Financial Review

Fed Day

Sinclair Noe — February 1, 2017

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DOW + 26 = 19,890
SPX + 0.68 = 2279
NAS + 27 = 5642
RUT – 0 .60 = 1361
10 Y + .02 = 2.47%
OIL + .73 = 54.15
GOLD – .070 = 1210.60

Today is Fed Day. The FOMC released its statement today, there was no press conference, and was no change; interest rates unchanged, outlook unchanged. Policy makers reiterated their expectations for moderate economic growth, “some further strengthening” in the labor market and a return to 2 percent inflation.

Policy makers in December penciled three rate hikes into their 2017 forecasts and there was nothing in today’s statement that would indicate a change from that course. Wall Street tries to read between the lines, and the absence of a more hawkish tone was interpreted as dovish; the thinking is that if the Fed really wanted to hike rates 3 times this year, they would have given us a hint.

Of course, the Fed policymakers could still have plenty to say in their speeches over the next few weeks, but for now, the implied or maybe just imagined tone is dovish.

The VIX, the volatility index, is hovering near multi-year lows and intraday, there was a little flash crash that momentarily sent the VIX under 10, which is a level we haven’t seen for about 10 years. The dollar index briefly flirted with the 100 level but that didn’t last. The dollar was mildly higher at 99.6. the dollar suffered its worst January on 3 decades.

ADP reports private-sector hiring picked up in January, as employers added 246,000 jobs, well above expectations. This was the fastest pace of job growth since June. Manufacturing added 15,000 jobs in January, the most since December 2014. Economists use ADP data to get a feeling for the Labor Department employment report, which will be released Friday and covers government jobs in addition to the private sector. Jobs are the most important economic indicator there is.

If this is improving, then the economy is improving. If the economy improves, earnings have more visibility. That can grab investors off the sidelines that had been worried about valuations.

The Institute for Supply Management (ISM) said its index of manufacturing activity rose to 56.0 last month from December’s reading of 54.5. That was its highest level since November 2014. A reading above 50.0 indicates expansion in the manufacturing sector, below indicates contraction.

The ISM indicated that the survey suggested that the overall economy had grown for the 92nd consecutive month. The new orders index rose to 60.4 in January from 60.3 a month earlier. The employment index advanced to 56.1 last month from the prior 52.8 and compared to forecasts for an increase to 53.1. There was also a big pop in the prices index.

The U.S. Census Bureau reports construction spending in December 2016 was estimated at a seasonally adjusted annual rate of $1,181.5 billion, 0.2 percent below the revised November estimate. The December figure is 4.2 percent above the December 2015 estimate. The value of construction in 2016 was $1,162.4 billion, 4.5 percent above spending in 2015.

Facebook reported a blockbuster fourth quarter, with $8.81 billion in revenue and 1.86 billion monthly active users and 1.23 billion daily active users. The company managed to beat growth expectations across the board, despite concern that it’s running out of room to place ads in the News Feed.

Facebook made an average of $4.83 in revenue per user, globally, over the last quarter. In the US and Canada, where disposable income is high and Facebook is well-established, each user was worth $19.81. Part of the company’s success is its ability to make more and more money off its existing users. Ad revenue shot up 53% over the quarter.

It wasn’t all sunshine and daffodils: a Dallas jury has ordered Facebook to pay $500 million in damages for a lawsuit that claims its Oculus VR subsidiary was based on stolen tech. The money will go to game maker Zenimax, who filed the lawsuit against Oculus in 2014. Oculus wasn’t found guilty of stealing trade secrets from Zenimax, but the jury did find that Oculus co-founder Palmer Luckey violated a signed non-disclosure agreement.  Facebook says it will appeal.

Volkswagen will pay at least $1.26 billion to fix or buy back nearly 80,000 polluting 3.0-liter diesel-engine vehicles. And the automaker could be forced to pay up to $4.04 billion if regulators don’t approve fixes for all vehicles.

New York Attorney General Eric Schneiderman filed a lawsuit that accuses Charter Communications Inc’s Spectrum cable unit of short-changing customers on internet speeds.

Pipeline company Oneok Partners LP’s biggest shareholder Oneok Inc said it would buy the rest of the company for $9.3 billion.

The acquisition of Rite Aid by Walgreens is being opposed by a union representing about 6,000 Rite Aid workers. The union said the two drug store chains don’t go far enough to address antitrust concerns.

Roche’s profit got a kick from drugs. The Swiss pharma company reported 8% profit growth in 2016 over the year before, thanks to robust sales of its medicines and diagnostic tools. Roche is bracing for the financial impact of copycat versions of its two best-selling cancer drugs.

Anthem reported adjusted quarterly profit of $1.76 per share, beating estimates by 15 cents, while revenue also beat forecasts. Anthem said it ended 2016 with better-than-expected enrollment.

Tupperware reported adjusted quarterly profit of $1.45 per share, 8 cents above estimates, despite a revenue miss.

Marathon Petroleum reported quarterly profit of 43 cents per share, well above estimates of 26 cents, and revenue also beat forecasts by a wide margin. Marathon’s results were driven by strong performances in its refining and transportation units.

Electronic Arts earned an adjusted $2.58 per share for its latest quarter, beating estimates of $2.30. Revenue also beat forecasts, helped by strong sales of the video game maker’s “Battlefield 1.”

Amazon will invest about $1.5 billion in an air cargo hub in northern Kentucky, planning to employ 2,700 people and eventually house 40 Amazon Prime Air planes there.

Some 15.4 million consumers were victims of identity theft or fraud last year, according to a new report from Javelin Strategy & Research. That’s up 16 percent from 2015, and the highest figure recorded since the firm began tracking fraud instances in 2004. In all, thieves stole $16 billion, the report found — nearly $1 billion more than in 2015.

A law allowing Prime Minister Theresa May to trigger Britain’s exit from the European Union cleared its first legislative hurdle today, paving the way for the government to launch exit talks by the end of March. The UK parliament passed a law giving Prime Minister May the right to trigger Article 50 of the EU’s Lisbon Treaty – the legal process for leaving the bloc – after the Supreme Court ruled last week that she could not take that decision unilaterally. The vote authorizes Theresa May to begin the withdrawal process, which she has indicated she will do by the end of March, 2017.

Last night President Trump announced Neil Gorsuch as his nominee for the Supreme Court to replace the late Justice Antonin Scalia. Today, Trump encouraged Senate Majority Leader Mitch McConnell to use the “nuclear” option to help get Gorsuch confirmed to the Supreme Court if Senate Democrats decided to filibuster his nomination.

If Democrats filibustered the nomination, Gorsuch would need a super-majority of 60 votes to be confirmed in the Senate. Republicans currently control 52 seats. The nuclear option would rewrite Senate rules and only require a majority for confirmation.

President Trump’s national security adviser, Michael Flynn says the administration is putting Iran “on notice” after it tested a ballistic missile, although he did not elaborate on what that meant.

Rex Tillerson, the former chairman and CEO of ExxonMobil has been confirmed to become the nation’s 69^th Secretary of State.

The Acting Secretary of the Army has directed the Army Corps of Engineers to issue the final permit needed by Energy Transfer Partners to finish the Dakota Access oil pipeline.

