Knee Jerk Trading
……OPEC might cut output, kinda, sorta. Congress overrides veto to sue Saudis. Senate approves CR funding. Janet Yellen testifies. Wells Fargo claws back a pittance. California cuts ties to Wells. The Arizona Republic is with Hillary. Durable goods flat. ABInBev’s global domination of beer. RBS fined. No rescue plan for Deutsche Bank. Tyson chicken nuggets now fortified with plastic. The inevitable end of the crackberry.
Financial Review by Sinclair Noe for 09-28-2016
DOW + 110 = 18,339
SPX + 11 = 2171
NAS + 12 = 5318
10 Y + .01 = 1.57%
OIL + 2.34 = 47.01
GOLD – 5.60 = 1322.40
Today started as a regular day: stocks were trading just a bit lower but no big moves. Fed chair Yellen was speaking on Capitol Hill, an economic report on durable goods – kind of a quiet day really. Then came word from Algiers; remember the big oil summit? Reuters reported that two sources in the Organization of the Petroleum Exporting Countries said the group would reduce output to 32.5 million barrels per day from current production of 33.24 million bpd. How much each country will produce is to be decided at the next formal meeting of OPEC in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia. The price of oil popped by about 5%. That was the knee-jerk response, but let’s dig in. First, we know that OPEC members are notorious for violating production limits. Next, there is no agreement with non-OPEC oil producers (specifically Russia and the US). And there is a seasonal tendency to cut back production in the winter months anyway. So OPEC will produce less, as is their seasonal tendency. Oil demand will drop in the winter and there will still be an oil glut at the end of the year. Still, it was trade first, ask questions later.
Heading into the Energy Forum in Algiers, there was a real concern that prices could dip to sub $20 a barrel levels if no decision was made, and that would leave many producers pumping at below market rate, so with every barrel they would be making a loss (if they aren’t already). The Saudis are running a budget deficit. Venezuela, Nigeria, and Algeria are in desperate need of oil revenues. So, OPEC announced a production limit, which is really no limit at all.
Congress has overwhelmingly rejected President Obama’s veto of legislation allowing relatives of the victims of the Sept. 11 attacks to sue Saudi Arabia, the first veto override of his presidency. The House of Representatives voted 348-76 against the veto, just hours after the Senate rejected it 97-1, meaning the “Justice Against Sponsors of Terrorism Act” will become law. Obama had argued that the bill could expose US companies, troops and officials to lawsuits, and alienate important allies at a time of global unrest. Major US corporations including General Electric and Dow Chemical also opposed it, as did the European Union and other US allies. Let the lawsuits begin.
The Senate approved a stop-gap funding bill to avert a looming federal government shutdown. Republicans and Democrats agreed to help Flint, Michigan, resolve its drinking water crisis. The bill also includes $1.1 billion to combat the Zika virus and $500 million for flood relief in Louisiana and other states. Lawmakers voted 72-26 to adopt the short-term continuing resolution, or CR, that would keep federal agencies operating from Saturday to Dec. 9. The vote sends the measure on to the House of Representatives, which also was expected to approve it. Without an extension, many government agencies would run out of money when the federal fiscal year ends at midnight on Friday.
Fed Chair Janet Yellen delivered semi-annual testimony this morning before the House Financial Services Committee. Since the Fed left interest rates steady at its meeting last week, expectations for the next hike have shifted toward the central bank’s December meeting. At the meeting, Yellen hinted that a hike would likely follow before the end of the year, saying that the case for an increase has strengthened but the committee wanted to wait for more economic evidence before raising rates. Today, Yellen said the financial condition of the top US banks has “strengthened considerably” since the financial crisis as she outlined steps the central bank is considering to make bigger banks have larger cushions and have smaller banks face less stringent requirements. Lawmakers pressed Yellen over the Wells Fargo mess and Yellen said the Fed has started a review of the “disturbing compliance failures.
