Financial Review

Sideways

Sinclair Noe — November 19, 2015

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

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DOW – 4 = 17,732
SPX – 2 = 2081
NAS – 1 = 5073
10 YR YLD – .02 = 2.25%
OIL – .24 = 40.51
GOLD + 11.30 = 1082.30
SILV + .04 = 14.32

The biggest rally in stocks in 4 weeks fizzled today. The S&P is up 2.9% so far this week. The S&P 500 has surged almost 12% from its August lows, including an 8.3% gain in October. Treasuries rose and the dollar fell. The MSCI Emerging Markets Index rallied 1.9%, heading toward the biggest weekly gain since the period ended Oct. 9. Equity gauges in South Korea, India and South Africa jumped more than 1%. Oil touched the lowest level in almost three months.

The number of Americans filing for unemployment benefits fell last week. Initial claims for state unemployment benefits slipped 5,000 to a seasonally adjusted 271,000 for the week ended Nov. 14. Claims have now held below the 300,000 threshold for 37consecutive weeks, the longest stretch in years, and are not too far from levels last seen in the early 1970s. Claims below this level are usually associated with a healthy jobs market.

Other data showed a slight pick-up in factory activity in the mid-Atlantic region in November after two straight months of declines. In a separate report, the Philadelphia Federal Reserve said its general activity index rose to 1.9 this month from -4.5 in October. It was the first positive reading in three months.

Arizona gained a net 33,800 jobs in October, dropping Arizona’s unemployment rate to 6.1% from 6.3%. Even so, the state remains well behind the nation’s 5% unemployment rate. In October, Phoenix had 1.9 million workers, about 3,000 fewer than it had in the same month eight years earlier.

Rebuilding the US energy industry to substantially reduce reliance on carbon-based fuels may result in a net gain of 2 million jobs by 2050 while increasing disposable household income, according to a new study sponsored by a nonprofit that advocates clean energy. The report found that a large-scale shift to renewable sources for generating electricity could increase U.S. employment by 1 million jobs by 2030 and 2 million by 2050, even after accounting for job losses related to fossil fuels. The transition would also provide between $300 and $650 in additional disposable income per household annually in 2050. A majority of the 2 million new jobs would be in the construction, utility and manufacturing industries.

Two IPOs came to market today: Square and Match. Both IPOs were underpriced, although the market will probably adjust in time. Square raised less than it had sought in its initial public offering, selling 27 million shares for $9 each, totaling $243 million. The price realized is well below the offer price of $11 to $13 a share and puts the company’s market value at about $2.9 billion, less than half the $6 billion valuation it had in its latest financing. In trading, the price popped to a high of $14.78.

Match Group, the owner of online-dating services Tinder, Match and OkCupid, priced its shares in its IPO at the bottom end of a $12 to $14 per share offering. The sale gives the company a market value of $2.9 billion. The price jumped as much as 24% in the first day of trading, valuing the company at $3.57 billion.

The U.S.’s biggest health insurer is considering pulling out of Obamacare, a month after saying it would expand its presence in the program. UnitedHealth Group is scaling back marketing efforts for plans it’s selling this year under the Affordable Care Act, and may quit the market entirely in 2017, because the business has proven to be more costly than expected. It’s an abrupt shift from October, when the health insurer said it was planning to sell coverage in 11 new markets next year, bringing its total to 34. The company also cut its 2015 earnings forecast.

MetLife, the largest U.S. life insurer, said the Financial Industry Regulatory Authority’s staff has indicated the agency will seek a “significant fine” from the company’s broker-dealer unit as part of a probe into possible violations tied to variable annuities. MetLife said in its quarterly regulatory filing that the company is cooperating in this investigation. MetLife said in the filing that the probe focuses on potential violations “regarding alleged misrepresentations, suitability, and supervision in connection with sales and replacements of variable annuities and certain riders on such annuities.”

Wall Street’s private stock markets would have to reveal whether they favor any particular users including high-frequency traders under a proposal approved Wednesday by the Securities and Exchange Commission. Many of the new disclosure requirements sought by the SEC mirror those currently reserved for public markets such as The New York Stock Exchange.

The regulatory effort follows a series of enforcement actions in which Investment Technology Group and UBS Group paid tens of millions of dollars to settle allegations they misled investors about how their dark pools worked. The proposal would require dark pool operators to make a new public filing that spells out their conflicts of interest, including whether an affiliate trades in the dark pool. If the dark pool creates advantages for any particular users, it would have to reveal that in the filing.

Japanese exports fell for the first time in more than a year in October. Exports slumped 2.1% last month, while imports fell 13.4%, hit by soft demand in China and other Asian economies. Despite the weakness, the Bank of Japan held its current pace of monetary stimulus steady at its policy meeting today.

Volkswagen is expected to announce substantial spending cuts on Friday, the day the carmaker must inform U.S. regulators of how it plans to bring its diesel cars into compliance with air-quality standards. VW is facing class action lawsuits around the globe. Volkswagen has also disclosed that 120,000 U.S. owners have signed up for its $1,000 goodwill package – or about one quarter of the 482,000 vehicle owners covered by the emissions scandal.

