €60-billion-euro per month. Policy makers also kept the main refinancing rate at zero and the deposit rate at minus 0.4 percent.

There is little sign that the Governing Council is ready to endorse more hawkish language just yet, even after a jump in inflation to 1.7 percent in Germany. The U.S. dollar rose against its major rivals, recovering off earlier weakness after ECB President Mario Draghi said he didn’t see any “convincing” pickup in Eurozone inflation.

The ECB’s renewed commitment to stimulus comes a day after Federal Reserve chair Janet Yellen said the American economy is strong enough to warrant higher interest rates.

Trump’s pick for Treasury Secretary Steve Mnuchin began his confirmation process today. Meanwhile, Energy Secretary-designate Rick Perry also went before lawmakers. Trump has chosen former Georgia Gov. Sonny Perdue to lead the Department of Agriculture, rounding out the president-elect’s Cabinet selections.

The Senate has not scheduled a single confirmation vote for Trump’s Cabinet.

On Wednesday, retired Defense Secretary designate General James Mattis became the first nominee to win approval at the committee level.  Senate Republicans still hope to confirm members of Trump’s national-security team on Friday, and the likeliest to receive votes are Mattis, retired General John Kelly as homeland security secretary, and Representative Mike Pompeo as CIA director.

Elaine Chao, the nominee for transportation secretary, could also win Senate approval on Friday. So could Ben Carson, Trump’s pick for housing secretary, though he is considered less likely to get a Friday vote. None of the five have generated significant opposition from Democrats, and all of them sailed through their confirmation hearings last week.

Trump may have more luck with the Senate than his immediate predecessors, and he has Democrats to thank. When they held the majority in 2013, they changed the rules so that executive-branch nominations are no longer subject to the 60-vote threshold for filibusters. That means Trump could conceivably win Senate approval of his entire Cabinet without a single Democratic vote.

In rally after rally, and speech upon speech, Donald Trump built a verbal skyscraper of campaign promises about what he would do on his first day in the White House. Begin building a wall at the nation’s southern border. End the “war on coal.” Label China a currency manipulator. The list went on and on. Tomorrow is Day One.

During a break in inauguration festivities, Trump is poised to wield one of the most powerful tools of his office, the presidential pen, for executive actions that can be implemented without the input of Congress. Trump’s advisers vetted more than 200 potential executive orders for him to consider signing on healthcare, climate policy, immigration, energy and numerous other issues, but it was not clear how many orders he will initially approve.

The number of workers being laid off each week has plunged again back to a more-than-40-year low. Initial jobless claims sank by 15,000 to 234,000 in the week ended Jan 14, just a hair above the post-recession low. Initial claims have been under 300,000 for 98 straight weeks, a streak last replicated in 1970 and one that shows no sign of ending.

Arizona’s seasonally adjusted unemployment rate decreased two-tenths of a percentage point from 5.0% in November to 4.8% in December. The U.S.  unemployment rate stands at 4.7% in December. A year ago, the Arizona unemployment rate was 5.9% and the U.S. rate was 5.0%.

Arizona gained 6,300 jobs in December; breaking that down, 10,900 new jobs in the private sector, minus 4,600 jobs cut from government. Arizona employment grew by 1.2% (32,000 jobs) for the year. The Private Sector accounted for 33,100 jobs (1.4%). Government employment declined by 1,100 jobs. The sectors with the largest gains included Education and Health Services (14,300 jobs); Leisure and Hospitality (10,300 jobs); and Construction (6,300 jobs).

Builders broke ground on more homes in December, as confidence in the economy and demand for properties stays strong. Housing starts ran at a seasonally adjusted annual pace of 1.23 million in December, 11.3% higher than in November but about flat compared to the year-ago rate.

The federal control board overseeing Puerto Rico’s finances might accept a revised fiscal plan by Feb. 28 and extend a debt moratorium until May 1, which would give the U.S. territory more time to negotiate restructuring deals. Both requests will be taken up later this month, but would be conditioned on the government agreeing to turn over more financial information and not taking on extra liquidity loans.

A court in South Korea turned down prosecutors’ request to arrest Samsung’s Jay Y. Lee on alleged bribery, perjury and embezzlement, letting him stay in place atop the country’s most powerful company while they continue their investigation.

The de facto head of the Samsung Group and vice chairman of Samsung Electronics is being investigated for allegedly providing tens of millions of dollars to benefit a close friend of South Korean President Park Geun-hye in exchange for approval of a merger between two Samsung affiliates. The deal helped Lee consolidate control over the sprawling conglomerate founded by his grandfather.

Brazilian Supreme Court Justice Teori Zavascki was killed in a plane crash today. Zavascki was overseeing a massive corruption investigation related to the state oil company, Petrobras. Dozens of politicians and some of Brazil’s wealthiest businessmen have been arrested as part of the inquiry, known as Operation Car Wash, over the past two years. The political crisis triggered by the Petrobras investigation eventually led to the impeachment of President Dilma Rousseff in September, on unrelated charges.