One year ago, today, the World Health Organization declared the mosquito-borne virus known as Zika an international public health emergency. Zika is no longer classified as a crisis, but new infections are still present around the globe. The WHO said in a report, saying, “Overall, the global risk assessment has not changed,” and warning that vigilance worldwide must remain high.

Financial Review

Water Wars

Sinclair Noe — November 29, 2016

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

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DOW + 23 = 19,121
SPX + 2 = 2204
NAS + 11 = 5379
RUT – 1 = 1328
10 Y – .02 = 2.30%
OIL – 1.82 = 45.26
GOLD – 5.40 = 1189.40

The Nasdaq Composite hit a new intraday high at 5403, but the major indices could not close at new highs.

The economy grew at the fastest pace in over two years in the third quarter. Gross domestic product expanded at a 3.2% annual rate, up from an earlier reading of 2.9%. Consumer spending rose 2.8% in the quarter, stronger than the original estimate of 2.1% and the strongest pace since 2002.

Another big contribution to the economy was business investment in structures like offices and factories, which expanded at a 10.1% pace, faster than the initial estimate of a 5.4% clip.

Corporate profits soared 6.6% in the third quarter, a much better performance than the 0.6% decline in the second. And after-tax profits were up 7.6% from the second quarter. Exports were marked up slightly, to a 10.1% gain from 10.0%, largely thanks to a surge in soybean exports.

Gross domestic income was up 5.2% in the third quarter. That was the fastest pace of increase in gross domestic income since the second quarter of 2014 and followed a 0.7 percent rate of increase in the second quarter. The average of GDP and GDI, which economists consider to be a more accurate measure of current economic growth and a better predictor of future output, increased at a 4.2 percent rate in the third quarter, the fastest pace in two years.

A measure of core inflation, which excludes volatile categories like food and energy, rose 1.7% during the quarter, unrevised from the initial reading. That’s inching closer to the Federal Reserve’s 2% target. The Atlanta Fed is currently forecasting GDP rising at a 3.6 percent rate in the fourth quarter. Tomorrow, the Federal Reserve publishes the Beige Book, to help prepare for the next FOMC policy meeting in two weeks.

National home price appreciation stayed strong in September. The S&P/Case-Shiller 20-City index was up 0.1% in the three months ending in September, and was 5.1% higher than a year ago, Case-Shiller’s national index rose 5.5% compared to a year ago, and passing the peak high of 2006.

There are fewer homeowners enjoying those higher prices; the home-ownership rate has dropped from 69.2% in 2004 to just 63.5% today. And only 7 major markets have recovered from the downturn – Phoenix home prices are still below the peak. In Phoenix, existing home prices were up 0.3% in September, and up 5.3% in the 12 months through September.

A separate report from the Conference Board showed its consumer sentiment index surged in November, climbing back to pre-recession levels. Consumers were upbeat about the labor market and current business conditions. The upbeat attitude is extending to holiday sales. U.S. online sales gained momentum on Cyber Monday and hit a single day record of $3.45 billion, per Adobe Digital Insights.

Oil prices fell 3.8% on signs leading oil exporters were struggling to reach a deal to cut production to reduce global oversupply. OPEC will meet in Vienna tomorrow, aiming to implement a deal outlined in September to cut output by around 1 million barrels per day. Non-OPEC producer Russia confirmed it would not attend the OPEC gathering. There remains disagreement among OPEC members over which producers should cut by how much.
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UK Prime Minister Theresa May has always insisted that Brexit means Brexit, without adding much in the way of detail. A photograph of scribbled notes in the arms of a Conservative Party aide entering Downing Street yesterday reveals something of the plan, showing the UK aim is to “have your cake and eat it.”

In testimony to European Parliament lawmakers, ECB President Mario Draghi took a different view, warning that Britain’s economy would be the first to suffer from a so-called ‘hard Brexit.’

Allstate has agreed to acquire privately held Squaretrade, which sells warranties for electronic products, for about $1.4 billion from a group of shareholders that includes Bain Capital.

AT&T took the wraps off its new DirecTV Now streaming service on Monday, making a foray into the new and crowded online video service market. The company said it will offer three new streaming plans – DirecTV Now, Freeview and Fullscreen – starting Nov 30.  DirecTV Now pricing bundles will range from over 60 channels for $35/month to over 120 channels for $70/month.

Texas has reported its first home-grown case of Zika virus – making it the second US state with mosquitoes spreading the disease. It’s a long-feared development but not a surprising one. Like Florida, South Texas is home to the mosquitoes that spread Zika and hosts many travelers to and from countries where the virus has been spreading.

Intel confirmed it will supply chips for self-driving car systems designed by Delphi Automotive and the Israeli company Mobileye. Those two companies announced in August plans to sell automakers a system by 2019 that can give less expensive cars and trucks the intelligence to drive themselves.

Shoppers can finally buy  Nike’s self-lacing, “Back to the Future Part II”-inspired sneakers. Nike says the sneakers are the “first step into the future of adaptive performance”; that means the hi-top sneaker can sense how snugly it should be laced, without the wearer having to tighten and loosen it manually. The HyperAdapt 1.0 shoes will retail at $720, which will put a squeeze on your pocketbook.

If you make the drive from Phoenix to Las Vegas, you cross the Colorado River at Lake Mead, and you can easily see the effects of 16 years of drought on this vital source of water for about 40 million people in 7 US states and 2 Mexican states.

The lake has a big bathtub ring, where the water once was; now, the water is at its lowest point since the lake was first filled in the 1930s. And that is raising the stakes for the US and Mexico to try to hammer out an extension of a 4-year-old agreement on how to share the water. That agreement expires at the end of 2017.

Negotiators who have worked for years are pressing to finish a new pact. Water policy experts say that even before Trump’s election, the Obama administration had been pressing to tie up a new deal for the Colorado River and avoid any delays caused by the change in administrations.

The Colorado River provides the lifeblood of much of the American Southwest, feeding desert metropolises including Phoenix, San Diego and Las Vegas, and supplying farmers who grow 15 percent of the nation’s food. Farmers and cities in Arizona and Nevada could face their first cuts in water supplies a year from now, just as the existing agreement ends. Without a new agreement with Mexico, it is unclear whether or how those cuts could be shared across the border, raising the prospect of either deeper, swifter cuts to US states or a bitter cross-border dispute.

Mexico holds significant leverage since its water is the most protected as a treaty obligation. It also has the right to take the US to international arbitration, and controls the delivery of Rio Grande water to American farmers in Texas. Under a 1944 treaty with Mexico, the U.S. must send 1.5 million acre-feet of water — nearly half a trillion gallons —across the border each year, an amount that’s roughly enough to supply 3 million homes.

But the treaty’s provisions laying out rules on what happens during a drought are vague and undefined. Moreover, hydrologists now realize that the period in the early 20th century when the Colorado River’s water supply was divvied up was unusually wet. And as temperatures rise and climate change shrinks the winter snow pack that feeds the Colorado, the river is likely to carry even less water in the future.

Water levels behind the Hoover Dam at Lake Mead this year plummeted to the lowest level since the reservoir was built. Under existing law, Arizona and Nevada must start taking cuts when water levels reach 1,075 feet above sea level in late summer.