Meanwhile, Reuters is reporting that federal prosecutors with the Department of Justice are examining whether Bosch, the world’s largest auto supplier, knew or participated in Volkswagen’s years-long efforts to rig diesel emissions tests. Bosch built key components in the diesel engine used in six Volkswagen models and one Audi model. Federal authorities are also investigating how deeply the scheme permeated VW’s hierarchy. The probe is at an early stage and there is no indication that prosecutors have found evidence of wrongdoing at Bosch.

A proposed four-year labor contract between Ford and the United Auto Workers appears to be in trouble after more than half of those voting so far have rejected the pact and only two days remain for workers to cast ballots. Newer UAW members are providing the most resistance over the length of time it takes for younger workers to reach the top wage level. Older workers feel they gave up too much in earlier contracts. Results of voting are due on Saturday.

Pfizer is in advanced talks to buy Allergan  for as much as $380 per share in a deal that would value the Botox maker as high as $150 billion. The companies might announce an agreement as soon as Monday. Shares in Ireland-based Allergan had dropped due to plans by the U.S. Treasury Department to deter tax inversions, a major motivation behind Pfizer’s pursuit of the company.

The US Treasury Department will release new “targeted guidance” this week designed to reduce the tax benefits available to US companies that move their tax addresses overseas. Treasury Secretary Jack Lew informed lawmakers of the coming announcement in a letter on Wednesday. The administration previously has said it was examining “earnings stripping,” a practice by which companies load up their US operations with deductions and effectively push profits to low-tax countries.

In September 2014, the Treasury Department announced rules against inversions, including limiting companies’ ability to use their offshore profits to finance a deal. That change caused AbbVie to abandon a planned inversion, but other companies moved ahead. The Treasury hasn’t yet issued the formal regulations it promised last year, and congressional efforts to revamp the international tax system have stalled.

The September 2014 announcement included a warning that rules against earnings stripping might be retroactive to inverted companies. That means the Treasury announcement coming later this week could affect companies such as Medtronic and Mylan that finished their inversions in the past 14 months, plus a half dozen more deals that haven’t closed yet.

Cutting Pfizer’s tax rate to 15% would save $2.1 billion in 2017 based on analysts’ estimates. At a multiple of 10, that’s worth just over $20 billion. At the reported deal price, Pfizer would be paying a premium of more than $35 billion for Allergan based on its undisturbed price. If Pfizer can’t get the deal done, it might face a breakup fee of 2 to 3%. And the more companies try to weasel out of taxes through inversions, the greater the likelihood there will be legislative change, which could make any savings short-term or even non-existent.

The attacks in Paris may have finally spurred a brand change for Isis Pharmaceuticals, a drug maker that until now has held on to its name despite the terrorist group’s rise in the Middle East. Named after Isis, the Egyptian goddess associated with good health, the company has had the moniker since its founding 26 years ago. Its ticker symbol is also under review.

The House of Representatives has easily passed a bill to restrict the admission of Iraqi and Syrian refugees to America by requiring extra security procedures. The American Security Against Foreign Enemies Act of 2015, or the American SAFE Act of 2015, would require the secretary of Homeland Security, the head of the FBI and the director of national intelligence to sign off on every individual refugee from Iraq and Syria, affirming he or she is not a threat.

It’s unclear whether the Senate will take up the legislation. President Obama has already said he would threaten such a bill, and the perfect venue for a veto would be directly in front of the Statue of Liberty.

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

Easy to Spot Winners

Sinclair Noe — October 22, 2015

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

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DOW + 320 = 17,489
SPX + 33 = 2052
NAS + 79 = 4920
10 YR YLD un = 2.03%
OIL + .18 = 45.38
GOLD – .80 = 1166.90
SILV + .16 = 15.94

European Central Bank policymakers are meeting today in Malta. ECB President Mario Draghi announced no change to interest rates or asset purchases, but he warned that emerging markets are hurting Eurozone growth prospects, and he hinted the central bank may lower the deposit rate further or expand its quantitative easing at its December meeting. Markets just love an accommodative central bank.

The European Economics Commission says “Greece has done a certain number of reforms, and we are going to give them money, €3 billion-euro in all,” and in the course of November, December, the commission will deal with the issue of the recapitalization of Greek banks and Greek debt.”

Chinese stocks recovered today as the People’s Bank of China added liquidity to the market. After the close on Wednesday, the PBOC injected $16.6 billion into 11 financial institutions via medium-term lending facilities. Meanwhile, the government’s anti-corruption campaign continues with a crackdown on golf, considered a lavish extravagance. Or in my case, cruel punishment.

New applications for U.S. unemployment benefits inched up by 3,000 to 259,000 in the week ended Oct. 17. This is the first gain after two straight large declines. Claims had fallen by 20,000 in the prior two weeks.

Existing home sales rose 4.7% to a seasonally adjusted annual rate of 5.55 million, the second-highest monthly level since Feb. 2007 and an 8.8% rise from the same month of 2014. The National Association of Realtors attributed the improvement in the housing market to low mortgage rates, an improving jobs environment and a slight thawing in credit availability. There were 2.21 million available homes for sale, down 3% from August. The number of listed properties in August was the second-lowest for that month since 2002.

The White House is making a push to solve the debt crisis in Puerto Rico, pressing Congress to amend bankruptcy code, instate a financial control board and extend tax credits as the commonwealth struggles with $72 billion in debt. On Wednesday, the Government Development Bank, the island’s de facto fiscal authority, ended talks with a group of its bondholders and their advisers after failing to reach a deal on restructuring the debt.