The US Justice Department announced a deal with a $5.28 billion settlement with the Swiss banking giant Credit Suisse, for misleading investors in residential mortgage-backed securities it sold in the run-up to the 2008 financial crisis. Credit Suisse will pay a $2.48 billion cash penalty and provide $2.8 billion in consumer relief, including loan forgiveness and financing for affordable housing.

Credit Suisse has admitted that between 2005 and 2007 it knowingly deceived investors in the sale of complex securities derived from residential mortgages. Credit Suisse employees knowingly packaged poor quality loans for sale, referring to them in some instances as “utter, complete garbage” and “complete crap.”

Goldman Sachs is considering moving 1,000 workers in its London offices to Frankfurt because of concerns over Britain’s vote to leave the EU. Yesterday, UBS said that about 1,000 of the bank’s 5,000 employees based in London may be affected by Brexit, while HSBC announced it could relocate 1,000 staff to Paris.

American Express reports quarterly profit fell 8.2 percent to $825 million, or 88 cents per share, from 89 cents per share, a year earlier. Total revenue fell to $8.02 billion from $8.39 billion last year.

IBM forecast full-year earnings above Wall Street estimates and reported better-than-expected quarterly revenue, helped by growth in newer areas such as cloud-based services and analytics. Still, IBM’s revenues declined for the 19^th straight quarter.

We’ve often heard we should be smart consumers when it comes to health care; we should shop for the best prices on things like medicine. So, here is a test. Suppose your family needs the EpiPen for emergency allergy treatment.

Mylan makes EpiPen but they raised the price more than 500% to $609 list price for a two-pack of the lifesaving treatments; that prompted a hearing in Congress last September.  In response, Mylan began selling an authorized generic for about $300 for a two-pack.

Last week, CVS Health Corp. said it would sell a twin-pack of the Adrenaclick auto-injector, from Impax Laboratories Inc., for $110, and offer a $100 discount for low-income families.

Today, privately held Kaleo, the maker of the Auvi-Q injectors, said it would list a twin pack for $4,500. But there is a twist. Kaleo, Auvi-Q’s manufacturer, will charge patients who have commercial insurance $0 for the product, if the insurance company pays for it.

That means that for insured patients, Auvi-Q would be the cheapest option. It will also give the product away to families with an income of less than $100,000. For those paying cash who do not qualify to get Auvi-Q for free, the product will cost $360.

If all this sounds like a big pricing scam concocted in the laboratories of Drs. Jekyll and Moreau, well, that is a possibility.

Paul McCartney sued Sony’s music-publishing division seeking a judgment validating his efforts to take back his copyrights in Beatles songs he mostly co-wrote with John Lennon.

McCartney began serving termination notices to Sony/ATV Music Publishing in 2008, intending to reclaim his copyright interests in the music catalog, composed between 1962 and 1971. The termination notices, which McCartney wants the court to validate, are supposed to take effect starting in October 2018.

Financial Review

Bad Optics

Sinclair Noe — January 3, 2017

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

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DOW + 119 = 19,881
SPX + 19 = 2257
NAS + 45 = 5429
RUT + 8 = 1365
10 Y + .01 = 2.45%
OIL – 1.23 = 52.49
GOLD + 7.30 = 1159.20

Stock markets all over the world opened 2017 with a bang. An upbeat Chinese manufacturing report helped spark a 1% gain for the Shanghai Composite, and Italy’s MIB (+1.7%) pushed an advance in Europe. On Wall Street, we started with a 160-point jump at the open, slowly but surely giving back part of the pop. And everyone is wondering whether the year-end breakout will continue.

If you have your S&P 500 chart open you might want to draw some channel lines over the past year; the bottom boundary would be marked by lows set June 27 following the Brexit vote – to November 4 and the US election; the upper boundary is marked by three distinct drives to highs in April, August, and December.

We are currently near that upper boundary; meaning we will need to see a break above 2277 for the bulls to keep running. The presumption is that we see a drop back to the lower channel line just above 2100, which has been a strong level of support over the past 2 years. This is not to say we will drop to that level, just that the market is looking at that level, respecting that level.

That’s the technical side of the outlook. On the fundamental side, take another chart of the S&P 500, overlay it on top of the Federal Reserve’s balance sheet and note the similarity. The Fed has a history of causing major market crashes by hiking interest rates. With interest rates near all-time lows in the history of the United States, rates have almost nowhere to go but up.

Yellen said they intend to hike three more times in 2017. It would be nearly miraculous if the Fed can raise rates gently and without doing harm. And if the path forward for the economy gets rough, the Federal Reserve has no room to lower interest rates to jump start the economy. Negative rates over in Japan and Germany have not helped resuscitate their economies.