The Bureau of Reclamation estimates a 50-50 chance that the lake will hit that level next year, triggering the first supply cuts for the U.S. — and potentially Mexico — in 2018. In fact, if the existing compacts and treaties had been strictly followed, the cuts would already have begun.

But after years of battling each other in court and across the negotiating table, the U.S. and Mexican governments and the seven U.S. states in the Colorado River basin decided to stop fighting and start working together, ultimately staving off water delivery cuts for several years.

Arizona, Nevada and California have struck several deals to undertake and fund aggressive water conservation programs. The U.S. and Mexico struck a similar deal as part of the water sharing agreement signed in 2012 that is set to expire next year.

Under that deal, called Minute 319, the states and the U.S. government are investing $21 million in water conservation programs in Mexico like lining canals to reduce leaks and improving water efficiency at farms. That deal also takes steps to restore the parched river delta south of the border, and allows Mexico to store some of its Colorado River water supplies in Lake Mead to make up for capacity that was lost in Mexico after a 2010 earthquake damaged its dams.

That helped Mexico solve its shortage problem while bolstering water levels at the critical reservoir. But that history of collaboration may be tested if the negotiations drag on.

Financial Review

Taxman Bites Apple

Sinclair Noe — August 30, 2016

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

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DOW – 48 = 18,454
SPX – 4 = 2176
NAS – 9 = 5222
10 Y + .01 = 1.57%
OIL – .70 = 46.28
GOLD – 12.70 = 1311.50

Since July 8, when the S&P rose 1.54%, that index hasn’t moved more than 0.9% in any given day, and most of those changes were slight gains, including 10 all-time highs. Since Brexit, the S&P 500 has now gone 43 straight sessions without a daily decline greater than 0.7%.

Compare that with the first 43 days of this year when it happened 15 times. For the month of August, the S&P 500 has managed to gain just 3 points, which means it is about as flat as it can be.

EU antitrust regulators have ordered Apple to pay up to €13-billion-euro ($14.5-billion dollars) in taxes to the Irish government after ruling that a special scheme to route profits through the country was illegal state aid. The EU Commission says Apple paid an effective corporate tax rate of less than five-one-thousandth of a percent (0.005%) on its European profits in 2014.

Apple has previously said it received no special treatment in Ireland. Apple’s tax arrangement with Ireland also meant the company avoided taxation on almost all profits from sales of its products in the EU single market, as the sales were recorded in Ireland rather than in the country where the transaction took place. Apple and Ireland said they would appeal the decision.

Ireland’s Finance Minister said he would fight the European Commission ruling that would force Apple to pay taxes to Ireland, even though €13-billion-euro in back taxes is more than twice the country’s entire 2015 corporate tax take and equivalent to about $3,000 for every man, woman and child in Ireland.

Apple is one of more than 700 U.S. companies that have units in Ireland, employing a combined 140,000 people. The government maintains that even if it were to take the cash, European rules mean it would have to use the money to pay down some of its €180 billion euros of national debt rather than fund spending.

CEO, Tim Cook wrote an open letter about the tax ruling and in it he said that Apple “in Ireland and in every country where we operate, follows the law and we pay all the taxes we owe.” And that is probably very true; no reason to doubt that Apple has hired top accountants and attorneys to figure out all the legal loopholes. And now the EU is closing one of the loopholes.

Tim Cook, that is to say Apple, has reacted with outrage, saying the decision would “upend the international tax system” and promising to appeal and overturn the decision. No doubt years of legal fees lie ahead for all involved. But the writing has been on the wall for Apple’s convoluted corporate structure in Ireland for years.

In 2013, a US Senate committee found that Apple pushed its foreign profits into a “stateless” company, one that paid no taxes anywhere, while using an intellectual property agreement to shift US profits to the subsidiary. In 2015, the EU released its own investigation, with more specificity: Apple had negotiated two special deals with Ireland that allowed it to allocate profits to this untaxed company.

The U.S. Treasury Department said it was disappointed with the European Commission seeking to force Apple to repay tax breaks given by Ireland and the case could undermine the “spirit of economic partnership between the U.S. and the EU.” In other words, the Treasury hopes to collect taxes on Apple’s overseas cash hoard someday and they don’t want to see that money going to Europe. Plus, any money Apple pays in taxes to the EU is deductible from Apple’s US tax bill.

Apple has its tax issues in Ireland but it will hope to put all that behind it next week as a new iPhone is expected to be announced. After all, as long as Apple is selling iPhones, $14 billion is not that much. What will an iPhone 7 look like? Pretty similar to an iPhone 6 but new features will likely include waterproofing, stereo sound, a touch-sensitive home button, a dual-lens camera, and due to its thinner chassis, the headphone jack will be removed. The starting point for storage on the new entry-level model is thought to be 32GB, up from 16GB.

New MacBooks, iPad features and a monitor may also be in the works from Apple – but at least some of those devices may not be seen until after the company’s Sept. 7 event. A thinner laptop, a faster iPad display to work with Apple Pencil, and 5K monitors are among the updates coming to Apple products. But the MacBook, which some tech bloggers had thought might come alongside the iPhone 7, is more likely to be released in October.

Voters are heading to the polls for Senate and House primaries in Arizona. Locations of polling places are assigned by address. The location that coincides with your registered address (on your voter information) is where you can cast your vote on election day. Arizona law allows any voter who is registered as independent to cast a vote in the primary election, but independent voters must choose a Republican or Democratic Party ballot at the polling place. The polls close at 7 PM.

The S&P CoreLogic Case-Shiller 20-city composite of existing home prices recorded a 0.8% gain in June and a 5.1% year-on-year advance; that’s down from a 5.3% pace the prior month. Home prices in three U.S. cities – Denver, Seattle and Portland, Oregon – showed the highest year-over-year gains. Housing prices in Phoenix were up 5.1% over the past 12 months.

The Conference Board’s consumer confidence index rose to 101.1 in August from a revised 96.7 in July. That’s the highest level since September 2015. Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months.

Americans’ view the economy right now was the strongest since before the Great Recession. The present situation index, a measure of current conditions, climbed to 123 from 118.8 and hit the highest level since late 2007. What consumers expect six months down the road, however, was less optimistic. The future expectations index edged up to 86.4 from 82, but it was still well below the post-recession high.

Fed Vice Chairman Stanley Fischer says the US job market is nearly at full strength and the pace of interest rate increases by the Federal Reserve will depend on how well the economy is doing. The Fed has signaled since March it would lift rates twice this year, but investors have been skeptical. Fischer did not comment on the timing of the next Fed rate hike but said “we choose the pace on basis of data.”

The U.S. Labor Department’s monthly employment report on Friday is expected to show the economy added 180,000 jobs in August.  At the end of the day, it always comes down to the jobs number. Yellen can try to persuade us that the case for a rate hike is strengthening, and the other policymakers can chime in with their two cents. But they are all held hostage to the government’s jobs numbers on Friday.

Anything strong (250,000-300,000) and you won’t need anyone from the Fed telling us they are going to raise in September. The number will say it all: below 200,000, and it’s back to a December-only hike.

Trade talks between the European Union and the United States should be halted and a new set started, France’s trade minister said on Tuesday, adding his voice to calls from within Germany for an end to the negotiations. Three years of talks on a Transatlantic Trade and Investment Partnership (TTIP) have failed to resolve multiple differences, including over food and environmental safety.