The U.S. Treasury said it will postpone the two-year note auction previously scheduled for Tuesday, as an impasse over the debt limit constrains the nation’s borrowing and inflicts the first ceiling-related auction delay in a decade. The Treasury sent an e-mail saying: “Due to debt ceiling constraints, there is a risk that Treasury would not be able to settle the two-year note” on Nov. 2. The five-year note auction on Oct. 28 and the seven-year note auction on Oct. 29 will proceed as planned.

The yield on the two-year Treasury note slid after the announcement, as it means less supply than had been expected in this sector. Treasury Secretary Jacob Lew said he is concerned that “last-minute brinkmanship” in Congress could lead to a legislative “accident” in which lawmakers would fail to raise the debt ceiling before a Nov. 3 deadline. With $12.9 trillion in marketable securities, the U.S. is considered the world’s most reliable debt issuer. The last time an auction was delayed due to the borrowing limit was in November 2004.

And part of the reason why this is noteworthy is because the Treasury markets are supposed to be boring, incredibly boring and completely predictable, regular, and consistent. This consistency has allowed the government, and by extension the US dollar, to become the safe harbor for investors. Predictability translates into decreased borrowing costs for the US, roughly $27 billion in savings over the past 17 years, simply attributed to the predictable, consistent bond market schedule.

Remember the debt ceiling fight of 2011 was behind the credit rating downgrade that stripped the US of AAA rating. And now we are preparing for another fight over the debt ceiling, and the clock is ticking, and the most boring part of the markets just got important.

The median stock in the US has been flat for 2015. That is actually a big improvement from about one month ago when the median stock was down 8%, so we’ve seen a nice rally, but at the current pace we are on track for the worst performance since 2008. And it doesn’t look like stocks are going to rally on earnings news; third quarter reports are coming in and we are on track for a two consecutive quarters of declining earnings, or an earnings recession.

The bad news is that when we have an earnings recession we tend to get a real recession. This is a statistic not lost on the Fed. Historically there has been a very high correlation between changes in the Fed Funds rate and the profit cycle. The Fed traditionally begins a tightening cycle when profits are moving higher and begins easing when profits decelerated. The notion that the Fed would raise rates in a profits recession, well, it has never happened before.

United Auto Workers members have ratified a new 4-year labor contract with Fiat-Chrysler. UAW members sacrificed gains in a 2011 contract and two years earlier made concessions to allow the former Chrysler to go through bankruptcy. The new contract, effective as of next Monday, provides a clearer path to top pay for so-called “second-tier” workers in a two-tier wage system established in 2007, which pays newer workers less than those hired before 2007. The new contract allows newer workers to earn wages more in line with veteran employees. Next up, negotiations with Ford and GM.

A swift plunge in the stock price of Valeant Pharmaceuticals cost some of Wall Street’s top names billions of dollars on Wednesday but Pershing Square’s Bill Ackman took the meltdown as a buying opportunity. Ackman bought 2.1 million additional shares as the company plummeted as much as 40% on a report from Citron Research that alleged it fraudulently inflated revenues. The report goes so far as to call Valeant the “pharmaceutical Enron.” Today, the stock dropped 10% more.

Let’s take a look at earnings reports:
McDonald’s reported quarterly earnings and revenue that topped estimates. Global sales at established restaurants were up a much better-than-expected 4 percent in the third quarter, ending six straight quarters of flat or falling results. McDonald’s share hit an all-time high on the report.

American Express posted quarterly earnings and revenue that missed analysts’ expectations on Wednesday, citing continued headwinds from a stronger U.S. dollar and a rise in marketing spending.

3M, the maker of Scotch tape and Post-it notes, reported disappointing net sales for the third quarter and said it would cut about 1,500 jobs next year, hurt by a strong dollar and a global economic slowdown.

Caterpillar delivered quarterly earnings and revenue that fell short of expectations on Thursday. The company also lower its earnings outlook for this year and sharply increased its estimates on restructuring costs for 2015.

Southwest Airlines posted an 83% jump in third-quarter profit, boosted by lower fuel prices and cost controls.

Daimler, the owner of Mercedes-Benz, reported a net income of $2.7 billion, a 13% drop compared with a year earlier, but Mercedes car sales rose by 18% in the period.

Hyundai reported a 23% fall in net profit to $1.1 billion on falling China sales, missing estimates.

Freeport-McMoRan will further cut copper and molybdenum output as it posted a bigger-than-expected quarterly loss. The Phoenix-based company said it remains confident in the longer-term outlook for copper, but will halve operating rates at its Sierrita mine in Arizona as prices continue to drop. Freeport reported an adjusted loss of $156 million, or 15 cents a share, lagging analysts’ expectation for an 8 cent loss.

Three big earnings reports came out after the closing bell: Microsoft, Amazon, and Google parent Alphabet.

Microsoft reported a profit of $4.6 billion, or 57 cents a share, up from $4.5 billion, or 54 cents a share, a year earlier. Profit beat estimates, despite a decline in earnings. For the first time, Microsoft broke out financial results based on three operating division, including its mobile and cloud business.