The three best decades for stock markets were the 1920s, the 1980s, and the 1990s. The Fed was not able to slow those markets gently, rather the markets crashed. In all other past cases, the Fed had plenty of room to reduce interest rates.

The $64,000 question for the bond market might be – when and how will the Federal Reserve adjust its holdings of US Treasuries and mortgage-backed securities. Do they stop reinvesting interest and principal payments or go straight to selling issues?

I really don’t want to sound bearish. Two weeks into 2016 the broadcast and print media were calling for a bear market; once again sounding foolish. I fully expect the S&P to make a run at new highs and the Dow Industrials will make another push to break through 20,000. Still, I am not sanguine at these levels. The only constant is change, and that means 2017 will offer many unexpected surprises and opportunities.

The dollar is flying. The US dollar index trading higher, moving above 103, at its best level since the end of 2002. The euro slipped below 105 and seems like it wants to find parity with the dollar. Yields were screaming higher across Europe, where the UK 10-year is up 9 basis points at 1.33%.

Bonds saw heavy selling early with yields across the Treasury curve moving higher, then pared losses throughout the session.

Meanwhile, crude oil prices topped $55 a barrel following confirmation that both Kuwait and Oman have lived up to their promises to cut production, but oil prices slipped – maybe because of the strong dollar, maybe because non-OPEC Libya is increasing output, maybe because the oil rig count in the US was up, maybe because of a strong report on manufacturing.

The Institute for Supply Management said its manufacturing index climbed to 54.7% in December from 53.2%. Any number above 50% signals expansion. The overall economy has been growing for 91 consecutive months, and the manufacturing sector hit a 2-year high, finishing the year on a positive note.

Corelogic reports home prices rose 7.1% year over year. On a month-over-month basis, home prices increased by 1.1% in November. Corelogic forecast an increase of 4.7% year-over-year in November 2017. In Arizona, the Home Price Index increased 0.6% for November; up 5.8% in the past 12 months through November, with a forecast of 6.2% growth over the coming year. Still, home prices in Arizona remain 21.4% below peak values.

Construction spending rose to its highest level in 10-1/2 years. The Commerce Department said construction spending increased 0.9 percent to $1.18 trillion, the highest level since April 2006. It was boosted by gains in both private and public sector investment.

Spending on private construction projects jumped 1.0 percent in November to its highest level since July 2006 as single-family home building, as well as home renovations, increased. Investment in private nonresidential structures – which include factories, hospitals and roads – rose 0.9 percent after dropping 1.5 percent the prior month.

Public construction spending gained 0.8 percent in November to the highest level since March. It was the fourth straight month of increases.

The 115th Congress was sworn in today, and Republicans continue to oversee both legislative houses. The House Republican Conference voted Monday night to approve a change to House rules to weaken the independence of the Office of Congressional Ethics and place it under the oversight of the House Ethics Committee – a panel controlled by party leaders.

They planned to vote on the measure today – what would have been the first vote of the new Congress – what would have been a textbook definition of bad optics. Not surprisingly, there was broad criticism of the move to gut the independent ethics office, including from President-elect Trump, who tweeted that House Republicans should focus on more important policy, even though he called the ethics watchdog “unfair”.

President-elect Donald Trump took aim at General Motors for making the Chevrolet Cruze sedan in Mexico. Trump slammed GM on Twitter for (quote) “sending Mexican-made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!”

A month ago, GM CEO Mary Barra agreed to join a panel of CEOs who will advise Trump on economic policy. The U.S. auto industry has defended NAFTA as critical to its business model, but Trump has described the deal as venomous to American jobs.

This is not the first-time Trump has gone after a carmaker for offshoring jobs. During the final weeks of the presidential campaign, Trump slammed what he called Ford’s “horrible” plans to move all small car production to Mexico within three years.

And today Ford said it will cancel production of a $1.6 billion plant in Mexico, and will instead invest $700 million in Flat Rock, Michigan; adding 700 direct new jobs to produce electric and autonomous vehicles, plus the Ford Mustang and Lincoln Continental.

Ford had originally planned to build its Ford Focus in San Luis Potosi, Mexico. The company said it will continue to build its Focus at an existing plant in Hermosillo, Mexico. Ford CEO Mark Fields told CNBC that Trump wasn’t the main factor when Ford decided to cancel its plans for a $1.6 billion plant in Mexico, rather the decision not to move was due to market demand.

And that may be the case but you can also bet that Ford management is a better judge of bad optics than Washington politicians.

A “technology disruption” Monday evening left thousands of international travelers stuck in US airports for hours on one of the busiest travel days of the year. Don’t blame the airlines. A four-hour outage for U.S. Customs and Border Protection left angry passengers dealing with significant delays from South Florida to Boston to Los Angeles. All affected airports were back up and running by late Monday.