Critics say the pact would hand too much power to big multinationals at the expense of consumers and workers. But despite a weekend comment by Germany’s Economy Minister that the talks had “de facto failed”, and today’s comments by the French Trade Minister, the European Commission says negotiations are making steady progress and there is an outline of a future agreement.

More than 76,000 people have signed a petition demanding former European Commission President Jose Manuel Barroso be stripped of his pension after taking a job at Goldman Sachs. Organizers plan to present it to current leaders of the EU institutions at the end of September. Critics claim the role is inappropriate given Goldman’s role in the U.S. subprime crisis and Greek debt talks. That’s one way to stop a revolving door.

The FDIC reported that U.S. banks earned $43.6 billion in the second quarter, up from $43 billion a year earlier. Around 60 percent of banks reported an increase in profit from a year earlier. However, the impact of low oil prices on energy companies led banks to continue to post bigger losses on commercial and industrial loans. Only 4.5 percent of banks were unprofitable, down sharply from 5.8 percent in the second quarter of 2015.

Countries including the U.K., Australia and Taiwan have issued travel advisories for tourists to Singapore after the city-state announced a further increase in Zika cases. Singapore’s Ministry of Health confirmed 15 more people with locally-transmitted Zika, bringing the total number affected to 56. Health officials think they will identify even more positive cases.

Stocks Finish Nearly Flat in Choppy Session

Charles Schwab: On the Market

Posted: 8/9/2016 4:15 PM ET

Stocks Finish Nearly Flat in Choppy Session

U.S. equities finished near the unchanged mark in a session that saw a marked swing in and out of negative territory, as investors weighed some lackluster earnings reports, fairly upbeat domestic economic data, and uninspiring inflation reports out of China. Meanwhile, Treasuries and gold were higher, but crude oil prices and the U.S. dollar were lower.

The Dow Jones Industrial Average (DJIA) gained 4 points to 18,533, the S&P 500 Index inched nearly 1 point higher to 2,182 and the Nasdaq Composite rose 12 points (0.2%) to 5,225. In moderate volume, 775 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.25 to $42.77 per barrel, wholesale gasoline was $0.01 lower at $1.35 per gallon and the Bloomberg gold spot price rose $5.11 to $1,340.42 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 96.13.

Gap Inc. (GPS $27) reported a 4.0% year-over-year (y/y) drop in July same-store sales, versus the FactSet estimate of a 1.0% decline, as sales at its Gap and Banana Republic segments fell, while its Old Navy unit posted flat sales. GPS were solidly lower.

Valeant Pharmaceuticals International Inc. (VRX $28) achieved 2Q earnings-per-share (EPS) ex-items of $1.40, versus the expected $1.47, as revenues declined 11.0% y/y to $2.4 billion, compared to the projected $2.5 billion. However, shares were sharply higher as the company reaffirmed its full-year guidance and announced plans to divest assets.

Coach Inc. (COH $41) posted fiscal 4Q EPS ex-items of $0.45, above the projected $0.41, as revenues rose 15.0% y/y to $1.2 billion, roughly in line with forecasts. North American retail same-store sales rose 2.0% y/y, slightly above estimates and the first increase in in over 12 quarters. COH traded lower as the company's 4Q revenue growth and full-year EPS guidance are garnering some scrutiny among analysts.

Hertz Global Holdings Inc. (HTZ $45) announced 2Q profits ex-items of $0.41 per share, including unanticipated net charges making it unclear if the figure was comparable to the projected $0.29. Revenues declined 2.0% y/y to $2.3 billion, in line with expectations. HTZ issued full-year EPS guidance that was below estimates and shares were solidly lower.

Wayfair Inc. (W $39) fell sharply after the home furnishing retailer posted a 2Q loss of $0.43 per share, compared to the forecasted loss of $0.40 per share, and issued 3Q revenue guidance that missed expectations.

Small business optimism ticks higher

The National Federation of Independent Business (NFIB) Small Business Optimism Index for July ticked higher to 94.6 from June's 94.5 level, where the Bloomberg forecast had called for it to remain.

Preliminary 2Q nonfarm productivity (chart) declined 0.5% on an annualized basis, versus expectations of a 0.4% gain, following the unrevised 0.6% fall seen in the 1Q. However, unit labor costs rose 2.0%, versus the forecast calling for a 1.8% increase. Unit labor costs were revised lower to a decrease of 0.2% in 1Q.

Wholesale inventories (chart) rose 0.3% month-over-month (m/m) in June, compared to forecasts calling for a flat reading and May's upwardly revised 0.2% gain. Sales were up 1.9% m/m, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—fell to a 1.33 months level from the 1.35 posted in May.

Treasuries were higher, as the yield on the 2-year note was 2 basis points (bps) lower at 0.71%, while the yields on the 10-year note and the 30-year bond fell 5 bps to 1.54% and 2.26%, respectively. For more on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Tomorrow's economic calendar will be fairly light, with the only scheduled reports being the Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, expected to show 5.5 million jobs were available to be filled in June, matching that in May, as well as MBA Mortgage Applications.

Europe higher following earnings, Asia mixed following Chinese inflation data

European equities finished higher, with a plethora of earnings reports that were mostly positive bolstering positive sentiment, while basic materials led a broad-based advance across the major sectors. Focus on the impact of the late-June vote in the U.K. to leave the European Union (EU) on economic data continued, with U.K. industrial production ticking higher in June, while manufacturing output declined slightly more than expected. The British pound came under some pressure versus the U.S. dollar, briefly falling below the $1.30 mark for the first time since early July amid the Brexit vote fallout. For more on the potential impact of the Brexit vote, read Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Brexit's Impact on Sectors, Part Two at www.schwab.com/marketinsight. And for commentary on how the recent Zika pandemic may or may not affect the markets, see the latest article from Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, Does Zika pose an Olympic-sized threat to stocks?, at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop. German exports rose by a smaller amount than anticipated in June, and the euro ticked higher versus the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mixed, with yesterday's rebound in crude oil prices lending support, along with maintained losses in the yen, while traders digested some Chinese inflation data and monetary policy decision in India. Japanese securities advanced, with the yen holding onto yesterday's weakness, while those listed in Australia gained modest ground, led by strength in oil & gas issues, and South Korean stocks also moved higher. Mainland Chinese equities rose, while Hong Kong's market dipped slightly, following data that showed the nation's consumer price inflation rose by 1.8% y/y in July, matching forecasts, but a deceleration from the prior month's 1.9% rise, while producer price inflation declined 1.7%, after falling 2.6% in June, compared to the projected 2.0% drop. The data comes ahead of this week's plethora of reads on industrial production and retail sales, along with lending figures for last month. Schwab's Jeffrey Kleintop discusses China data in his article, Trust but Verify: Five Independent Indicators of China's Economy. Also, Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016. Read both articles at www.schwab.com/oninternational. Finally, stocks in India declined on the heels of the monetary policy decision from the Reserve Bank of India, where it kept its benchmark interest rates unchanged, as expected.

For tomorrow, the international economic calendar will offer machine orders, the Tertiary Index and inflation data from Japan, South Korea's unemployment rate, and industrial production from France.

