Financial Review

Call It Neutral

Sinclair Noe — April 10, 2017

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

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DOW + 1 = 20,658
SPX + 1 = 2357
NAS + 3 = 5880
RUT + 2 = 1367
10 Y – .01 = 2.36%
OIL + .91 = 53.15
GOLD + .60 = 1255.40

Fed Chair Janet Yellen held a Q&A session today at the University of Michigan. Yellen said the Fed’s task has shifted from a post-crisis exercise of healing the economy to one aimed at sustaining progress.

Yellen said, “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could.”  Now, she says the Fed is trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.

The appropriate stance of policy now is closer to, let me call it neutral.” That still likely means two more rate hikes this year. Minutes of their March meeting showed that most Fed officials also expect to begin shrinking the bank’s $4.5 trillion balance sheet later this year, gradually reversing emergency bond purchases made during the financial crisis and recession.

In last week’s minutes, the Fed policymakers warned that stock prices were on the high side, specifically saying: “Broad equity price indexes rose further, leaving some standard measures of valuations above historical norms.” And, “some measures of valuations, such as price-to-earnings ratios, rose further above historical norms.”

Now, the Fed is not known for its stock picking or timing skills, but this week the proof is in the putting as earnings season kicks into gear. Earnings of S&P 500 companies are estimated to have risen 10.1 percent in the first three months of the year. The index is currently trading at 17.4 times forward earnings estimates, above its long-term average of 15, according to Thomson Reuters I/B/E/S.

JPMorgan, Citigroup and Wells Fargo are scheduled to report earnings on Thursday. The financial sector has been a darling performer since the election on anticipation of deregulation and tax reform policies that have yet to materialize; so, look for the focus to shift to earnings.

Wells Fargo’s board of directors has released its investigation into the bank’s recent fraudulent-accounts scandal, pinning blame primarily on two former executives. According to the report, Wells Fargo’s board will claw back $28 million in pay from former CEO John Stumpf and $47.3 million from former head of community banking Carrie Tolstedt for their roles in the scandal.

The board determined that Stumpf and Tolstedt did not do enough to address the culture at Wells that set quotas for bank employees to open as many as 2 million credit card and retail banking accounts for customers from 2011 to 2015 without their knowledge. According to the report, Stumpf was aware of individual issues as far back as 2002 but did not become aware of the systemic nature of the problem until 2012.

Even when he did become aware, the board said, Stumpf did not do enough to address the issues.

Today’s report also referenced an internal Wells Fargo report prepared 12 years ago, in 2004 which foretold the fake account scandal. That investigation, titled “Gaming,” warned that Wells Fargo employees had an “incentive to cheat” that was “based on the fear of losing their jobs.” It said that workers felt they couldn’t meet the bank’s unrealistic sales goals “without gaming the system.”

With the newly announced clawbacks, Wells Fargo has taken back nearly $183 million from Stumpf, Tolstedt and other executives. Wells Fargo has been fined $185 million by regulators and been the subject of two congressional inquiries.

Until as late as 2015, even as sales practices were labeled a “high risk” in materials provided to the board of directors’ risk committee, there was a general perception within Wells Fargo’s control functions that sales abuses were a problem of relatively modest significance. The report published today did not seem to recognize a failure on the part of the Board of Directors – no clawbacks there.

And it doesn’t look like the money in fines and clawbacks will do much to compensate the victims of Wells Fargo fraud, specifically the customers and the employees who tried to blow the whistle only to be fired for their efforts to be honest.

We’ve told you about the Libor Rate Rigging scandal, where various traders manipulated the daily fix on the London Interbank Offered Rate, which affects trillions of dollars of transactions around the globe; everything from mortgage loans to credit card rates to complex derivatives. The scandal rocked the financial industry when it was uncovered in 2012.

Now the BBC has released an audio recording that implicates the Bank of England, the central bank, of rate manipulation. According to the recording, The Bank of England repeatedly urged commercial banks to lower their Libor settings during the financial crisis. The BOE has consistently said it wasn’t aware of the Libor manipulation until years after the rigging happened.

In response to the BBC findings, the central bank noted that Libor and other global benchmarks weren’t regulated in the U.K. or elsewhere during the period in question. The rate-rigging scandal first came to public attention in 2012 when an international investigation revealed that several major banks colluded to manipulate Libor.

The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England. At the time, both said that they had only recently become aware of rate manipulation.

Meanwhile, Barclays CEO Jes Staley is in hot water. Staley is a veteran American banker and took the helm at Barclays in December 2015. He pledged to overhaul Barclays’ culture, which had been in the spotlight due to the bank’s involvement in rigging Libor, for which it was ordered to pay a fine of nearly £290 million-pounds.

Staley is accused of twice attempting to use Barclay’s internal security team to track down the authors of two anonymous letters. On the second occasion the security team received assistance from a US law enforcement agency, but still failed to identify the individual.

The whistle-blowing saga began in June 2016 when the board of Barclays received an anonymous letter and a senior executive received a second letter. These letters made allegations about a senior employee who had been recruited by the bank earlier that year. Staley has apologized for his actions and faces a significant cut in his bonus.