Samsung’s upcoming flagship Galaxy S8 smartphone could give users the ability to plug it into a screen and turn it into a desktop personal computer. The All About Windows Phone blog posted a leaked slide from a presentation showing a Samsung smartphone being connected to a screen with a keyboard and mouse. The slide is titled “Samsung Desktop Experience” and shows a phone powering a screen to create a multi-tasking interface. We might see the new phone in February.

SpaceX is preparing to resume rocket launches next Sunday, using revised operational procedures developed in response to a fiery accident that occurred during routine ground preparations last fall. SpaceX’s blastoff date is subject to results of testing later this week, WSJ reports, but if everything checks out, Iridium Communications will get the first 10 of its next-generation communications satellites into orbit.

Last year turned out to be a disappointing one for new drug approvals with the FDA clearing just 22 new medicines for sale, the lowest number since 2010 and sharply down on 2015’s tally of 45. Several factors led to the decline: Five new drugs that had been scheduled for approval in 2016 ended up winning an early green light at the end of 2015. There was also a decline in drugs being filed for approval and the FDA rejected or delayed more applications in 2016 than in the previous two years.

Many sufferers of type 1 or type 2 diabetes are bracing for changes in insurance coverage of their insulin as prices soar. CVS Caremark will no longer cover the insulin brand Lantus in favor of a new biosimilar version, Basaglar.

Biosimilars are considered the generic versions of “biologic” drugs that are based on natural sources. Prices for many insulin brands have increased from about $300 to $500 between January 2013 to October 2016, per drug discount search company GoodRx.

Retailers are bracing for a fresh wave of store closures at the start of the new year. Macy’s will close 35 to 40 under-performing stores, around 5% of its total locations in 2017

Financial Review

Dominoes on Edge

Sinclair Noe — December 6, 2016

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

Subscribe: iTunes | Android | RSS

DOW + 35 = 19,251
SPX + 7 = 2212
NAS + 24 = 5333
RUT + 14 = 1352
10 Y + .01 = 2.40%
OIL – .95 = 51.88
GOLD – .80 = 1170.20

Another record high for the Dow industrial average. This is starting to be old hat. Also, a record high for the Russell 2000 –  close but no cigar for the S&P. Still, it looks like the stock market, at least the US stock market loves the idea of Trumponomics, at least for now.

The rest of the financial world – not so much.

The bond market certainly has not been happy. Government bond prices have unraveled. The yield on the benchmark 10-year Treasury note for example, surged from 1.6% at the end of September to 2.40% today. And there is the inverse relationship to price and yield; as yield moves higher prices moves lower, or in this case prices have cratered.

So, is the stock market or the bond market smarter when it comes to predicting what’s next for broader financial markets and the economy? Will inflation sour the growth outlook, and which market will reflect that sooner? Perhaps the biggest threat to financial markets right now is a sense of complacency.

The U.S. trade deficit jumped almost 18% in October as imports rose to the highest level in 14 months. The nation’s trade gap climbed to a four-month high of $42.6 billion. October imports increased 1.3% to $229 billion, marking the highest level since August 2015. The U.S. imported more drugs, computer accessories, cell phones and other consumer goods.

Exports, meanwhile, slipped 1.8% to $186.4 billion in October. That’s the smallest amount in three months. The decline in exports was largely related to fewer shipments of farm products such as soybeans and corn as well as petroleum and other industrial supplies.

Bankers are running out of private sector solutions for Banca Monte dei Paschi and have told the Italian lender to prepare for a state bailout this weekend after Matteo Renzi suffered a referendum defeat. Renzi will remain in his job as Prime Minister for at least a week; snap elections have not yet been called.

While financial markets responded relatively calmly, sources told the Financial Times that the political upheaval made it “more difficult” to secure a €1-billion-euro investment from Qatar on which Monte de Paschi’s €5-billion-euro capital-raising plan hinges. Shares in the bank have lost more than 85% in value this year. Plans by leading Italian banks to raise billions of euros from investors to boost their financial strength have been damaged by the outcome of Sunday’s referendum, a leading ratings agency said on Tuesday as it downgraded its outlook for the sector.

Fitch – which said it had a negative outlook on the Italian banking industry for 2017 – said profitability in the sector was already frail before the referendum. So, why no bank run in Rome? Well, Eurozone rules come into effect: first the shareholders lose, then bondholders get bailed in and their bonds are exchanged for stock, and then depositors above the deposit insurance level of €100,000 are forcibly converted to equity. Only then can the government step in with bailouts.

No idea who would buy all the newly converted stock, and without buyers, you have a bank run of sorts. And if you have a bank run of sorts in Italy, the German banks (specifically Deutsche Bank) start looking very, very dangerous. So, the idea that Italian banks are having a hard time finding private recapitalization brings up visions of dominoes on edge.

Despite approving a set of “short-term” debt relief measures, talks between Eurozone ministers and the IMF broke down on Monday with little headway having been made in resolving splits over Greece’s €86-billion-euro bailout. And it looks like the International Monetary Fund has abandoned the bailout program, at least until the Eurozone gives Athens more debt relief or Greece legislates more spending cuts.  The Greek government, facing a population worn down by years of austerity, has warned creditors not to push it too far.