Amazon posted a profit, always a bit surprising, a profit of $79 million, or 17 cents a share, compared with a loss of $437 million, or 95 cents, a year earlier. You’ll remember that last year’s results included a big whiff with the Fire phone. In the most recent quarter revenue gained 23 percent to $25.4 billion, pushed by Amazon Prime Day, which was even better than Black Friday.

As Amazon has been transformed from an online bookstore into a vast conglomerate, its video-streaming service competes with Netflix Inc. and its third-party logistics business rivals UPS. Its cloud business, with revenue growing 78%, competes with Google and Microsoft to rent storage and computing power. Meanwhile its core e-commerce business challenges brick-and-mortar chains such as Wal-Mart and Target. It has all worked well for CEO Jeff Bezos; with today’s gains Bezos saw his net worth climb to $55 billion, making him the third richest man in America.

Google parent Alphabet reported better-than-projected sales and profit in the latest quarter. Revenue was up 15% to $15.1 billion. Third-quarter net income was $2.74 billion. Total clicks on ads up 23 percent, even as the average price for an ad fell 16 percent. But Alphabet is now more than an online search engine.  Other initiatives range from computers and fast-Internet services, to projects such as like product-delivering drones, life sciences products, airborne wind turbines and self-driving cars. While the new areas have yet to bring in sales to rival Google’s core operations, they’re being given room to operate as distinct units under a new operating structure.

Black Monday + 28 years

Financial Review

Black Monday + 28

Sinclair Noe — October 19, 2015

Podcast: Play in new window | Download (Duration: 13:18 — 6.1MB)

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DOW + 14 = 17,230
SPX + 0.55 = 2033
NAS + 18 = 4905
10 YR YLD + .01 = 2.03%
OIL – 1.07 = 46.19
GOLD – 7.10 = 1171.60
SILV – .20 = 15.93

Twenty-eight years ago today, the Dow Jones Industrial Average crashed; a one day loss of 508 points, or 22.6%, down to 1,738 on what is now referred to as Black Monday. It was by far the largest one-day percentage drop in US stock market history.

China’s economy grew 6.9% in the third quarter from a year ago, beating forecasts for 6.8% growth. The results add to doubts the country can meet its year-end GDP target of about 7%, and raises pressure on Beijing to roll out more stimulus measures following a summer stock market plunge and devaluation of the yuan. Most China analysts also feel the GDP number is fictional, probably more like 3% than 6.9%, but it’s still the slowest growth since 2009.  China has been cutting its holdings of US Treasuries for the first time since 2001, but so far demand remains strong from other foreign investors and American investors.

Last month, Chinese President Xi Jingping visited Washington and an agreement was announced that China and the US would refrain from cyberattacks by each country on the other or on companies domiciled in the respective countries. Yeah, not so much. Security services provider, Crowdstrike reports it has tracked a number of attacks on American tech and pharmaceutical companies leading up to and after President Xi’s visit to the US, including the 3 weeks since Washington and Beijing signed the cybersecurity agreement.

Of course, it may be foolish to think that anything on the internets is secure. Case in point: a hacker has breached non-government personal accounts associated with CIA Director John Brennan as well as Department of Homeland Security Secretary Jeh Johnson and posted personal info, fortunately nothing classified. The hacker told the New York Post that it was a fairly simple process to hack Brennan’s personal AOL account. The hacker is apparently a high school student who doesn’t like US foreign policy, and probably has job offers already in San Jose.

The slump in oil prices has pushed Saudi Arabia into a budget deficit for the first time since 2009, forcing the country to delay payments to government contractors. Seperately, Iran’s Oil Minister has said that “no one is happy” with prices at current levels and that OPEC members should cut production to boost prices to $70 to $80 a barrel.

The European Central Bank’s Governing Council meets this week in Malta to set monetary policy for the region. There has been plenty of talk about the need for more monetary easing, but most analysts expect a move later in the year, but not at this week’s meeting. Still, if they plan some sort of stimulus plan, they would need to communicate at this meeting – in other words, they might talk down euro strength. Whatever they do, it’s already working the dollar was higher against the euro and a basket of currencies.

Sustained gains in the dollar will come from a more defined increase in hopes for a December Fed rate hike. In other words, while the ECB might jawbone markets for more easing, the Fed might jawbone markets for a rate hike. That could come from a more hawkish Fed at next week’s Federal Open Market Committee meeting or a solid uptick in payrolls for October and November.

The National Association of Home Builders/Wells Fargo housing market index rose 3 points to 64, the highest level since the same month of 2005. The index measuring sales expectations in the next six months rose seven points to 75, and the component gauging current sales conditions increased three points to 70. The index on buyer traffic held steady at 47.

International Business Machines said its third-quarter revenue fell 14%, hurt by declines in hardware sales and the stronger dollar. IBM posted revenue of $19.2 billion in the latest quarter from $22.4 billion a year earlier.  Per-share earnings from continuing operations fell to $3.34 from $3.68. IBM also lowered its earnings guidance for the year as the company reported sales declines across its major businesses, led by a 39% drop in its hardware segment.

Morgan Stanley is the last of the major banks to announce third quarter results, and they saved the worst for last. Morgan Stanley reported both revenue and profit declined more than expected. The biggest hits came from the bank’s bond and fixed-income trading desks and from its hedge fund and private equity business in Asia. Revenue dropped 13 percent from the same quarter a year earlier, and 20 percent from the previous quarter; the drop was even sharper after accounting for certain customary adjustments for debt valuations. That pushed down the profit in the quarter to $740 million, or 34 cents a share, after those adjustments – a 55% decline from a year earlier.