Swift Transportation and Knight Transportation are merging in a stock-swap deal, creating a company with a market value of more than $5 billion. Shareholders of Swift will own 54 percent of the new entity and Knight shareholders the rest after the deal closes.

The two companies earned about $5.1 billion in total revenue and $416 million in adjusted operating income last year. The companies expect to achieve about $15 million in cost-saving synergies and pretax revenue in the second half of 2017, and up to $150 million in 2019.

The companies, both based in Phoenix, have a shared history – Jerry Moyes started Swift in 1966, while Randy Knight, who was a part-owner of Swift – founded Knight Transportation along with three cousins in 1990.

Knight’s executive chairman, Kevin Knight, will assume the same title at the new company. Moyes, who retired as co-CEO of Swift last year, will become one of the directors of the new company. The Jerry Moyes family, however, will own about 24 percent of Knight-Swift. The deal will create the largest truckload operator in North America.

AT&T announced it would buy Straight Path Communications, a holder of licenses to wireless spectrum, for $1.25 billion in an all-stock deal as it aims to accumulate the airwaves it needs for a 5G network. AT&T’s offer represents a 162% premium to Straight Path’s closing price on Friday.

After a partisan fight so deep it forced the Senate to go “nuclear” to confirm him, Neil Gorsuch was sworn in as the nation’s newest Supreme Court justice, filling the seat left vacant when Justice Antonin Scalia died last year. In the final months of the Supreme Court’s current term, Gorsuch could break a potential 4-4 deadlock on cases involving religious freedom, racial discrimination, immigration, and other issues.

The court might also have to weigh in on Trump’s executive order restricting travel from majority-Muslim countries. And in the next few years, the justices are expected to consider new cases involving same-sex marriage, abortion, and gun rights.

Toyota said it would invest more than $1.3 billion in its Georgetown, Ky., plant, its largest factory in the world. Although the investment does not include new jobs, the move signals a deepening commitment to the U.S. market.

The 7.5 million-square-foot Kentucky plant makes several vehicles, including the Camry sedan, which Cars.com has dubbed the most made-in-America car in the U.S. based on an assessment of the car’s components. The plant currently has about 8,200 employees, having added 700 in recent months to launch the redesigned 2018 Camry, which was unveiled in January at the Detroit auto show. The investment adds to a $530 million project authorized in 2013 to make a new Lexus vehicle.

What’s the most valuable car company in the USA? No, it is not GM. At the end of January, short interest in Tesla made up about 35% of the float, or shares available for trading. Tesla was burning through cash and had only  delivered 76,230 vehicles in 2016, well below the 80,000 to 90,000 that Wall Street was expecting. General Motors sold about 10 million cars in 2016.

But a funny thing happened – Tesla shares have been moving higher, up 46% so far, this year, a fact that has caused billions of dollars of losses for those who have bet against it. Tesla now has a larger market capitalization than Ford or General Motors.

Financial Review

Uncertain

Sinclair Noe — February 6, 2017

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

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Financial Review by Sinclair Noe for 02-06-2017
DOW – 19 = 20,052
SPX – 4 = 2292
NAS – 3 = 5663
RUT – 11 = 1366
10 Y – .08 = 2.41%
OIL – .72 = 53.11
GOLD + 15.70 = 1236.20

Traders around the world seem uncertain about whether to buy or sell. European markets were mixed. Most Asian markets ended the day with gains. This follows a week where U.S. stocks dropped and then slowly climbed back up. The Dow Jones industrial average ended the week with a 0.1% dip. The S&P 500 and Nasdaq each edged up by 0.1% over the week.

Big business in the UK is starting to feel the pain from Brexit. An Ipsos Mori poll of senior executives at more than 100 of the top 500 companies in the UK found that 58% of businesses believe they are starting to feel the impact of the UK’s decision to leave the European Union.

A decision on a Scottish referendum is coming soon. When the U.K. triggers Article 50 to leave the EU, it might also trigger a fresh independence referendum. Scotland – one of the United Kingdom’s four nations along with England, Wales and Northern Ireland – voted to keep its EU membership last June, but will leave the EU because the UK voted to do so. The British parliament could technically block the move, but to do so would likely provoke a constitutional crisis.

Top Euro Union diplomats have vowed to uphold sanctions against Russia for destabilizing Ukraine, despite US intentions to ease those sanctions. The EU imposed a series of economic and diplomatic sanctions against Russia in 2014. Over the past week, a flare-up in hostilities has erupted between the Ukrainian military and Russia-backed separatists, with each accusing the other of a new wave of shelling. Over the weekend, President Trump committed to meet with NATO leaders in Europe in May.

A federal appeals court rejected early Sunday morning a request from the Justice Department to immediately reinstate an executive order on immigration and refugees, asking for more court filings before it rules on the matter. Airlines in Europe and the Middle East respond to the suspension by allowing passengers from countries that had been blocked to fly.