Reaching a deal to cut production is one thing; getting an actual reduction in global output is another. Crude production from OPEC members is likely to have risen to a record 34.16 million barrels a day in November, with African members leading the gains.

Federal and Los Angeles officials said they had been alerted by authorities in another country to a “specific” threat against the city’s Red Line commuter rail system, prompting them to beef up security and alert the public. Los Angeles Police Chief Charlie Beck told a news conference, “This threat is imminent, … it is very specific, but the credibility still needs to be vetted.”

Amazon wants to automate grocery shopping. Amazon is testing a grocery store in downtown Seattle that lets customers walk in, grab food from the shelves and walk out again, without ever having to stand in a checkout line. Customers tap their cellphones on a turnstile as they walk into the store, which logs them into the store’s network and connects to their Amazon account through an app.

The service is called Amazon Go. It uses machine learning, sensors and artificial intelligence to track items customers pick up. These are then added to the virtual cart on their app. If they pick up an item they later decide they don’t want, putting it back on the shelf removes it from their cart. Amazon envisions opening more than 2,000 brick-and-mortar grocery stores under its name, depending on the success of the new test locations. Target and Walmart plan to expand a service that lets shoppers order online and pickup curbside to 1,000 stores by the end of next year.

The Supreme Court ruled that Samsung’s violation of Apple’s smartphone design patents may involve only a component, rather than the entire product – a decision that means Samsung might not have to pay penalties reaching into the hundreds of millions of dollars. The justices reasoned that the patent infringement could affect just a component of the phones, such as their appearance, rather than all their capabilities.

The legal battle between the two tech giants represented the first design patent case to reach the high court in more than a century. A jury in 2012 had ruled that because Samsung infringed on three of Apple’s iPhone design patents, it must fork over the entire profits from the phones in question. Now the case will return to the U.S. Court of Appeals for the Federal Circuit to determine what portion of its profits Samsung must pay – a process several justices predicted will be difficult.

In a separate case, the Supreme Court sought to crack down on insider trading, ruling unanimously that tips passed between relatives and friends are illegal even if the corporate insider receives no financial benefit.

The decision marked the first time the high court had clarified what constitutes insider trading in nearly two decades, and it upended a legal standard set by a New York-based federal appeals court in 2014 that had made prosecutions more difficult. The decision was written by Justice Samuel Alito, saying: “Giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.”

Wall Street has been watching the case carefully for a sign of where the justices stand on the issue. The earlier case, which the high court refused to hear, made it almost impossible to obtain convictions unless prosecutors presented evidence showing the tipster received a direct benefit. The high court called that decision “inconsistent” with its precedents.

Requiring that insiders get rewarded didn’t sit well with most of the justices during oral argument in October. In some instances, Justice Stephen Breyer said, “to help a close family member is like helping yourself.” Federal prosecutors have used a 1983 rule, like the one agreed upon by the justices, to convict both corporate insiders and the people they tip off. Maintaining such a rule, Justice Elena Kagan said last month, was important to maintain “the integrity of the markets.”

A group effort? YouTube, Facebook, Twitter and Microsoft are stepping up efforts to remove extremist content from their websites by creating a common database that will be up and running in early 2017. The web giants will share “hashes” – unique digital fingerprints they automatically assign to videos or photos – of terrorist material to enable their peers to identify the same content on their platforms.

5G and its multi-gigabit cellular speeds probably won’t hit the market until 2020, but AT&T has started testing the technology inside of one of Intel’s offices in Austin, TX. The company is particularly interested in how the new network will stand up to streaming 4K video, but will also test a wide variety of uses, including VPN, VoIP, “unified communications applications” and good old internet access.

Equities Disagree on Direction Despite Deluge of Data

Charles Schwab: On the Market

Posted: 10/26/2016 4:15 PM ET

Equities Disagree on Direction Despite Deluge of Data

U.S. stocks finished mixed as upbeat results from Boeing lent some support to the divergent Dow, while a read on services sector activity growth accelerated more than expected. Crude oil prices finished lower after a brief spike following a bullish government oil inventory report. In other developments, corporate earnings results continued to roll in and new home sales missed expectations for September. Treasury yields advanced, gold was lower and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average (DJIA) increased 30 points (0.2%) to 18,199, the S&P 500 Index was 4 points (0.2%) lower at 2,139 and the Nasdaq Composite lost 33 points (0.6%) to 5,250. In moderate volume, 866 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.78 to $49.18 per barrel, wholesale gasoline ticked $0.02 lower to $1.47 per gallon and the Bloomberg gold spot price shaved $7.23 to $1,266.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was mostly flat at 98.70.