Muted Action Amid Light News

Charles Schwab: On the Market

Posted: 8/8/2016 4:15 PM ET

Muted Action Amid Light News

Despite a jump in crude oil prices giving the energy sector a boost, U.S. equities finished lower, led by declines in healthcare stocks. Meanwhile, a dormant economic calendar was unable to provide any spark, and a lackluster trade report in China also dampened sentiment. M&A activity dominated the equity front, headlined by Dow member Wal-Mart Stores' acquisition of Jet.com for roughly $3.0 billion. Treasuries were little changed and the U.S. dollar was higher, while gold was modestly lower.

The Dow Jones Industrial Average (DJIA) lost 14 points (0.1%) to 18,529, the S&P 500 Index fell 2 points (0.1%) to 2,181 and the Nasdaq Composite declined 8 points (0.2%) to 5,213. In moderate volume, 775 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose by $1.22 to $43.02 per barrel, wholesale gasoline lost $0.02 to $1.36 per gallon and the Bloomberg gold spot price ticked $0.60 lower to $1,335.40 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.2% to 96.38.

Dow member Wal-Mart Stores Inc. (WMT $73) announced an agreement to acquire e-Commerce company Jet.com Inc for about $3.0 billion in cash, with an additional $300 million of Walmart shares being paid to the company over time as part of the transaction. WMT finished lower.

Tyson Foods Inc. (TSN $74) reported fiscal 3Q earnings-per-share (EPS) ex-items of $1.21, above the $1.06 FactSet estimate, with revenues declining 6.6% year-over-year (y/y) to $9.4 billion, compared to the expected $9.3 billion. TSN raised its full-year EPS outlook and shares gained modest ground.

Steinhoff International Holdings NV announced an agreement to acquire Mattress Firm Holding Corp. (MFRM $64) for $64.00 per share in cash, with a total equity value of about $2.4 billion. MFRM surged over 114%.

Economic calendar dormant

Treasuries finished nearly unchanged, with the economic docket void of any major reports today. The yields on the 2-year and the 10-year note were flat at 0.73% and 1.59%, respectively, while the 30-year bond rate was 1 basis point lower at 2.30%. For more on the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Tomorrow, the week's domestic economic calendar will heat back up, with the releases of preliminary 2Q nonfarm productivity and unit labor costs, forecasted to show production rose 0.5% month-over-month (m/m) and labor costs gained 1.8% m/m, as well as the NFIB Small Business Optimism Index for July, with economists anticipating a level of 94.5, matching that seen in June, while wholesale inventories will round out the day, expected to remain at June's flat reading.

However, the week will be headlined by some key reads on the consumer in the form of July retail sales and the preliminary University of Michigan Consumer Sentiment Index for August. In the recent Schwab Market Perspective: Is the Recent Rally for Real?, our experts note that consumer confidence remains relatively healthy according to the Conference Board, likely due at least in part to a continued healthy job market. This has helped to move wages higher after years of largely tepid or nonexistent gains according to the Atlanta Fed Wage Tracker, which could have aided the recent move up in the retail sales estimates for 2016 by the National Retail Federation. Read more at www.schwab.com/marketinsight, and be sure to follow Schwab on Twitter: @schwabresearch.

Europe and Asia higher in wake of U.S. employment report

European equities finished modestly higher, with financials leading the way on the heels of Friday's upbeat U.S. labor report, an analyst upgrade in the sector and as Italian banking concerns remained in check. Basic materials stocks gained ground despite some lackluster Chinese trade data. Stronger-than-expected reads on German industrial production, French business sentiment and eurozone investor confidence may have also provided some support, while U.K. stocks modestly added to a rally that began Thursday following the Bank of England's decision to cut its benchmark interest rate and surprisingly boost its asset purchases in the wake of the late-June Brexit vote. For more on the potential impact of the Brexit vote, read Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Brexit's Impact on Sectors, Part Two, at www.schwab.com/marketinsight. The euro dipped and the British pound was lower versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished higher, with Friday's stronger-than-expected U.S. July nonfarm payroll report boosting global sentiment and overshadowing a lackluster trade report out of China. Japanese equities rallied, bolstered by the yen extending its decline after the U.S. dollar gained ground on Friday's U.S. jobs data. Mainland Chinese stocks and those traded in Hong Kong advanced, even as the nation reported larger-than-expected drops in July exports and imports when reported in dollar terms. Australia's markets moved higher, led by the heavyweight oil & gas, financials and basic materials sectors, while some upbeat earnings reports helped push Indian securities higher, while South Korean stocks also gained ground. For analysis on how the recent Zika pandemic may or may not affect the markets, see the latest article from Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, titled Does Zika pose an Olympic-sized threat to stocks?, at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Tomorrow's international economic calendar will be fairly heavy, with reports scheduled for release to include: CPI and PPI from China, business confidence from Australia, trade data from Germany, industrial and manufacturing production and trade figures from the U.K., and retail sales from Brazil. In central bank action, the Reserve Bank of India will meet, with no change to its monetary policy stance expected.

Financial Review

7 Straight

Sinclair Noe — August 2, 2016

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

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DOW – 90 = 18,313
SPX – 13 = 2157
NAS – 46 = 5137
10 Y + .03 = 1.53%
OIL – .43 = 39.67
GOLD + 10.40 = 1363.80

The Dow logged its seventh straight drop, while the Nasdaq snapped its five sessions winning streak. The S&P 500 broke out of a very tight consolidation pattern, but still managed to close with a loss of less than 1%.  WTI crude oil erased an early gain and closed down 1.1% at a four-month low.

Consumers boosted spending by 0.4% in June — the third straight strong increase — but they’ve also been saving less to fund their purchases.  Income growth has not been keeping pace with spending. Incomes rose 0.2% in June for the second straight month.

As a result, the personal-savings rate dropped to 5.3% and matched a 15-month low. Savings had hit a four-year high earlier in the year. Inflation as measured by the PCE index edged up 0.1% in June. The PCE index, the Federal Reserve’s preferred inflation barometer, increased 0.9% in the 12 months ended in June. That’s unchanged from in the prior month.

The annual rate of core inflation was also flat at 1.6%.  Although inflation has been creeping higher lately, there still are no signs of widespread price pressures in the U.S. economy.

CoreLogic reports home prices were 5.7% higher in June compared to a year ago, and prices were up 1.1% from May to June. They forecast a 5.3% increase in home prices over the next year. Including distressed sales, national single family home prices remain 6.7% below peak values recorded in April 2006. Mortgage rates dipped in June to their lowest level in more than 3 years. Among major metro areas, Denver had the lowest unemployment rate and the strongest home price appreciation. Arizona saw a 5.5% increase in home prices over the past 12 months.

Japanese Prime Minister Shinzo Abe’s cabinet approved a $274 billion stimulus package. The Bank of Japan last week only tweaked its monetary stimulus. By total size, the stimulus package ranks among Japan’s biggest since the global financial crisis, but three quarters of the stated value comprises targeted low-interest loans from the government and state-owned companies. The program will include money for infrastructure projects, including a magnetic-levitation train line connecting Tokyo and Osaka, as well as reconstruction projects in the southern region hit by earthquakes in April.  It also will pay for cash handouts to 22 million low-income people.