Recently named Deutsche Bank CEO John Cryan is shaking things up at the investment bank. Cryan cleaned house by removing executives close to the former CEO. Deutsche is also abolishing its group executive committee, which is made up of 19 senior managers, and streamlining how its main units are represented on the management board.

U.S. banks are going to new lengths to ward off big cash deposits, judging that the cash may be too costly to keep. For the first time, State Street has begun charging some customers for large dollar deposits, and JPMorgan has already cut unwanted deposits by more than $150 billion this year. The actions are driven by low interest rates and new regulations adopted since the financial crisis, such as reserves of as much as 40% against certain corporate deposits and as much as 100% against some deposits from hedge funds.

Police have raided Volkswagen’s main offices in France as part of an investigation into the automaker’s cheating on diesel emissions tests. The move suggests VW’s legal troubles are spreading across Europe as similar searches have already been carried out at the company’s headquarters in Italy and Germany. On Friday, Volkswagen reported its group sales fell 1.5% in September, although the larger impact from its scandal will likely be reflected in the sales volume of October.

General Motors has discovered another ignition switch problem that causes engines to shut off and disables power steering, power brakes and possibly the air bags. The automaker is now recalling about 3,300 big pickup trucks and SUVs mainly in North America. The issue was discovered by an employee who owned one of the defective trucks and reported it to higher-ups through GM’s new “Speak Up For Safety” program.

Ferrari’s long-awaited initial public offering is finally at the starting line, with the stock likely to be priced Tuesday night and begin trading on the NYSE on Wednesday. Fiat Chrysler is selling about 10% of Ferrari in the IPO. At the top of its projected range of $48-$52 a share, the luxury sports-car maker would have a stock-market valuation of $9.8 billion.

Ahead of a critical vote this week, leaders at the United Auto Workers union have launched a social-media blitz to help sell a new tentative labor deal to Fiat Chrysler workers. While offering a path to higher wages for new hires, many members still find the deal lacking. Voting on the new contract starts Tuesday and concludes on Wednesday.

Shareholders will get their say this week on two proposed health insurer mergers: Aetna’s $37 billion offer for Humana, and Centene’s $6.3 billion bid for Health Net. Although consumer advocates have raised concerns about whether the combinations will lead to less competition and higher prices, proxy advisors ISS and Glass Lewis have given both deals a thumbs-up. Aetna and Humana investors are scheduled to vote this afternoon and Centene and Health Net shareholders will cast their ballots on Friday.

United Continental is still silent on the medical condition of its new CEO Oscar Munoz, who was admitted to the hospital on Thursday after suffering a heart attack, but investors are questioning who will lead the company in his absence. Munoz’s health problems come barely a month after he took on the job of improving the profitability and reputation of United, the No. 2 U.S. carrier by capacity.

Slowing growth and rising costs are driving a historic wave of consolidation in the semiconductor industry as firms look to streamline their organizations and product lines. Chip companies have so far announced just over $100 billion in mergers and acquisitions this year, exceeding the $37.7 billion in 2014, and totals could go even higher. Last week, at least four chip companies were in talks concerning different deal options, including; Analog Devices, Maxim Integrated Products, SanDisk, and Fairchild Semiconductor.

Alibaba is lobbying to stay off the U.S. Trade Representative’s blacklist this year after coming under renewed pressure over suspected counterfeits sold on its shopping platforms. Alibaba.com was removed from the “Notorious Markets” list in 2011.

Over the weekend, US Airways ceased independent operations after more than 75 years in business.  Flight 1939 — the final flight operated using the US Airways name — started at the airline’s Philadelphia hub before flying to Charlotte, Phoenix, San Francisco and Philadelphia. After its final flight, the Tempe, Arizona-based airline combined its flight and ticketing operations with its merger partner, American Airlines. The Flight number, 1939, was the year US Airways started service, delivering mail.

This is the culmination of an $11 billion merger that was first announced in 2013. Prior to the merger, US Airways boasted a fleet of more than 300 jets. The post-merger American Airlines now has the largest fleet in the world, with more than 900 mainline aircraft. In addition to adding capacity and changing the name, the merger involved combining reservations systems and baggage handling, and millions of tiny details. As you might expect, there were a few little hiccups, but really very few. The transition was one of the smoothest, so far, in aviation history. It is easy to find something to complain about regarding the airlines, any airline, but on this point, it looks like they did it right.

Financial Review

Anticipation of Consequences

Sinclair Noe — October 8, 2015

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

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DOW + 138 = 17,050
SPX + 17 = 2013
NAS + 19 = 4810
10 YR YLD + .05 = 2.11%
OIL + 1.86 = 49.67
GOLD – 6.80 – 1140.00
SILV – .39 = 15.77

This morning was full of anticipation: earnings season scheduled to kick off after the closing bell, the FOMC scheduled to release minutes from their September policy meeting, the House of Representatives scheduled to select a new Speaker of the House. Wisdom consists of the anticipation of consequences.