Dow member Apple Inc. (AAPL $116) reported fiscal 4Q earnings-per-share (EPS) of $1.67, one penny ahead of the FactSet estimate, as revenues declined 8.9% year-over-year (y/y) to $46.9 billion, compared to the expected $47.0 billion. Apple's 2016 revenues declined 7.7% y/y to $215.6 billion, the first annual sales decline since 2001. Shipments of iPhones and iPads both exceeded forecasts, while Mac shipments missed estimates. AAPL issued 1Q revenue guidance that topped forecasts, while its gross margin outlook came in a bit shy of expectations. Shares traded lower on the margin guidance and as analysts suggested that the company was not yet able to fully capitalize on Samsung Electronics Co. Ltd's (SSNLF $1,250) decision earlier this month to halt production and sales of its Galaxy Note 7 smartphone due to its batteries overheating and catching fire.

Dow component Boeing Co. (BA $146) posted 3Q EPS ex-items of $2.81, north of the projected $2.61, with revenues decreasing 8.0% y/y to $23.9 billion, exceeding the expected $23.6 billion. BA raised its full-year earnings and revenue guidance. Shares moved nicely higher.

Dow member Coca-Cola Co. (KO $42) announced 3Q profits of $0.49 per share, one cent north of estimates, with revenues declining 7.0% y/y to $10.6 billion, versus the forecasted $10.5 billion. KO noted that the U.S., Japan and Western Europe delivered standout performances. The company reaffirmed its full-year organic revenue guidance, while its EPS outlook had a midpoint that was slightly below expectations. KO traded slightly lower.

Comcast Corp. (CMCSA $63) reported 3Q EPS ex-items of $0.92, one penny above expectations, as revenues increased 14.2% y/y to $21.3 billion, compared to the forecasted $21.2 billion. Shares finished solidly lower.

New home sales miss forecasts, growth in services sector activity jumps

New home sales (chart) rose 3.1% month-over-month (m/m) in September to an annual rate of 593,000, but below the Bloomberg forecast of 600,000 units. The median home price increased 1.9% y/y to $313,500. The supply of new home inventory dipped to 4.8 months at the current sales pace. Sales surged in the Northeast m/m, and rose solidly in the South and Midwest, while sales in the West dropped. Compared to last year, sales in all regions were sharply higher. New home sales are based on contract signings instead of closings. For a look at investing in the real estate sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform, at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The preliminary Markit U.S. Services PMI Index for October rose to 54.8 from September's reading of 52.3, compared to forecasts of a modest rise to 52.5, with a reading above 50 indicating expansion. Markit said new order volumes rose at the quickest rate seen so far in 2016, while service providers reported the strongest business optimism since August 2015. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and its index components are weighted differently.

The MBA Mortgage Application Index decreased 4.1% last week, after rising 0.6% in the previous week. The decline came as the Refinance Index dropped 2.3% and the Purchase Index fell 6.9%. The average 30-year mortgage rate decreased 2 basis points (bps) to 3.71%.

The advance goods trade deficit unexpectedly shrank to $56.1 billion in September, from the downwardly revised $59.2 billion in August, versus projections calling for the deficit to widen to $60.5 billion.

Treasuries were lower, with the yield on the 2-year note increasing 2 bps to 0.87%, the yield on the 10-year note gaining 3 bps to 1.78% and the 30-year bond rate advancing 4 bps to 2.54%. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her latest article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Tomorrow, the U.S. economic calendar will begin with a look at manufacturing demand with the September durable goods orders report, projected to show no change m/m, while the ex-transportation component is forecasted to rise 0.2% m/m and nondefense capital goods orders excluding aircraft—a gauge of business spending—is expected to dip 0.1% after August's solid 0.9% gain. Also prior to the open, we will receive weekly initial jobless claims, anticipated to decrease by 5,000 to a level of 255,000. Once trading commences the docket will deliver pending home sales, expected to have risen 1.0% m/m in September, and the Kansas City Fed Manufacturing Index, forecasted to decline to 3 during October from the 6 registered the month prior, though a reading above zero denotes expansion in manufacturing activity.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Vertigo: Effect of Spiking Healthcare Costs on Consumers, households remain in relatively good shape, with wages and incomes rising and debt levels/debt servicing costs low. But this upward pressure on inflation bears watching. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

With political uncertainty festering as the November election looms, Schwab's Vice President, Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Final Clinton-Trump Debate Sets Up a Sprint to the Finish Line, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles. Be sure to follow Schwab on Twitter: @schwabresearch.

Europe and Asia mostly lower

European equities finished lower, with basic materials issues leading the way, along with energy issues as crude oil prices continued to see pressure following a short-lived recovery on some bullish U.S. government oil inventory data. Sentiment was hampered by some lackluster earnings results on both sides of the pond. Results from the financial sector in the region were mixed, while German consumer confidence unexpectedly dipped for November. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscape at www.schwab.com/oninternational and follow Jeff on Twitter: @jeffreykleintop. The global markets continued to grapple with uncertainty toward the monetary policy and political fronts. The euro and British pound moved higher versus the U.S. dollar, while bond yields in the region gained ground.