Ninety-seven tech companies, including Netflix, Twitter, Apple, and Facebook filed an amicus brief on Sunday night against the executive order that places an immigration ban on citizens of seven Muslim-majority countries. The brief states that the executive order “inflicts significant harm on American business, innovation, and growth” and “makes it more difficult and expensive for U.S. companies to recruit, hire, and retain some of the world’s best employees.”

More than any other industry, tech companies hire the lions’ share of the 85,000 foreign workers allowed into the US annually under the H1-B visa program. The H1-B is a temporary visa intended to bring in foreign professionals with college degrees and specialized skills to fill jobs when qualified Americans cannot be found.

A research report from Goldman Sachs estimates that nearly one million H-1B visa holders now reside in the US, and they account for up to 13 percent of American technology jobs. The big tech companies have pressed for increases in the annual quotas, saying there are not enough Americans with the skills they need.

But many tech workers see the H-1B program as a way to pay temporary workers less; or ship their jobs abroad, or at least to bring in workers from abroad, train them, and then ship the jobs offshore.

And it’s not just tech workers. Each year, more than 6,000 medical trainees from foreign countries participate in medical residency programs through J-1 non-immigrant visas, according to the American Association of Medical College.

Once they complete their residency, physicians can either return to their home country for two years before they are eligible to re-enter the U.S. through a different immigration pathway, such as an H1-B worker visa, or they can apply for a Conrad 30 J-1 Visa Waiver. This allows them to extend their stay in the U.S. if they commit to serving in rural and under-served areas for three years.

 The point being, don’t expect a quick resolution to a complex problem.

This past Friday we focused on the January Jobs Report, but there was some other news of note. President Trump signed two executive orders dealing with Wall Street. The first calls for the Treasury secretary to conduct a review over the next 120 days of regulations stemming from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

So, once again the banksters that caused the meltdown of 2008 will oversee policing their industry. What could go wrong?

The second order calls for a review of the Department of Labor’s “fiduciary rule,” which requires investment professionals to act in the best interest of their clients, rather than seek the highest profits for themselves. The orders don’t do much by themselves to roll back reforms but they do offer details on how the financial industry is likely to receive favored status over the next 4 years.

The order on the fiduciary rule is more like a memo; no extension was granted, and no guidance about seeking a stay to the rule. Nothing in the final version of this memorandum delays the fiduciary rule; still, it was enough for the acting Labor Secretary to state the Department of Labor “will now consider its legal options to delay the applicability date.”

Right now, the date is April 10. And apparently, no matter the administration, government continues to move at a glacial pace.

Over the past month, several Fed officials have openly discussed the need for the central bank to reduce its bond holdings, which it amassed as part of its quantitative easing during and after the financial crisis. There is some concern the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stash of mortgage-backed securities.

In the past year alone, the Fed bought $387 billion of mortgage bonds just to maintain its holdings. Moody’s Analytics estimates that if the Fed gets out of the bond-buying business as the economy strengthens, it could help lift 30-year mortgage rates past 6 percent within three years.

Bill Gross, in his monthly newsletter says that other central banks have stepped up bond buying as the Fed has cut back, but when those central banks stop buying bonds, there will be a bear market in bonds that will ripple out.

The global central bank balance sheet has surpassed $12 trillion, Gross said. At the same time, Fitch Ratings recently reported that global sovereign debt with negative yields still surpasses $9 trillion.

Even if central banks remain accommodative, it only serves to inflate asset prices without boosting economic growth, creating “an unhealthy capitalistic equilibrium that one day must be reckoned with.”

JPMorgan has received approval and license to underwrite corporate bonds in China’s interbank bond market, making it the first U.S.-headquartered bank to do so. China is the third largest bond market in the world with $6.3 trillion outstanding at the end of 2016, with the interbank bond market accounting for over 90%.

U.S. energy companies added oil rigs for a 13th week in the last 14. Despite OPEC cuts, U.S. crude inventories increased more than expected last week. With output being cut, more investors are betting on rising prices despite indicators such as the Baker Hughes rig count pointing to increased U.S. supply. The Commodity Futures Trading Commission says investors raised their net long U.S. crude futures and options positions in the week to Jan. 31 to a record 412,380 lots.

Canadian department store operator Hudson’s Bay, which also owns the Saks Fifth Avenue stores, has made a takeover approach to U.S. department store chain Macy’s. Hudson’s Bay could raise equity and debt against its real estate portfolio, which could be worth $14 billion, to fund the deal. The company could also bring in a partner.

The economic calendar is a bit light this week, with the JOLTS report serving as the highlight alongside the preliminary reading on consumer confidence from the University of Michigan. But we will stay busy with earnings reports. Analysts will be looking for S&P 500 companies to maintain the 7.5% average profit increase that has marked an encouraging fourth-quarter earnings season so far and will be needed to sustain the market rally.

Tyson Foods reported stronger-than-expected first-quarter earnings and sales and raised its annual outlook, citing strong beef and pork sales.