The Federal Reserve reports loan standards to commercial and industrial firms and commercial real estate tightened for the fourth straight quarter in the three months ended in June. The survey also found standards on all categories of residential real estate mortgage loans were little changed, except some easing for loans that can be bought or guaranteed by Fannie Mae and Freddie Mac. The report also showed that demand for most types of residential real estate loans strengthened over the second quarter.

Major automakers in the U.S. market reported July vehicle sales slightly below expectations as the pent-up demand that has helped drive sales since 2009 plays itself out. In a continuing trend, consumers shunned passenger cars in favor of SUVs and pickup trucks. GM sales dropped 2%. Ford sales slipped 3%. Fiat Chrysler sales rose 0.3%. Nissan reported a 1.2% increase. Honda surprised with a 4.4% increase. Ford shares dropped 4.3% today and are down 14% in the last 4 sessions.

Shares in Biogen jumped almost 10% today, after the Wall Street Journal reported that Merck and Allergan have each informally expressed interest in a possible acquisition. A takeover of Biogen would be the biggest of a biotech company since 2008, and one of the largest takeovers by a drug company on record. Biogen makes drugs that treat multiple sclerosis and hemophilia, and its main focus overall is on neurological and autoimmune diseases, as well as rare diseases.

Pfizer said it has reached a $486 million settlement of shareholder litigation accusing it of causing big losses for shareholders by concealing safety risks associated with its Celebrex and Bextra pain-relieving drugs. Pfizer pulled Bextra from the U.S. market in April 2005, and agreed in September 2009 to pay $2.3 billion to settle a U.S. government probe into the marketing of Bextra and other drugs. The accord is subject to negotiation of a final settlement agreement and court approval, and would end more than 11 years of litigation against the drug maker.

Also, Pfizer reported better-than-expected quarterly results, driven by lower taxes and sales of generic medicines, but revenue from its array of branded patent-protected medicines brought disappointment. Pfizer did not offer any hints on whether it plans to split into two separate companies, a long-mulled potential decision that has kept investors in suspense.

Of the 353 companies in the S&P 500 that have reported earnings through Tuesday morning, 71 percent have topped analyst expectations, according to Thomson Reuters data. Earnings for the second quarter are expected to show a decline of 2.6 percent, an improvement from the expected 4.5 percent decline on July 1.

Emerson Electric, which makes factory automation equipment, said it would sell two units for a total of $5.2 billion as the company focuses on its high-growth businesses. Emerson will sell its network power unit to investment firm Platinum Equity in a deal worth $4 billion, while Japan’s Nidec Corp will buy its motors and electric power division for $1.2 billion.

Australia cut rates to a record low. The Reserve Bank of Australia lowered its benchmark interest rate to a record-low 1.50%, as expected. The central bank’s board noted “that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

European bank stocks were crushed again today. The sector remains under pressure after the results of the European Banking Association stress tests were released after markets closed on Friday. Europe’s STOXX Banking Index traded lower by 2.8%, taking this year’s total losses to more than 30%; with Germany’s Commerzbank pacing today’s decline among individual names, down 8.2% after reporting a 32% drop in quarterly profits.

Credit Suisse and Deutsche Bank – will be dropped from the STOXX 50, an index of Europe’s top 50 blue-chip companies next week. Credit Suisse and Deutsche Bank shares have lost half their value this year. Exclusion from a benchmark generally means that exchange-traded funds and other passive investors that track the index will be forced to sell the shares.

Deutsche’s plight should be of particular concern. Its shares are now worth barely a quarter of its book value. That is a twofold bind: proof that investors distrust the bank; and a practical block on being able to raise the equity needed to boost regulatory capital and absorb the cost of fines; and Deutsche faces considerable fines.  Investors are again pricing in a risk that the bank’s coco (or contingent convertible) bonds will be bailed in. Last month, the International Monetary Fund issued a report that concluded Deutsche is probably “the most important net contributor to systemic risks in the global banking system”.

And as bad as that is, the worst of the lot, is Italy’s Banca Monte dei Paschi, which utterly failed the stress test last week and now requires recapitalization. The Financial Times reports: “The proposal is being presented as “the last bailout” for Monte dei Paschi, with the expectation that, if the lender cleans up its bad loans, it will become a takeover target. Still, senior bankers admit it is highly risky and will prove a tough sell to drum up support for the recapitalization with the bank’s past history of burning investors. Bankers do not rule out that, if the recapitalization fails to find enough buyers, Monte dei Paschi may be forced to swap some of its debt for equity.”

The only good news is that Monte dei Paschi is nowhere near as big as Deutsche Bank. Italy is turning into the next Greece. Non-performing bank loans have risen to 18% in Italy. Monte dei Pachi has non-performing loans around one-third of its assets. I’m not sure how this plays out but it will probably be messy.

The Centers for Disease Control and Prevention advised pregnant women not to go to a Miami neighborhood where new, confirmed cases of Zika virus that appeared to be locally transmitted were reported. It was the first time the government health agency tasked with preventing the spread of disease has issued such an advisory for the Zika virus within the 48 contiguous US states, and it appeared to be the first time the CDC has warned against visiting any part of the continental United States for health reasons.

The warning applied to a one-square-mile area north of downtown Miami. Despite the narrowness of the warning, it may be problematic for Florida’s important tourism industry. The state drew in more than 100 million visitors and generated more than $89 billion of economic activity last year

At the end of last year, the FAA mandated—arguably as a stopgap against potentially stricter regulations from Congress about how citizens can use drones—that anyone wishing to fly a consumer drone weighing more than a half pound needed to get a registration number from the FAA for $5.

At a conference at the White House today on the future uses of drones in US airspace, Federal Aviation Administration director Michael Huerta told the gathered crowd that more than consumer 500,000 drones had been registered with the agency since December. According to the FAA, it took 100 years for about 320,000 regular aircraft to be registered with US officials—a feat that drones have surpassed in a matter of months.

Financial Review

Dovish Indeed

Sinclair Noe — July 6, 2016

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

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DOW + 78 = 17,918
SPX + 11 = 2099
NAS + 36 = 4859
10 Y + .02 = 1.38%
OIL + 1.27 = 47.87
GOLD + 7.00 = 1364.20
Silver + .14 = 20.16

The Federal Reserve released the minutes of the June FOMC meeting. When the central bank met in mid-June, an abysmal May jobs report (just 38,000 new jobs in May) had just startled markets, and the upcoming British referendum on European Union membership loomed large – an event that certainly had the Fed worried.

But beyond that, what was the Fed thinking? Were they confident of a recovery and chomping at the bit to hike rates, or were they more concerned that the economy was still too fragile for higher rates?

Turns out, the Fed was mixed. Some of the policymakers thought the weak jobs report was an aberration; others thought “the lower rate of payroll gains could instead be indicative of a broader slowdown in growth of economic activity.”  Even though retail sales were strong in April and May, “a few participants expressed caution.”

Some officials thought business investment could pick up, particularly given the “greater optimism” businesses had expressed, including in the Fed’s Beige Book. Yet “some participants mentioned that the sluggishness in business investment could portend a broader economic slowdown.”

There were similar mixed interpretations on inflation. In the end, the doves prevailed. The decision to leave rates unchanged was unanimous. The June minutes contained no reference to the timing of any future rate rises. Dovish indeed.