Stocks in Asia finished mostly to the downside as the global markets grapple with ramped up earnings season, with a plethora of mixed reports yesterday leading the U.S. markets lower, while the continued pressure on crude oil prices hampered the energy sector. Equities trading in mainland China and Hong Kong decreased with energy issues seeing pressure, while Indian stocks traded lower amid concerns about loan-loss provisions in the banking sector. South Korean securities decreased as local reports of travel agencies in China being told to reduce the number of tourists visiting South Korea weighed on the market, per CNBC. Australian equities fell on the weakness in oil & gas issues and as a hotter-than-expected read on the nation's consumer price inflation hamstrung sentiment.

However, Japanese stocks bucked the trend amid some upbeat earnings results as the nation's reporting season gears up to overshadow some recent strength in the yen. For analysis of earnings and the stock markets, Schwab's Jeffrey Kleintop, CFA, offers an outlook for the stock markets and earnings growth in his latest article, Three Reasons Stocks May Avoid Another Lost Decade, at www.schwab.com/marketinsight.

Tomorrow's international economic calendar will yield industrial profits from China and trade data from Australia. Reports from across the pond will include advance 3Q GDP and the Index of Services from the U.K. and consumer confidence and wage data from Italy.

Financial Review

Fed Talk & Earnings

Sinclair Noe — October 17, 2016

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

Subscribe: iTunes | Android | RSS

DOW – 51 = 18,086
SPX – 6 = 2126
NAS – 14 = 5199
10 Y – .03 = 1.76%
OIL – .31 = 50.04
GOLD + 3.90 = 1,260.50

Kurdish forces advanced on villages near Mosul, the start of a campaign to reclaim Iraq’s second-largest city from Islamic State militants who seized it more than two years ago. U.S. warplanes are providing air support for the operation, which involves nearly 30,000 Iraqi and Kurdish troops.

Government bond yields climbed around the world after Friday’s comments by Federal Reserve Chair Janet Yellen fueled bets that U.S. policymakers may be prepared to tolerate faster inflation in the interests of a more emphatic economic recovery.

By the middle of next year, Federal Reserve Bank of Boston President Eric Rosengren says he expects unemployment to fall to 4.7 percent and inflation to beat the Fed’s 2 percent target, leaving policymakers at risk of having to squelch the recovery with faster-than-expected rate increases. Rosengren said: “If you wait too long … the more likely you are going to have to do it more quickly … The less likely you are to calibrate it just right.”

The result: a jobless rate that might dip to an ultra-low level, but then force the Fed to risk a recession with faster increases. Rosengren argues the Fed might instead engineer a soft landing that brings the economy to full employment and “we would basically stay there.”

Fed Vice-Chair Stanley Fischer spoke this afternoon at the Economic Club of New York; Fischer suggested that low rates can lead to longer and deeper recessions, making the economy more vulnerable. He added they can also threaten financial stability, although the evidence so far doesn’t show a heightened threat of instability.

His remarks contrasts with those of Fed Chair Janet Yellen on Friday, when she suggested that the Fed may want to run a “high-pressure economy” with low interest rates. Fischer said technology and demographics are contributing to low rates, but are out of the Fed’s control. Fischer said other reasons contributing to weak growth include productivity and labor force growth, an aging population, weak investment and weak foreign growth.

It is probably worth noting that the Fed does not have a great track record of preventing recessions or bear markets. The Fed seems to be pretty good at creating bubbles, not so much at preventing the aftermath. Booms lead to busts and the Fed has not been able to repeal the business cycle.

Wall Street investors now place a 67% chance of a Fed rate hike in December. Today, Treasuries rebounded from a four-month low and the dollar fell after mixed economic data bolstered the case for accommodative monetary policy. Oil declined.

Output at U.S. manufacturers rose for the third time in four months on production of consumer goods and construction materials, a sign the industry is recovering from a prolonged spell of weakness. The 0.2 percent gain at factories, which make up 75 percent of production, followed a 0.5 percent decrease the prior month.

A rebound in manufacturing and mining output was offset by surprisingly weak demand for utilities. In September, mining production rose 0.4 percent as gains in oil and gas well drilling offset a drop in crude oil extraction. That left mining output rising at a 3.7 percent rate in the third quarter following six consecutive quarterly declines.

Energy services firm Baker Hughes reported on Friday oil firms increased drilling rigs last week for the 16th straight week. So, in case you were wondering, oil prices around $45 to $50 a barrel is the level where US drillers pump up their production. That doesn’t mean companies in the oil patch will turned profitable in the third quarter; Oilfield service providers Halliburton and Schlumberger are expected to reported significantly lower earnings (or even losses) later this week.