Toyota Motor reported a sharp decline in net profit for its fiscal third quarter, as the relatively strong yen continued to weigh on earnings. Toyota and other Japanese exporters are being hammered by the yen’s strength. A U.S. dollar bought 109 Yen on average in the third quarter; a year earlier, it bought 121 Yen.

Toyota has a glut of used cars in the U.S.–fueled by years of record sales–which is weighing on new car prices. Toyota said it is ramping up production of more-profitable trucks and sport-utility vehicles to increase profit.

Toyota Motor and Suzuki Motor said they plan to trade expertise in parts supplies and R&D. Any deal could see Toyota benefit from a supply chain that has helped Suzuki dominate India’s massive auto market, while Suzuki could hope to access Toyota’s innovations in automated driving, artificial intelligence and low-emission vehicles.

Hasbro’s revenue was helped in the fourth quarter by surging sales of products in its girls’ category, which include its line of Disney Princess and Frozen dolls. Profit and revenue came in above Wall Street’s expectations.

Tiffany & Co. abruptly replaced Chief Executive Officer Frederic Cumenal after disappointing financial results, just hours before the jewelry chain introduced a new campaign with the first Super Bowl ad in its history. The shake-up follows the departure of the jeweler’s top designer three weeks ago, and weak holiday sales that sent the stock tumbling.

Google used the Super Bowl to plug its Google Home connectivity service, but the TV commercial apparently confused the systems in homes of those who already have it. For them, Google Home went wacko. Apparently, the home systems heard the TV broadcasts calling its name, and it became befuddled. OK Google do not listen to the commercial.

Financial Review

Returns Day

Sinclair Noe — January 5, 2017

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

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DOW – 42 = 19,899
SPX – 1 = 2269
NAS + 10 = 5487
RUT – 16 = 1371
10 Y – .08 = 2.37%
OIL + .47 = 54.69
GOLD + 17.10 = 1181.20

The Nasdaq squeaked out a record high close on thanks to Amazon.com, while deep drops in the retail sector weighed on the broader stock market.

The Institute for Supply Management’s index of nonmanufacturing activity was 57.2 in December, unchanged from November and remaining at its highest level since October 2015. A reading over 50 indicates expansion; so, this was a strong report.

The number of Americans filing for unemployment benefits fell to near a 43 year-low last week, pointing to further tightening in the labor market. Initial claims for state unemployment benefits dropped 28,000 to a seasonally adjusted 235,000 for the week ended Dec. 31.

In a separate report, payrolls processor ADP said private employers added 153,000 jobs in December after increasing their payrolls by 215,000 in November.

In a third report, global outplacement consultancy Challenger, Gray & Christmas said U.S.-based employers announced plans to cut 33,627 jobs from payrolls last month, up 25 percent from November. Still, that was below the monthly average of 43,910 job cuts for 2016. Layoffs last month were led by the defense, automotive, energy, transportation and government sectors.

Tomorrow morning the Labor Department will report on Non-Farm Payrolls for December; most estimates are calling for about 170,000 net new jobs, which would extend the longest streak of job creation since the Bureau of Labor Statistics started reporting employment figures. The labor market’s tightness could add on higher wages if employers increase pay while they struggle to find qualified workers, especially in high-paying industries.

The Fed has its eyes on Trump. The minutes from the December Federal Open Market Committee meeting show the Federal Reserve is monitoring how fiscal policy will affect growth and how quickly it should raise rates. The minutes said almost all Fed policymakers: “indicated that the upside risks to their forecasts for economic growth had increased because of prospects for more expansionary fiscal policies in coming years.” Bottom line, the Fed plans to hike rates 3 times this year.

Federal Reserve Chair Janet Yellen pulled off her first dissent-free interest rate decision since June at last month’s meeting as policymakers decided unanimously to raise interest rates by a quarter percentage point, but the minutes of the FOMC meeting show discord between Fed economists and policymakers, the ones who make the call on rates. The policymakers were generally optimistic about the economy, while the staff economists were generally pessimistic.

The House of Representatives passed legislation giving Congress the power to kill dozens of “midnight rules” – regulations imposed by presidents on their way out the door. Under the Congressional Review Act, any federal regulation approved since May could be voided by the Republican-led Congress once President-elect Donald Trump moves into the White House and can sign off on their disapproval. The Senate is expected to take up similar legislation soon.

President-elect Trump is now targeting Toyota, threatening to impose a hefty fee on the Japanese automaker it if builds its Corolla cars for the US market at a plant in Mexico. Trump tweeted: “Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.”

The value of the Mexican peso has been in freefall over fears that Trump’s policies would harm Latin America’s second-biggest economy. One of the side effects – a 20% price hike for gasoline in Mexico – is not going over well. “Gasolinazo”, as the price hike is called, took effect on January 1^st, and has resulted in long lines and fuel shortages.

Demonstrators have blockaded highways, looted shops and forced service stations across Mexico to close in a wave of angry protest. The state run oil company, Pemex warned that blockades had created a “critical situation” in at least three Mexican states, while demonstrations in suburban Mexico City turned violent as protesters looted at least two department stores.