Earnings season is underway; the unofficial start is when Alcoa reports; ticker symbol AA, they lead the pack alphabetically, and then it just became tradition. The company reported adjusted third-quarter earnings of 7 cents a share on revenue of $5.57 billion. Analysts surveyed by FactSet had estimated earnings of 13 cents a share on revenue of $5.66 billion. Alcoa indicated that China’s industrial economy is slowing more rapidly than expected, as the aluminum producer slashed its production outlook for the country for cars, trucks and construction. And just like that, we have a trend.

Short interest has hit a peak. Short interest on companies listed on the New York Stock Exchange (NYSE) just hit a seven-year high, going back to the 2008 financial crisis. Short interest, or a bet that prices will drop, tends to increase as stocks are falling, and peak when they’ve bottomed; and so a peak in short interest is often seen as a contrarian indicator. Of course, short interest could still increase from these levels.

The Fed published the minutes of its September FOMC meeting. Most Federal Open Market Committee members still think an interest rate hike is possible this year. According to the Minutes from the September meeting, the Fed decided to wait on concerns about sluggish inflation and global economic growth, particularly in China. It also did not want to hike rates with inflation below its 2% target, as this could have hurt its credibility. The Fed remarked that the pullback in equities in August was likely because investors believed stocks were expensive.

Most thought that their goal of healthy labor market had been met or would be met by the end of the year. That view may be different now that the September jobs report, released after the Fed meeting, showed slowing growth. Fed officials decided it would be “prudent” to wait for more data to confirm the economy was growing at a moderate rate and labor market conditions had improved further.

House Republicans were scheduled to gather today to elect a new Speaker after John Boehner abruptly announced two weeks ago that he plans to retire from Congress at the end of October. House Majority Leader Kevin McCarthy was expected to be the front-runner for the Speaker’s job, but before the vote this morning, McCarthy dropped out of the race.

Yesterday  the Freedom Caucus, a group of about 40 of the House’s most conservative members announced it was throwing its support behind Rep. Daniel Webster, a Florida sophomore considered a longshot challenger to McCarthy. That comes three days after Jason Chaffetz, a three-term Utah Republican and Chair of the Oversight Committee announced he, too, was challenging McCarthy. A full House vote is scheduled for the end of the month. House Republicans tweeted that the leadership election would be postponed.

As the politicians sort through the chaos, there is still work to be done.  The Treasury Department has said it will exhaust its authority to borrow money to fund the government on Nov. 5. If Congress does not raise or suspend the government’s statutory borrowing limit, the government would default on its debt days later, risking economic chaos, soaring interest rates and plunging stock prices. Then, on Dec. 11, a stopgap spending bill expires. Without congressional action, much of the government will shut down. And don’t forget an October 29 deadline to replenish the Highway Trust Fund, which funds many construction projects across the country. With leadership elections occupying much attention, the window to get something done grows smaller.

Brazil is facing political and economic crisis; Brazil’s Federal Accounts Court has ruled President Dilma Rousseff manipulated government budget figures in 2014, and the nation’s highest court permitted a lawsuit to annul last year’s presidential election. The move paves the way for a possible impeachment, although any ouster would likely take months and has no guarantee of succeeding.

Jobless claims fell by 13,000 to 263,000 in the week ended Oct. 3, the fewest since July 18. The four-week average of claims, a less-volatile measure than the weekly figure, dropped to 267,500.

Revolving credit continues to show life, up a solid $4.0 billion in August for a sixth straight gain. Gains in this reading, which have been scarce this recovery, perhaps suggest that consumers are growing less reluctant to run up their credit cards.

The United Auto Workers union has reached a tentative deal with Fiat Chrysler Automobiles on a new four-year contract, averting a strike of the automaker’s U.S. operations. Local UAW leaders will gather in Detroit on Friday to hear details of the deal, while Fiat Chrysler’s 40,000 union workers will have to vote again to finalize the agreement. If the pact is ratified, the UAW will likely use it as a template for negotiations with General Motors and Ford.

A Congressional hearing into the Volkswagen emissions cheating scandal continued today. Volkswagen’s top U.S. executive, Michael Horn, repeatedly apologized but didn’t reveal details of who was behind the scam or who knew what, when.  Horn was grilled on questions he claimed to not have answers to and the lawmakers didn’t get the answers they were looking for. In Germany, police and prosecutors swooped in on Volkswagen factories and employees’ private homes in an early morning raid to gather evidence about who was behind the carmaker’s decision to cheat on diesel emissions tests.

Doubts have been raised over the level of Volkswagen reported death and injury claims in the U.S. over the last decade as the numbers have been so good as to make some industry experts question their validity. Already this year, Honda has been fined in the U.S. for underreporting claims and Volkswagen’s reported claims are significantly below the number Honda was fined for.

Dell, the world’s third largest PC maker, and the cloud storage company EMC Corp. are in discussions about a potential merger, for what could be one of the biggest technology deals in history. An agreement could be reached within a week, according to the New York Times. Of course, it’s also possible the talks won’t lead to any deal at all. It remains unclear if the two companies are discussing a full or partial takeover. EMC has a market capitalization of $50 billion, and it owns the software-development company Pivotal and enterprise-security firm RSA, as well as 80% of the virtualization company VMware.

