Seven Years – Financial Review

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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