Meanwhile, Trump remains opposed to the megamerger between AT&T and Time Warner because he believes it would concentrate too much power in the media industry, according to people close to the president-elect, who has been publicly silent about the transaction for months.

Now there’s an app that lets you know when Trump tweets about your stocks. The free app, called Trigger, will notify you in real time if Trump tweets about a stock that you own. Bully pulpit indeed.

The International Consumer Electronics Show is underway in Las Vegas; this is day 2. The CES show will spotlight a wide range of cool new tech, including: self-driving cars, 4K televisions, wireless audio, smart home systems and drones. Apple, Alphabet, Amazon are the early leaders in connected home platforms, there’s a host of startups and consumer product majors looking to piggyback off the trend. Chinese companies are also hoping to make a large splash, with 1,300 registered as exhibitors.

Amazon.com and the Forever 21 teen retail chain are weighing bids for bankrupt American Apparel. Next Level Apparel and Authentic Brands, are also kicking the tires ahead of Friday’s deadline. Any successful offer would have to top a $66 million stalking horse bid by Canadian apparel maker Gildan Activewear Inc, which American Apparel agreed to when it filed for bankruptcy in November.

Stanley Black & Decker said it would buy Sears Holdings’ Craftsman tool brand for $900 million, strengthening its portfolio of hand and power tools. The Craftsman deal will give Stanley Black & Decker the right to make and sell Craftsman-branded products in non-Sears retail, industrial and online sales channels. Sears will continue to offer Craftsman-branded products at Sears and Kmart stores through a perpetual license from Stanley Black & Decker.

It looks like Amazon ate Macy’s and Kohl’s lunch this holiday season, as the department store chains posted same stores sales were down 2.1% over the holiday season; they also slashed their 2016 profit forecasts, sending shares down for the entire retail sector.  Macy’s will close 68 stores and cut 10,000 jobs; it had already announced plans to close 100 of its 730 stores. Retail was the weak sector today, and it spread beyond Macy’s, Kohl’s and Sears.

After getting off to a slow start following the election, retailers overall rang up a record $91.7 billion in online sales over the holidays, an 11 percent increase on-year but barely edging out an industry forecast.

UPS expects holiday returns to peak today, on what it calls National Returns Day. Shoppers are projected to send back 1.3 million packages with UPS today, and more than 5.8 million this week.

Apple said its App Store generated $20 billion for developers in 2016, a 40 percent jump from 2015. The App Store also received nearly $240 million in orders on New Year’s Day, its highest single day ever.

IT research and advisory company Gartner said on it would buy CEB Inc., a provider of business research and analysis, in a cash-and-stock deal valued at $2.6 billion to expand its business services. The deal represents a premium of about 25 percent to CEB’s Wednesday close.

Two of the nation’s largest credit reporting bureaus, TransUnion and Equifax, will together pay more than $23 million in fines and refunds to settle charges from a federal consumer watchdog that they misled consumers about the pricing and value of credit products. Equifax and TransUnion will pay $17.6 million combined in restitution for consumers and $5.5 million in fines to the CFPB. The companies will need to notify affected customers about the refunds.

The number of large global corporations that defaulted in 2016 outpaced those in 2015 by 40 percent. The figure for 2016 hit 150, making 2016 the worst year for corporate defaults since the financial crisis; almost tw0-thirds of those defaults hit corporate America. Of those, 50 out of 63 globally, were in the oil and gas sector.  (Emerging markets accounted for 28 defaults and Europe for 12).  S&P expects the default rate to rise in 2017.

A study by the World Economic Forum predicted last year that the rise of robots and AI will result in a net loss of 5.1 million jobs over the next five years in 15 leading countries. The 15 economies covered by the survey account for approximately 65% of the world’s total workforce.

And while that might sound like so much science fiction, it has already started. Japanese insurance company Fukoku Mutual will use IBM’s Watson AI to gather and process the information needed for policyholders’ payouts – by reading medical certificates, and data on surgeries or hospital stays.

The firm believes it will increase productivity by 30%; which is another way of saying 34 claims processors just lost their jobs. The company expects to save around $1.2 million a year in salaries after the AI system is installed later this month.

Last year saw the highest costs from natural disasters since 2012, with two earthquakes in Japan in April accounting for the heaviest losses. German reinsurance company Munich Re’s annual survey pegs total losses from natural disasters worldwide at $175 billion last year, some $50 billion of which was covered by insurance.

Earthquakes on Japan’s southern Kyushu island caused $31 billion worth of damage. Floods in China in June and July caused $20 billion in costs. The third-costliest disaster was Hurricane Matthew, which hit the Caribbean and the eastern US in October. It incurred losses totaling $10.2 billion. In 2015, global natural disaster losses totaled $103 billion.

Financial Review

Batten Down the Bonds

Sinclair Noe — November 14, 2016

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

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DOW + 21 = 18,868
SPX – 0.25 = 2164
NAS – 18 = 5218
10 Y + .10 = 2.22%
OIL + .26 = 43.67
GOLD – 7.60 = 1221.00

Another record high close for the Dow.