After triggering a buy-sell clause in a deal with Michael Jackson’s estate, Sony appears ready to sell its half of the world’s biggest music publisher – Sony/ATV Music Publishing (a company worth about $2 billion). Sony and Jackson – and after his 2009 death, his estate – have jointly owned the company since 1995, each with a 50% stake. The publisher has a catalog that has copyrights to most of the Beatles’ songs, among many others including those by the Rolling Stones and Taylor Swift.

Just a few days after Google officially became a subsidiary of Alphabet, its new holding company, Alphabet has acquired the domain name abcdefghijklmnopqrstuvwxyz.com. Google announced its restructuring in August. At the time, Google unveiled its website with a URL of abc.xyz. A Google spokesperson said, “We realized we missed a few letters in abc.xyz, so we’re just being thorough.” The purpose of the new domain is unclear given that the page did not load on this morning.

Netflix is raising prices for the second time in two years. The company’s “standard” tier of service will increase by $1, to $9.99 a month, starting November 18. Prices for its “basic” and “premium” tiers remain the same.

Remember Etsy, the online site for handcrafted stuff? Amazon is looking to crush Etsy by announcing its own marketplace specifically targeted at factory free, handmade goods.

Urban Outfitters has asked salaried workers at the company’s home office to “volunteer” for extra weekend shifts at a new fulfillment center. The picking, packing and preparing that’s required of voluntary workers are, in fact, jobs that normally pay wages. Urban Outfitters says many wage employees offered to pitch in, but hourly-wage workers were excluded from the voluntary work because it might violate labor laws.

Bill Gross sued his former employer, Pimco, for improperly firing him. Gross says his ouster was driven by greed. Gross, a billionaire, is demanding a jury trial and damages of no less than $200 million.

Belarusian writer Svetlana Alexievich won the Nobel Prize in literature. Swedish scientist Tomas Lindahl, American Paul Modrich and U.S.-Turkish national Aziz Sancar won the Nobel Prize in chemistry on Wednesday for showing how cells repair damaged DNA, work that can be used to develop new cancer treatments. The Nobel Prize in medicine was awarded to Irish-born William Campbell, Satoshi Omura of Japan and Tu Youyou – the first-ever Chinese medicine laureate for discovering drugs against malaria and other parasitic diseases that affect hundreds of millions of people every year.

Takaaki Kajita of Japan and Arthur McDonald of Canada won the Nobel Prize in physics on Tuesday for discovering that tiny particles called neutrinos change identities as they whiz through the universe, proving that they have mass; by uncovering the “chameleon-like” nature of neutrinos, the laureates had solved a long-standing puzzle in particle physics that could alter our grasp of the cosmos. Tomorrow, the Nobel Peace Prize will be announced. Anticipation builds.

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

Financial Review

Close Calls

Sinclair Noe — October 7, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Review

Don’t Bet the Farm

Sinclair Noe — September 16, 2015

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

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DOW + 140 = 16,739
SPX + 17 = 1995
NAS + 28 = 4889
10 YR YLD + .02 = 2.30%
OIL + 2.56 = 47.15
GOLD + 14.10 = 1120.20
SILV + .53 = 15.03

The cost of consumer goods fell in August for the first time since the beginning of the year, owing mostly to another sharp drop in gasoline prices as the summer driving season came to an end. The consumer price index, or the cost of living, fell by a seasonally adjusted 0.1% last month. That’s the first decline since January. Retail prices are up just 0.2% in the past year. Excluding food and energy, so-called core consumer prices rose 0.1% in August. Core prices have risen just 1.8% in the past 12 months, unchanged from in July.

Energy prices declined 2% in August. Most of the relief came in the form of lower prices at the pump. The cost of a regular gallon of gas fell about 8% last month. The price of fuel had risen three straight months before the decline in August. Still, energy prices are down 15% over the past year. Food prices rose again, however. They increased 0.2% in August, spurred by higher costs of eggs, fruits and vegetables. The cost of airline tickets dropped for the second straight month. The price of new cars and medical care were unchanged. Lower inflation is also giving American workers more relief. Real hourly wages jumped 0.5% in August, a combination of lower inflation and a bump in pay. Real wages have climbed a modest 2% in the past 12 months.

By the way, the CPI-W is used to determine the COLA, or Cost of Living Adjustment; and it is based on the third quarter Consumer Price Index for Urban Wage Earners and Clerical Workers, which came in at negative 0.3% in August. We will still have to wait for September to determine the COLA, but we know it can’t go negative, so it looks like there will be no cost of living adjustment for Social Security benefits, or anything else.

The Federal Reserve will certainly consider inflation, or the lack of inflation, in their FOMC meeting today and tomorrow. An improving labor market and a growing economy are seen giving the Fed enough fodder to justify a hike. But many analysts see enough concern over low inflation and the impact of a rate move on fragile emerging markets as likely to stay the Fed’s hand. The World Bank and the International Monetary Fund have both argued against a Fed rate increase out of concern a move could add to turmoil in emerging-market economies, which has been fueled by a collapse in commodity prices and related concerns about China’s economy and Beijing’s decision last month to devalue its currency.

If you want to understand what the World Bank and IMF are worried about, you can look to 1997 and the Asian financial crisis. In 1997, speculative attacks against the Thai baht forced the country to float and devalue its currency in a move that was swiftly followed by the Philippines, Malaysia, Singapore, and Indonesia. Then came a massive decline in Hong Kong’s stock market that led to losses in markets around the globe. Eventually the Russian ruble collapsed. Long Term Capital Management, a hedge fund run by John Meriwether and a few Nobel laureates, made some highly leveraged bad bets, and for a while it looked like the whole thing might result in a global financial meltdown.