Stronger demand for imports boosted the U.S. trade deficit by 10% in May, but the rebound in consumer spending suggests the economy regained momentum after a slow start to the year.

The nation’s trade gap climbed $41.1 billion — a three-month high — from a revised $37.4 billion in April. Imports increased 1.6% in May to a seasonally adjusted $223.5 billion. Exports, meanwhile, slipped 0.2% to $182.4 billion.

Exports have been weak because of a strong dollar that makes American products more expensive as well as slower growth around the world. The U.S. exported fewer autos, airplanes and computer accessories in May.

The Institute for Supply Management’s service sector index jumped to 56.5% in June, a much stronger reading than expected. The forward-looking new orders component jumped 5.7 points to 59.9%, and the production index rose to 59.5. Employment increased 3.0 points to 52.7%, signaling expansion. The ISM says the report shows a “strong rebound” in economic activity.

The pound sterling dropped to a fresh 31-year trough overnight, sliding as far as $1.2796 to record a more than 14% loss in value since last month’s referendum. The 10-year US Treasury note yield hit a new record low of 1.32% in overnight trade; not so much an indication of US strength but of global weakness.

The Stoxx Europe 600 dropped 1.7%, with all but the defensive utilities sector losing ground. Among banks, Switzerland’s Credit Suisse Group and German lenders Deutsche Bank and Commerzbank posted their lowest share-price closes on record.

Henderson Global Investors, Columbia Threadneedle Investments and Canada Life suspended trading in at least $7.4 billion of property funds, taking the number of U.K. firms curbing redemption to six in the wake of Britain’s shock decision to leave the European Union.

Investors pulled money from real estate funds in the lead up to the vote, depleting cash levels, as industry commentators warned that London office values could fall by as much as 20 percent within three years of the country leaving the EU.

Standard Life Investments was the first money manager to halt withdrawals on Monday, followed by Aviva Investors and M&G Investments. These are open end funds. It is kind of like a run on a bank, but it is a mutual fund, and it is not as liquid as many investors had hoped.

Deutsche Boerse has signaled the company to be created from its planned merger with the London Stock Exchange may be headquartered outside of the U.K. following Britain’s EU vote. A referendum committee, involving representatives of both partners, will assess all regulatory and commercial goals aimed at getting the transaction approved.

Paris is sending letters to British executives. German politicians have paid for billboards in London to promote Berlin. Dublin is planning an advertising campaign, and Milan wants to be home to Europe’s bank regulator. Not 2 weeks after the Brexit vote and cities across the Eurozone are trying to steal away British jobs and lay claim as the new financial hub.

In London’s financial district on Tuesday a truck was spotted carrying a billboard with the words “Dear start-ups, Keep calm and move to Berlin.” French and German politicians have sparred over whether Frankfurt or Paris should take over London’s euro-clearing business.

And once again they miss the point; instead of trying to poach the UK’s financial interests, they should try to think about how they can build a union that is better than what they have and so good that people will want more of it.

Stock in struggling Italian bank Monte dei Paschi di Siena bounced back after the country´s financial market regulator temporarily banned short-selling in the bank´s shares. The intervention comes after shares in the troubled lender fell by nearly 20% in yesterday’s session.

Gold prices extended recent gains to strike a fresh two-year high and is now challenging $1400 per ounce. Silver prices topped $20 an ounce, a nearly two-year high, gaining over 10% just in the handful of trading days since the Brexit vote.

Analysts at UBS say gold has now entered a “new phase” and is the go-to investment for the remainder of 2016. They raised their annual forecast to an average of $1,280 an ounce, up from $1,225 an ounce.

Copper inventories are piling up. Copper inventories at the London Metals Exchange-approved warehouses rose 10,525 tons. The jump in inventory made for the biggest copper stockpile in nearly a month.

US cancer drug company Medivation has agreed to open its books and provide confidential information to French pharmaceutical company Sanofi as part of exploring a sale that would be open to other bidders.

Similar agreements have been signed with Pfizer and Celgene, which have also expressed interest in an acquisition. As part of negotiations, Sanofi agreed to drop efforts to have Medivation shareholders replace the board, after its $9.3 billion offer for the company was rejected in April.

Sanofi has also formed a partnership with the US Army to expand R&D of an experimental Zika vaccine that has shown promise in early laboratory studies and is among a few candidates expected to be tested on humans in the coming months. Researchers and companies are racing to get a vaccine to market as quickly as possible – though they caution it is likely to take three years or more before that happens.

Barcelona’s Argentine soccer star Lionel Messi was sentenced on Wednesday to 21 months in prison and fined $2.2 million after being found guilty of three counts of tax fraud, although it is unlikely he will serve time. Another penalty he will miss. Spanish law is such that any sentence under two years for a non-violent crime rarely requires a defendant without previous convictions to serve jail time.

The court also found Messi’s father guilty, sentencing him to 21 months and fining him 1.5 million euros. Messi and his father were accused of defrauding the Spanish government of 4.2 million euros in taxes between 2007 and 2009. They allegedly evaded taxes on income from Messi’s image rights by using a web of shell companies, which were revealed in the Panama Papers expose this spring.

The Pension Benefit Guaranty Corporation (PBGC) is now saying the government is on track to run out of money to prop up the troubled Teamsters Central States Pension Fund in 2024, roughly the same time the fund itself is expected to go bankrupt.

Without congressional action, the confluence of those two events could leave Central States pensioners collecting pennies on the dollars they invested in their retirements. Central States, the largest of the country’s troubled pension plans negotiated between single unions and multiple employers, has been operating at deficits of $2 billion a year recently.

The PBGC, which guarantees a minimum benefit to pensioners, expects to spend the better part of $15 billion assisting Central States in the next decade. But the projected rate of assistance to Central States and other ailing pension plans will wipe out the government’s multi-employer assistance funds by 2024. Should Central States fail and the PBGC emergency fund run dry, all of Central States’ 407,000 participants could see their payments cut almost to nothing.

The scramble to solve the problem has not been as urgent as the pressure to stop the cuts Central States proposed under the Multi-employer Pension Reform Act of 2014 (MPRA). That fight involved rallies by angry pensioners, some of whom faced benefit cuts of 40 to 70 percent. The Government Accountability Office said it would investigate investment decisions made by Wall Street firms hired by Central States Pension Fund trustees.

Financial Review

Fed Day

Sinclair Noe — June 15, 2016

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

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DOW – 34 = 17,640
SPX – 3 = 2071
NAS – 8 = 4834
10 Y – .02 = 1.60%
OIL – 1.00 = 47.49
GOLD + 6.00 = 1292.50

It’s Fed Day. The Federal Open Market Committee (the FOMC) released a policy statement leaving the fed funds rate unchanged at 0.25 percent to 0.5 percent, in the first unanimous decision since January. The FOMC statement read: “The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.”

The Fed expressed confidence that jobs will rebound, saying that it expects “labor market indicators will strengthen.” It said that the “drag from net exports appears to have lessened” and housing has improved, while business fixed investment has been “soft.”

At the start of the year, the Fed was projecting up to 4 rate increases in 2016; they have now revised that down to 2 rate hikes. The median long-run projection for the federal funds rate fell to 3 percent from 3.3 percent in March. Most market watchers do not expect a rate hike in July, although that is subject to change between now and then, if we see a really significant pickup in economic data.