U.S. bond yields are sharply higher across the board following a public market holiday on Friday. The yield on the benchmark 10-year Treasury note topped 2.25%; they surged 37 basis points last week, the most in three years, amid speculation Trump’s plans to boost spending and cut taxes will widen the budget deficit and stoke inflation.

The 30-year Treasury bond yield is over 3% for the first time since January. The two-year yield crossed the 1.00% threshold for the first time since January.

The movement has also lit a fire under the greenback, with the U.S. dollar index up more than 1%, hitting 100 for the first time in almost a year.

The global bond rout is intensifying. Long-dated bonds are getting hit hardest in Europe. The selloff wiped a record $1.2 trillion off the value of bonds around the world last week. Investors rotated into stocks, as global developed-market shares beat investment-grade debt by the most since 2011 amid concern the stimulus will stoke inflation and lead the Fed to increase rates.

President-elect Donald Trump has made the first official appointments to his White House administration after a shake-up on Friday that saw VP-elect Mike Pence replace Chris Christie as the head of his transition team. RNC Chairman Reince Priebus has been selected as Chief of Staff, while Trump’s campaign Chairman and former head of news outlet Breitbart, Steve Bannon, will lead as Chief Strategist and Senior Counsel.

The common view is that the inflation trade has been reignited by the election results. If this were so, the two major inflation markers in the commodity market, gold and oil, would have rallied strongly. Instead, gold sold off approximately $70 or over 3% from its level a week before the election, while the price of oil has been slightly weaker. Industrial metals, especially copper, did see major rallies.

This was not across the board, however. Aluminum, which has almost as widespread commercial use as copper, fell about 3%, while copper was up 17% in the days immediately following the election. Tin was up around 6% and nickel 9% from a week earlier. The inflation argument came mostly from action in the global bond markets.

While it is true yields soared, they have been at unsustainably low rates for years now. Still, it looks like the bond market is sending a message about a fiscally expansive, deficit spending growth agenda – there will be price to pay.

And while the Dow and the S&P rallied following the election, the big winner was the Russell 2000 index of smaller stocks. And while small-cap stocks can outperform in inflationary environments, this rally is probably provoked by the idea that small-cap companies are less likely to do business internationally and more likely to get most of their sales domestically. The companies that tend to have most of their sales overseas are tech companies, and the tech-heavy Nasdaq hasn’t rallied at all. So, the stock rally has been selective and not broad-based.

Next, consider that the Federal Reserve will probably raise rates sooner and later. Fed funds futures rates are pricing in an 84% probability of an interest rate increase at the Fed’s meeting in December. PIMCO said the central bank may move three times by the end of 2017. Those rate hikes will hit the markets much sooner than any legislative action, which tends to move very slowly.

Japan’s economic growth handily beat expectations in the July-September period, expanding for a third straight quarter as exports recovered, but weak domestic activity cast doubt on hopes for a sustainable recovery. While GDP grew at an annualized 2.2% pace, household spending and capital investment were flat on quarter.

Mixed Chinese economic data for October came out overnight, released by the National Bureau of Statistics. Retail sales rose a weaker-than-expected 10%, slowing from the previous month’s 10.7% growth, while industrial output expanded 6.1%, matching September’s pace but remaining a hair below expectations.

After gathering in Brussels to discuss the future of Europe-U.S. relations, EU foreign ministers said the bloc would stand by its key foreign-policy positions on issues including the Iran deal, Russia’s annexation of Crimea and climate change, but vowed to work with the Trump administration. Not everyone attended the emergency meeting. Britain’s Boris Johnson called it “unnecessary.”

Colombia’s government and Marxist FARC rebels have agreed on a new peace pact to end a 52-year war, six weeks after the original was narrowly rejected in a referendum amid objections it was too favorable to the rebels. The new accord, which will be presented to Congress for a vote, includes several new provisions – from requiring FARC to surrender money and holdings to infrastructure development for the countryside.

Just one day after the IEA warned the world could drown in oil if production does not fall beneath demand sometime soon, OPEC released a new market whammy, offering up the cartel’s production figures, which largely jive with figures reported by the IEA yesterday: OPEC has increased its oil production. OPEC’s Monthly Oil Market Report revealed daily oil production for the cartel of 33.64 million barrels for October—up by 240,000 barrels per day in September—largely confirming the IEA’s report.

A little over 90% of S&P 500 companies have reported their quarterly results, and it’s become clear that the recession in corporate profits has come to an end. Since the second quarter of 2015, S&P 500 earnings reports have shown a decline in profits – year-over-year. A decline for two consecutive quarters indicates an earnings recession.

Based on the companies that have reported so far this quarter, S&P earnings will be up 2.75% from the prior year’s third quarter. Leading the comeback is the financial sector, which posted growth of 13.1% in profits from the third quarter of last year. According to FactSet, 71% of companies that have reported beat their estimates, higher than the five-year trailing average of 67%.