While parallels exist between 1997 and the current emerging market selloff, notably in the form of a stronger dollar, which makes it more expensive for emerging-market countries to finance their debts, plus lower commodity prices and slowing trade, it could be more dangerous today; there are more highly leveraged hedge funds, and sovereign funds, and derivative trades. At the least, emerging market debt will become more expensive, commodities (denominated in dollars) will become less expensive, trade will likely slow, and defaults could become more common.

The Fed’s decision tomorrow will be felt around the world because the dollar is still the reserve currency and the Fed’s monetary policy determines what happens to currencies, stock markets and economies right around the world. The markets are pricing in roughly a one-third likelihood of a rate rise this week, but, in truth, no one has any real idea whether the trigger will finally be pulled or not. I think there is a much higher probability the Fed will hike rates. We’ve been warned, it has been telegraphed and signaled and communicated in almost every way other than an official proclamation. And if they don’t do it tomorrow – when will they?

ZIRP, or Zero Interest Rate Policy was instituted in response to emergency financial conditions nearly 7 years ago. Where is the emergency today to justify ZIRP? The economy is less than stellar but it’s not like Lehman Brothers just shut their doors. And so my best guess is the Fed will raise rates tomorrow, but I’m not betting the farm because I don’t know what will happen. Neither do you. Plan accordingly.

Home-builder confidence in the market for newly constructed single-family homes rose a point to 62, the highest level since Nov. 2005, according to the National Association of Home Builders/Wells Fargo housing market index. Any reading above 50 indicates good conditions.

The Energy Information Administration reports oil stockpiles slipped 2.1 million barrels last week. Refineries increased operating rates for the first time since July, and supplies of gasoline and distillate fuels surged. Stocks of oil exploration and production companies rallied, while those of refiners fell. WTI crude rose 5.7%; it was the highest close and biggest one-day gain since Aug. 31.

So, how is the economy on Main Street? The Census Bureau has some answers. The median household income was $53,657 last year, down from $54,462 in 2013 but not statistically different. The poverty rate was 14.8%, which means 46.7 million people were impoverished — the fourth straight year in which the number of people in poverty was not statistically different. The percentage of people without health insurance coverage for the entire 2014 calendar year was 10.4%, down from 13.3% in 2013.

The Obama administration has begun preparations for a possible federal shutdown next month as a series of obstacles threaten a repeat of 2013. Lawmakers have just 15 days to reach a budget agreement before September 30, when current funding expires.

Snapping a major two-day slump, China’s Shanghai Composite Index jumped 4.9%, with all of the gains coming one hour before markets shut in a pattern that’s generally interpreted as government intervention.

Japan debt ratings were cut today by Standard & Poor’s over doubts the government will revive economic growth and end deflation in the next two to three years. The country currently has some $450 billion of debt outstanding; and the credit rating was cut to AA- rating instead of an A+ report card. The S&P downgrade is the most recent of the major credit-rating companies to do so; Moody’s was the first, in December 2014, followed by Fitch in April. S&P justified its downgrade by saying that the outlook for Prime Minister Shinzo Abe’s “Abenomics” program is grim.

Eurozone officials are racing against the clock to restructure Greece’s banking system before new rules kick in that could wipe out corporate deposits and result in disastrous effects for the country’s economy. The rush has been complicated by Sunday’s snap parliamentary elections, which could produce no clear winner and prolong negotiations over a governing coalition.

Anheuser-Busch InBev has informed rival SABMiller that it intends to make an offer to acquire the British firm in a deal that would bring together the world’s two largest beer makers. SAB Miller issued a statement saying, “No proposal has yet been received and the board of SABMiller has no further details about the terms of any such proposal.” So, the deal is far from certain, but if it happens, it would probably value SAB Miller around $75 to $92 billion, and create a brewing giant that would dominate much of the global beer market; which raises some questions about whether such a deal could pass anti-trust muster.

Also, since Anheuser Busch InBev is now a Belgian company trying to acquire SABMilller, a British company, there are some unique rules that come into play. Stringent rules on disclosure require a company to confirm or deny any hint of a deal, whether that comes from an anonymously sourced news article or unusual stock movement. The disclosure triggers a 28-day timeline for a formal, fully financed bid. Known as the put-up-or-shut-up rule, if AB InBev decides to walk away from the transaction it can’t come back for six months.

General Motors has agreed to sign a deferred-prosecution agreement to end a US government investigation into its handling of an ignition-switch defect linked to 124 deaths. The company will pay less than the $1.2 billion that Toyota paid to resolve a similar case, but the exact amount was not immediately known. The deal means GM will be charged criminally with hiding the defect from regulators and in the process defrauding consumers, but the case will be put on hold while GM fulfills terms of the deal.

The United Auto Workers union has reached a tentative labor deal with Fiat Chrysler after a long drawn-out night of negotiations. The union hopes the terms can be used as a template for Ford and GM, which also extended their deals past a midnight deadline on Monday to allow more time to wrap up negotiations. Under the agreement, Fiat Chrysler will eventually phase out the two class wage system between new factory workers and more senior employees.