The risk of the Fed prematurely raising interest rates at this point is extremely low. They are going to let this cycle lengthen and strengthen by keeping rates low. Unfortunately, this means the economic data of the past few months has really been bad. Job gains and overall output have disappointed, projections of future growth have declined, and inflation expectations remain far short of targets. And if there is a Brexit next week, we may be wondering why the Fed didn’t cut rates.

The statement said the Fed continues to monitor global market risks but in a press conference following the release, Fed chair Janet Yellen said next week’s referendum in the U.K. on whether to remain in the European Union was a factor in the U.S. central bank’s decision to hold interest rates steady. The Bank of England has begun a series of extra market operations aimed at boosting bank funding around the referendum. The European Central Bank said last week the bank is prepared to offer euro liquidity.

The dollar extended losses, touching a 20-month low versus the yen. Fed Chair Janet Yellen said in a news conference, that while the currency is “certainly relevant” to Fed rate decisions, “I really would not go so far as to say it is a constraint on monetary policy.” Treasuries gained, with two-year note yields touching the lowest since February. Gold rallied again.

Oil prices extended their losses for the fifth straight day, the longest losing streak since February. Goldman Sachs published a research note predicting the price recovery is likely to stall. The bank explained that the restart of Canadian production, prospects of a solution to Nigerian outages, larger-than-expected output from OPEC members, and the risk of smaller-than-expected production declines as result of higher crude prices are likely to temper price gains going forward.

With opinion polls showing momentum swinging to the “Leave” camp, British finance chief George Osborne is warning voters that he will increase taxes and cut spending if they decide to leave the bloc in next week’s referendum. Meanwhile, the world’s biggest banks are drafting senior traders to work through the night of June 23, which might be one of the most volatile 24 hours for markets since Black Wednesday of 1992. If it sounds like political fear mongering…, yea, that’s about right.

The Labor Department said its producer price index, a measure of prices at the wholesale level, increased 0.4 percent last month after rising 0.2% in April. In the 12 months through May, the PPI slipped 0.1% after being unchanged in April. The core PPI, a measure of underlying producer price pressures that excludes food, energy and trade services dipped 0.1% last month.

Industrial production fell more than expected in May on a decline in utilities output and auto manufacturing, a sign that the economy may be losing some steam in the second quarter. Industrial output declined 0.4 percent last month. American producers are still battling the fallout from the plunge in energy prices that has sapped the appetite for investment, while a strong dollar and slow global growth have weighed on exports. Manufacturers could find some relief as companies have trimmed stockpiles, leaving them with fewer goods on hand should consumer spending continue to climb.

Chinese stocks rose the most in two weeks today as investors shrugged off MSCI’s decision not to add mainland shares to its key Emerging Markets Index. This marks the third year running it has given Chinese A-shares the thumbs-down, given lingering concerns about market accessibility. MSCI noted that it would consider including the equities as part of its 2017 review, but did not rule out a potential off-cycle announcement.

California has overtaken France as the world’s sixth-largest economy, growing by 4.1% in 2015. The most-populous U.S. state, with a gross domestic product of $2.5 trillion, has also eclipsed recession-plagued Brazil. Irena Asmundson, chief economist of the California Department of Finance said, “This is the result of both good growth in California and exchange-rate movements of the dollar vs. other currencies.”

In an effort to make good on a pledge to cut its carbon output anywhere from 80 percent to 95 percent by 2050, Germany is mandating that new cars registered there will have to be emissions-free by the year 2030. The German government is planning to provide subsidies that it hopes will boost the sale of electric cars. In a plan similar to those in other countries, people who buy electric or hybrid cars would be eligible for cash incentives. The Environment Ministry is hopeful that the move will help to sell around 500,000 electric cars by the year 2020.

As many as 8,000 more jobs are set to go at Bank of America’s consumer arm as the digital banking revolution gathers pace and reduces the need for back-office staff and bank tellers. The biggest US retail bank by deposits also plans to add sales staff — including mortgage loan officers, small business bankers and personal investment advisers. Even so, the overall headcount is expected to decline by several thousand as the number of consumers who visit branches falls steadily.

Office Depot said it planned to hire 8,000 temporary and full-time workers during the busy back-to-school season. Office Depot said temporary staffing will rise by a third as it prepares for the increased customer traffic from July through September. Some of the new hires will help fulfill the “buy online, pick up in store” service that the company offers.

U.S. Senator Charles Grassley, chairman of the Senate Judiciary Committee, is urging federal antitrust officials to conduct a “careful analysis” of Dow Chemical’s proposed $130 billion merger with DuPont. Among the concerns: A decrease in farming competition, raising barriers to entry for smaller companies, hurting innovation and higher prices.

Google Fiber is looking to expand in Texas. The Alphabet unit is working with Dallas leaders to learn more about the city’s existing infrastructure, local topography and other factors that could impact the building of a fiber network. The service, which costs $70 per month, is already available in Austin and is set to roll out in San Antonio.

The U.S. and Venezuela are launching high-level diplomatic talks to ease tensions in the South American country amid deepening social and economic crises. Secretary of State John Kerry said the talks with Washington’s ideological foe would begin in Caracas “as soon as possible” and that the U.S. was looking at ways to provide assistance.

More political earthquakes in Brazil… The country’s Supreme Court has denied ex-president Lula da Silva a privileged legal protection, increasing the likelihood he will be arrested in connection with a corruption probe centered on the state run oil company, Petrobras. Meanwhile, Speaker Eduardo Cunha has lost his seat for allegedly lying about undeclared Swiss bank accounts and President Dilma Rousseff has been stripped of some perks, including her use of Air Force planes and hotel bill allowances.

A World Health Organization panel has elevated the Zika virus to a public health emergency, but spurned calls to postpone or move the 2016 Olympic Games, which are scheduled to begin in Rio de Janeiro in six weeks. Brazil is hosting the Games during its winter, when the concentration of mosquitoes that spread Zika and other viruses is low. The country is also intensifying its efforts to control mosquitoes around cities and event venues.

Twenty-five years after classifying coffee as a possible carcinogen leading to bladder cancer, the World Health Organization has reversed course, saying today that coffee is not a carcinogen, and has even been seen to reduce the risk of liver and uterine cancers. At the same time, however, they presented other scientific evidence which suggests that drinking anything very hot, over 150 degrees, including water, coffee, tea and other beverages, probably does cause cancer of the esophagus. Still, that might be the best news of the day.

Or maybe this: If you watch any NBA basketball, you are probably familiar with TBS sideline announcer Craig Sager; With his signature flamboyant suits and good-natured interviews between timeouts, Sager has become one of the most beloved figures in the NBA. Sager was diagnosed with acute myeloid leukemia in 2014, and said in March that the cancer was no longer in remission.

The Turner-owned TNT broadcasts the playoffs through the conference finals, but the NBA Finals have been on ABC since 2003. For more than a decade before that, the series aired on NBC. Because he’s worked more than 30 years for Turner Sports, Sager has never worked the championship series. That will change tomorrow, when Sager joins ABC’s broadcast of game six of the NBA Finals between the Golden State Warriors and Cleveland Cavaliers.