Samsung Electronics is buying Harman Industries for $112 a share in cash, or a total equity value of about $8 billion, placing the company in the vanguard of the auto industry. The deal – Samsung’s largest acquisition in its history – will reshape the pecking order in the global automotive supply chain.  Samsung could combine its display and semiconductor operations with a business that already provides sound, electronics, and other smart components for a new generation of digitally connected cars.

In Europe, Novartis AG is said to be in talks to acquire U.S. generic-drugs maker Amneal Pharmaceuticals in a deal which could value the closely-held company at as much as $8 billion. Siemens, meanwhile, agreed to buy software company Mentor Graphics for $4.5 billion, a premium of 21 percent on Friday’s closing price.

American Apparel files for bankruptcy. The retailer filed for Chapter 11 bankruptcy protection for the second time in just over a year, (so maybe we should call it Chapter 22) listing assets and liabilities in the range of $100 million to $500 million. The company exited court protection in early 2016 but quickly encountered trouble again.

Toyota will pay up to $3.4 billion to settle claims that some of its trucks and SUVs lacked proper rust protection, leading to premature corrosion of vehicle frames. The proposed settlement covers about 1.5 million Tacoma compact pickups, Tundra full-size pickups and Sequoia SUVs and estimates the value of frame replacements at around $15,000 per vehicle. However, Toyota admitted no liability or wrongdoing in the proposed settlement.

Hedge fund filings will give investors a chance to see what they were betting on when the third quarter ended. Hedge funds have had a tough time of it recently with some $50 billion flowing out of the industry this year. Hedge fund managers are required to disclose their holdings to the SEC in a Form 13F. Filed four times a year, the reports show which sectors these traders were betting on when the quarter ended, roughly 45 days ago.

Out of 13 western states, California and Texas have the highest number of single-family residential homes in extreme risk wildfire areas, per a new report from CoreLogic. CoreLogic’s scale has four categories: low, moderate, high and extreme risk, and 1.8 million homes across 13 western states fall into the high and extreme risk category.

While only a small percentage of the millions of homes that fall somewhere on the scale, these 1.8 million homes represent a combined total reconstruction value of nearly $500 billion. The other 27 million homes on the scale — those at low and moderate risk — have an estimated reconstruction cost value of $6.7 trillion.

Financial Review

Like It Never Happened

Sinclair Noe — June 29, 2016

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

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DOW + 284 = 17,694
SPX + 34 = 2070
NAS + 87 = 4779
10 Y + .04 = 1.51%
OIL – .30 = 49.58
GOLD + 6.80 = 1319.30

Stocks rallied for a second day, and it was a global rally. The dollar weakened. The yield on 10-year Treasuries rose four basis points to 1.51 percent after falling Monday to the lowest in almost four years. The MSCI All-Country World Index had its biggest two-day gain since August. The S&P 500 moved from negative year to date to slightly positive. The Dow Jones Industrial Average stretched its rebound to 553 points since Monday’s close.

Britain’s FTSE 100 Index erased its post-Brexit losses with a 6.3 percent surge over two days. The Stoxx Europe 600 Index climbed 3.1 percent. The gauge has recovered 4.7 percent after tumbling 11 percent over two days. It is still heading for a second consecutive quarterly decline. Emerging-market shares climbed. Maybe cooler heads prevailed; maybe it is a short squeeze. Goldman’s basket of the most shorted shares in the Russell 3000 Index rose the most since 2009. Doesn’t matter. Prices moved higher.

And so this raises the question of whether all the fear over Brexit was justified, or if this is just the calm before the storm. The fall in the pound sterling is a blessing for the British economy, and a headache for the Eurozone. The exchange rate is acting as a shock-absorber. The FTSE 100 index of equities in London is back to where it was on the eve of the vote, compared to falls of roughly 6% in Germany and France, 10% in Spain, 11% in Italy, 13% in Ireland, and 14% in Greece.

The UK was stripped of its AAA credit rating but there has been no sign of systemic meltdown. Britain’s Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error.

US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or “start ginning up scatter-brained or revengeful premises.” Nobody seemed to heed his words at the EU’s summit in Brussels, but the situation still carries the potential for significant economic damage, even if it plays out in slower motion.

European Union leaders wrapped up a two-day conference in Brussels and called for an orderly British withdrawal from the bloc to minimize instability. They also spelled out conditions for a new relationship with a departing Britain, warning that if British business wants to continue to enjoy the seamless single market after its departure, it would also have to accept that EU citizens can continue to enter Britain.

Francois Hollande, the French President, has warned London that it will no longer be the center of euro-denominated clearing following the Brexit vote, dealing a blow to one of the City’s biggest markets and casting further doubt on the London Stock Exchange’s merger plans. Mr. Hollande, speaking after a tense meeting of European Union leaders last night, said: “The UK has said it doesn’t want any more freedom of movement. Now it won’t have access to the single market anymore.”