More than 80 companies in the S&P 500 are set to report earnings this week, according to Thomson Reuters. So far, 34 companies have reported third-quarter results and 62% have topped forecasts, just above the long-term “beat” average of 59%. Earnings of S&P 500 companies are expected to have dipped 0.4 percent in the third quarter, according to Thomson Reuters data.

Bank of America’s third-quarter profits rose nearly 6 percent from a year earlier, helped by strong results in investment banking and trading, as well as lower expenses. BofA earned $4.4 billion in the three months ending in September, up from $4.1 billion in the same period a year earlier. The per-share figure rose to 41 cents versus 38 cents a year ago, easily beating the 34 cents per share analysts were expecting. While revenue was relatively flat year over year, the bank managed to cut expenses.

Management at Deutsche Bank has discussed cutting back investment-banking operations in the US to save money. Reducing US operations could be part of a deal with the US Department of Justice over mis-selling of mortgage-backed securities in the run-up to the 2007 US housing crisis. This is devastating news for the 3 or 4 people who actually wanted to apply for a job with Deutsche Bank.

Financial shares have been a decent performer in the past month, up about 1%, but year-to-date the financial ETFs have been the second worst performers.

At the closing bell, Netflix reported earnings, more specifically Netflix crushed earnings. Third quarter earnings per share came in at .12 cents compared to estimates of .06 cents. Revenue jumped 36% to $2.29 billion. US subscriber growth grew to 370,000, beating estimates of 300,000. International subscriber growth came in at 3.2 million, beating estimates of 2 million. Shares popped about 20%.

IBM reported its smallest drop in quarterly revenue in more than four years, helped by continued growth in the company’s cloud and analytics businesses. Revenue fell to $19.23 billion from $19.28 billion a year ago. Net income fell to $2.85 billion, or $2.98 per share, from $2.95 billion, or $3.01 per share.

IBM is betting on Watson, its artificial intelligence technology, to help it expand, employing about 10,000 workers on the project and investing billions of dollars. The company does not report separate financial results for Watson, but UBS estimates that it may generate $500 million in revenue this year and grow rapidly, nearing $17 billion by 2022.

Intel, Yahoo, and Goldman Sachs release earnings results tomorrow, and Morgan Stanley on Wednesday.

Minneapolis-based grocery chain Supervalu has reached a deal to sell grocery discount chain Save-A-Lot to a private equity investor. Onex Corp. agreed to pay $1.4 billion in cash for Save-A-Lot, which owns 472 stores and licenses naming rights and supplies another 896 locations. Supervalu, which has 3,342 stores, including the Save-A-Lot locations, said it would use the cash from the transaction to pay down debt.

Apple has drastically scaled back its automotive ambitions, leading to hundreds of job cuts and a new direction that, for now, no longer includes building its own car. Hundreds of members of the car team, which comprises about 1,000 people, have been reassigned, let go, or have left of their own volition in recent months. Apple executives have given the car team a deadline of late next year to prove the feasibility of the self-driving system and decide on a final direction.

Tesla Motors said it would collaborate with Panasonic to manufacture solar cells and modules in New York. Under the agreement, which is a non-binding letter of intent, Tesla said it will use the cells and modules in a solar energy system that will work seamlessly with its energy storage products Powerwall and Powerpack. Panasonic is already working with the U.S. automaker to supply batteries for the Model 3, its first mass-market car. Panasonic is expected to begin production at the Buffalo facility in 2017.

Samsung Electronics said its system chips business has started mass production of semiconductors using 10 nanometer technology, adding it was the first company in the industry to do so. Samsung said in a statement a tech product launching early next year will use chips made with its 10-nanometre production technology without specifying the device.

Chemical companies including Honeywell and Chemours are ramping up efforts to produce alternative coolants used in air-conditioners and refrigerators, following a global pact to reduce planet-warming greenhouse house gas emissions.

On Saturday, some 150 nations struck a global agreement in Kigali, Rwanda, on ways to phase down hydrofluorocarbon (HFC) gases, which are currently used in air-cooling systems and refrigerators, and help curb the release of climate-warming emissions. As per the agreement, developed countries such as the United States have to move first to reduce HFCs. Equipment manufacturers will switch to making systems with alternative coolants as chemical makers produce new HFC substitutes.

Honeywell began developing HFC alternatives as far back as 2000 and has invested $500 million to date. The company has committed $900 million in total. Chemours, which was spun off from DuPont Co in 2015, said in May it will invest “millions of dollars” to set up a new plant to produce an auto refrigerant substitute in Texas.

Twitter has lost another potential buyer after Salesforce chief executive Marc Benioff said the company does not intend to bid for the social firm, marking yet another potential high-profile buyer turning its back on the site. Salesforce follows Google and Disney in walking away from Twitter, which at one point appeared to be in the middle of a potentially lucrative bidding war.

However, investors will now wonder whether any company will buy Twitter, which has struggled to grow or generate much revenue, especially when compared with rival Facebook, despite its sizeable and loyal user base.