Wells Fargo Chairman and Chief Executive John Stumpf will forfeit $41 million in unvested equity awards. The bank’s board moved to rescind pay for Stumpf and former community- banking head Carrie Tolstedt ahead of a hearing of the House Financial Services Committee Thursday. Wells Fargo’s board said Tolstedt, who oversaw retail banking during bad behavior there, will forfeit unvested equity awards valued at $19 million. Clawbacks, or their absence, became a big focus of a Senate Banking Committee hearing last week into the bank’s sales tactics, which earlier resulted in a $185 million fine and regulatory action. During his appearance before that panel, Stumpf and the bank were roundly criticized for firing 5,300 employees over five years, yet taking no action against top executives. No violins for Stumpf and Tolstedt; Steumpf already holds nearly 5.5 million shares of Wells Fargo worth north of $240 million. Tolstedt is retiring with a $125 million golden parachute, more or less. You have to admit, that’s a hefty pay package for destroying the reputation of a 164 year old bank.
The Labor Department had just announced it has opened a “top-to-bottom review” of how Wells treated workers tasked to meet unrealistic sales targets. That includes firing workers who reported misdeeds. It also includes failing to pay overtime to workers who toiled extra hours to reach impossible sales quotas. The agency has set up a special website for current and former Wells Fargo employees to instruct them how to file complaints about labor law violations.
The state of California will no longer use Wells Fargo as an underwriter for the issuance of state municipal bonds, and the bank will have no involvement in the state’s banking or investment activities for the next 12 months. California currently has $2.3 billion invested in Wells Fargo “fixed income and equity and is the largest issuer of municipal bonds and the home state of Wells Fargo. California state Treasurer John Chiang issued a statement saying: “Wells Fargo’s fleecing of its customers by opening fraudulent accounts for the purpose of extracting millions in illegal fees demonstrates, at best, a reckless lack of institutional control and, at worst, a culture which actively promotes wanton greed.”
The Arizona Republic has never endorsed a Democrat for president — until now. The newspaper’s editorial board writes: “The challenges the United States faces domestically and internationally demand a steady hand, a cool head and the ability to think carefully before acting. Hillary Clinton understands this. Donald Trump does not.” The newspaper said Trump, “is not conservative and he is not qualified.”
Orders for durable or long-lasting goods were unchanged in August after a sizable gain in the prior month; still, it was better than estimates which called for a decline. Demand declined for aircraft, heavy machinery, computers and electrical equipment. Orders for core capital goods rose 0.6% and posted the third increase in a row. The last time that happened was at the end of 2014 and early 2015. Core orders are viewed as a proxy for business investment.
Anheuser-Busch InBev clinched its $103 billion takeover of SABMiller Plc after the British brewer’s investors approved a deal that unites the world’s two biggest beer-makers about a year after it was proposed. AB InBev will dominate the combined entity, which will account for one of every three beers sold worldwide. The Budweiser maker will keep its name, ditching any vestiges of SABMiller, and only one SABMiller executive will be on the new company’s senior leadership team.
Germany denies reports of a possible Deutsche Bank bailout. Germany’s finance ministry says it’s not working on a rescue plan for Deutsche Bank, contrary to an earlier report from the German newspaper Die Zeit. Deutsche Bank told employees not to worry. In a memo sent to employees, the German investment bank said it had no intention to settle with the US Department of Justice at a price “anywhere near the opening position of $14 billion” and that is had no plans to raise capital.
RBS has agreed to a “toxic” mortgage settlement. The bank has agreed to pay $1.1 billion to settle claims it mis-sold toxic mortgage security products to the US Central Federal Credit Union and Western Corporate Federal Credit Union in the run-up to the 2008 financial crisis.
It may have been the world’s largest IPO in two years, but shares of Postal Savings Bank of China failed to generate much enthusiasm in the Hong Kong market. The lender raised $7.4 billion but priced the deal near the bottom of its marketing range; shares gained 02%. The lukewarm start comes as investors remain cautious on the outlook for the Chinese banking industry, battling bad debts and a slowing economy.
Tyson Foods is recalling 60 tons of fully cooked chicken nuggets that may be contaminated with hard plastic. The problem may have come from a rod used in the manufacturing process, but there are no confirmed reports of adverse reactions to the products. Tyson said the nuggets were supplied to Costco stores and a Pennsylvania wholesaler.
It’s the end of an era. BlackBerry, the Canadian company that invented the smartphone and addicted legions of road warriors to the “crackberry,” has stopped making its iconic handsets. Finally conceding defeat in a battle it had long ago lost to Apple and Samsung, BlackBerry is handing over production of the phones to overseas partners while it turns its full attention to the more profitable and growing software business. BlackBerry said it struck a licensing agreement with an Indonesian company to make and distribute BlackBerry-branded devices. More deals are in the works with Chinese and Indian manufacturers.