Scottish minister Nicola Sturgeon, spoke before the European Commission in Brussels, trying to make the case for Scotland to stay in the EU. In last week’s referendum, Scottish voters backed staying in the EU by a nearly 2-1 majority. Mrs. Sturgeon argued that Scotland must not be dragged out of the EU against its will. She wants to negotiate directly with Brussels to protect membership rights of Scots and is open to a new independence referendum, splitting from the UK, if that is the only way to keep Scotland in the bloc. Sturgeon drew a mixed response from EU leaders. Spanish Prime Minister Rajoy said flatly, “If the United Kingdom leaves, Scotland leaves.”

Moody’s has cut its outlook on the British banking system from stable to negative following last week’s referendum, saying: “We expect lower economic growth and heightened uncertainty over the U.K.’s future trade relationship with the EU to lead to reduced demand for credit, higher credit losses and more volatile wholesale funding conditions.”

The Federal Reserve delivered a report card on the largest banks in their annual stress tests. US units of Deutsche Bank and Banco Santander were the only firms to fail the tests in 2015, and they failed the tests again this year. The Fed gave Morgan Stanley only a conditional pass, saying that the bank also had to resolve weaknesses in its processes. Morgan Stanley has until Dec. 29 to resubmit its capital plan for approval. The stress test results, known as CCAR (or Comprehensive Capital Analysis and Review), are particularly important because they determine how much capital big U.S. banks can put toward dividends, stock buybacks, acquisitions or investments.

General Electric has won approval to drop its designation as a too-big-to-fail financial institution, capping a transformation that has included the sale of almost all of its lending business. The Financial Stability Oversight Council determined that GE no longer poses a threat to U.S. financial stability. The decision marks the first time a company has been granted formal release by the council.

The Commerce Department reports consumer spending increased 0.4 percent last month, on increased demand for automobiles and other goods. Consumer spending in April was revised up to show it advancing 1.1 percent instead of the previously reported 1.0 percent jump. Consumer spending rose at a 1.5 percent annual rate in the first quarter, holding down gross domestic product growth to a 1.1 percent pace. Personal income rose 0.2 percent after advancing 0.5 percent in April. Wages and salaries gained 0.2 percent. Savings slipped to $730.6 billion last month from $753.7 billion in April.

A gauge of pending home sales slid 3.7% in May, a step back following several months of strong sales. The National Association of Realtors’ index fell to 110.8 in May from a downwardly-revised 115.0 in April. Even with that revision, April figures were the highest since February 2006 – but May marked the first year-over-year decline since August 2014.

The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. Last week the NAR reported sales of previously-owned homes rose to the highest level in more than nine years in May. So, it appears demand is still strong but there is a shortage of inventory.

Congress has been thinking about doing something about the debt problem in Puerto Rico. Of course, Congress hasn’t actually done anything yet. They did table further debate on a bill, which means a vote could come later this evening or tomorrow on a measure to allow Puerto Rico to restructure its total debt and establish an oversight board to impose big cuts in spending. And it probably doesn’t matter.

Puerto Rico will default on more than $1 billion in general obligation bonds on Friday. The default will mark the first time the U.S. territory has failed to pay what it owes on general-obligation debt, a $13 billion swath that its constitution says has the top claim to the government’s funds. Puerto Rico had already defaulted on debt issued by three agencies, but creditors were left with little recourse because the securities were backed by weaker legal safeguards.

Governor Garcia Padilla previously said the commonwealth couldn’t raise enough to cover what’s owed to bondholders even if he shut down the government. The island has about $2 billion in principal and interest payments due Friday, and total debt of around $70 billion. Without the ability to file for bankruptcy protection as cities including Detroit have done, Puerto Rico pushed Congress to give it legal tools to force creditors to the bargaining table and prevent an onslaught of lawsuits. Instead, it looks like they will be headed to court.

Energy Transfer Equity has terminated its merger agreement with Williams Cos. after a court ruled that it can walk away from the deal since it was unable to deliver a required tax opinion by June 28. Williams published a statement saying it is committed to completing the merger and will “enforce its rights” under the terms of its agreement. The deal had been valued at nearly $33 billion when it was signed last year.

Toyota announced another massive recall. The Japanese carmaker said it needed to recall 2.8 million cars over a possible fault in emissions control units, after it announced on Tuesday that 1.4 million Prius and Lexus models had to be brought in to have their air bag inflators fixed.

Coca-Cola expects to pull some of its beverages from Vermont stores this week as the state imposes a new law requiring all products made with genetically modified organisms to include warning labels. Although its top beverages will stay on shelves, including Coca-Cola, Diet Coke and Coke Zero, some smaller brands or configurations may temporarily disappear. Kellogg, Campbell Soup and Mars previously announced they would comply with the Vermont law and begin labeling their products for GMOs.

Nike’s futures sales disappointed. Nike reported adjusted earnings per share of $0.49, beating the consensus by a penny. Revenue rose 6% to $8.2 billion but was a bit shy of estimates. The closely followed worldwide futures orders jumped 11%, missing the 13% increase that analysts were anticipating.

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

Denying Denial

Sinclair Noe — October 26, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Review

Seven Years

Sinclair Noe — September 15, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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