Market Snapshot* Tomorrow s Headlines

Market Snapshot* DJIA 18352.05 -2.94 5166.25 +6.51 S&P 500 2164.25 +0.46 10-Year 1.5009% 11/32 Nasdaq Thursday, August 04, 2016 30-Year ...
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Market Snapshot* DJIA

18352.05

-2.94

5166.25

+6.51

S&P 500

2164.25

+0.46

10-Year

1.5009%

11/32

Nasdaq

Thursday, August 04, 2016

30-Year

2.2541%

27/32

Euro

$1.11315

-0.0017

$41.93

+1.1

Nymex Crude Source: SIX Telekurs, ICAP plc

Stocks U.S. stocks were little changed in what traders said was a quiet session. Insurance companies lagged behind, following a string of disappointing earnings.

Treasurys U.S. government bonds strengthened Thursday after the Bank of England announced a package of stimulus measures that was more aggressive than many investors had expected, sending the yield on the 10-year gilt to a record low.

Forex The British pound slid and government bond yields fell after the Bank of England surprised investors with an aggressive package of stimulus measures designed to revive the U.K. economy.

Commodities U.S. oil prices rose Thursday after an inventory report released earlier in the week sent traders mixed signals about supply levels in the market.

*preliminary values subject to adjustments

Tomorrow’s Headlines

BOE Cuts Key Interest Rate to New Low The Bank of England cut its benchmark interest rate to a new low in its 322year history and revived a crisis-era bond-buying program to cushion the U.K. economy from the aftershocks of the vote to leave the European Union. Thursday’s unexpectedly large and diverse stimulus package — which included a torrent of cheap cash for banks — underscores the concern at the central bank over the potential economic cost of the surprise Brexit vote. The BOE sharply cut its growth forecast for 2017, marking the biggest downgrade since it began publishing such forecasts in 1993, saying the outlook had “weakened materially” following the June 23 referendum. Central banks, including the Federal Reserve and the European Central Bank, say they are watching closely in case Brexit sparks another damaging bout of financial-market contagion and economic instability. However, the fallout so far appears confined to the U.K., with early signs that the U.S. and eurozone economies have shrugged off the result. The package’s different aspects didn’t gain universal support from the BOE’s rate-setting Monetary Policy Committee, reflecting caution among some officials that the trickle of economic data since the referendum didn’t yet justify such a broad response. The few bits of data to emerge “may overstate the weakness of the economy,” they said.

MetLife to Cut Costs by $1B Through 2019 MetLife Inc. will cut $1 billion, or 11%, in costs by the end of 2019 with some job losses, as the big insurer reacts to protracted ultralow interest rates that pressure earnings of life-insurers, the company said Thursday. MetLife Chief Executive Steven Kandarian told analysts and investors during a conference call following Wednesday’s disappointing second-quarter earnings continued on page 2

Tomorrow’s Calendar 8:30 a.m.

Jun U.S. International Trade in Goods & Services Trade Balance (USD) (expected -43.2B), Exports (USD) (previous 182.35B), Exports, M/M% (previous -0.2%), Imports (USD) (previous 223.50B), Imports, M/M% (previous +1.6%)

8:30 a.m.

Jul U.S. Employment Report Non-Farm Payrolls (expected +179K), Unemployment Rate (expected 4.8%), Avg Hourly Earnings (USD) (previous 25.61), Net Chg (USD) (previous +0.02), Avg Hourly Earnings, M/M% (expected +0.2%), Y/Y% (previous +2.6%), Overall Workweek (previous 34.4), Net Chg (previous +0.0), Government Payrolls (previous +22K), Private Payroll (previous +265K), Participation Rate (previous 62.7%), Non-Farm Payrolls Bench Net Chg

3:00 p.m.

Jun Consumer Credit Consumer Credit Net Chg (USD) (expected +16.5B)

N/A

WTO Director-General Roberto Azevedo continues visit to San Francisco for meetings with the private sector

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Thursday, August 04, 2016 4 p.m. ET

Tomorrow’s Headlines continued that the cost-cutting “will require us to reduce head count.” MetLife shares are off 8% this morning. The Federal Reserve has used ultralow interest rates since the 2008 global financial crisis to revive the economy, and though rates had begun edging up, they were set back by the U.K.’s vote in June to exit the European Union, creating a flight to safety in U.S. Treasurys.

US Government Sued Over Tax-Inversion Rules The U.S. Chamber of Commerce and a Texas business group sued the federal government on Thursday, alleging that the Treasury Department’s rules limiting tax-motivated inversion transactions violate the law. “The Executive Branch has purported to rewrite the Internal Revenue Code, and to do so disregard of the rulemaking requirements of the Administrative Procedure Act,” the lawsuit said. The case stems from regulations the government issued April 4 that led Pfizer Inc. and Allergan PLC to cancel a planned merger that would have located the combined company’s in Ireland. That was the government’s third administrative action against inversions, transactions in which companies can get addresses in low-tax countries, often by merging with a smaller firm based in a lower-tax jurisdiction. Those April 4 rules attacked “serial inverters,” companies such as Allergan that had grown to their current size through other inversions. The rules would disregard three previous years of those deals when calculating the size of the two companies, and that matters because the tax rules are tied to the relative size of companies that merge and take a non-U.S. address. The U.S. Treasury Department didn’t immediately respond to a request for comment.

Online Lender Prosper in Talks On $5B Loan-Buying Deal Online lender Prosper Marketplace Inc. is in advanced talks with a group of investment firms to sell them roughly $5 billion worth of loans over the next two years, people familiar with the matter said. If finalized, the deal would help resolve ongoing concerns that Prosper, like its peers including LendingClub Corp., has faced about how to fund lending after a difficult start to 2016. It would also emphasize the major role that traditional financial players will continue to have in what was once seen as a disruptive “peer to peer” online lending model. The buyers in the talks include Fortress Investment Group LLC or an affiliate, Soros Fund Management LLC and Third Point LLC, along with investment bank Jefferies LLC, the people said.

The loans would be bought at face value, but the firms are also in discussions to receive equity warrants in Prosper as they make the purchases, the people added. The potential buyers are also talking to banks about borrowing money to support their loan purchases, and a deal could wrap up in the coming weeks, they said. In addition to the deal with the four investment firms, Prosper has also started selling loans to BBVA Compass, the U.S. regional-banking unit of Spanish lender Banco Bilbao Vizcaya Argentaria, according to a bank spokeswoman. BBVA’s venture-capital arm took an equity stake in Prosper last year.

Chevron to Sell Asia Assets For Up to $5B Chevron Corp. is paring its Asia operations, selling assets worth up to $5 billion in an effort to raise cash, according to people familiar with the situation. The California-based energy giant is set to begin selling its offshore China assets this month, the latest in a series of divestments in Asia. The company is looking to raise up to $10 billion globally from asset sales, a big chunk of which will come from its Asia upstream operations, as part of a broader effort to cut costs and adapt to an environment of lower oil prices. Among the assets Chevron is looking to sell is its stake in an offshore oil field production venture with China’s stateowned oil company Cnooc Ltd., which could fetch as much as $1 billion, according to people familiar with the situation. The asset could be attractive to a range potential bidders including Chinese energy companies and sovereign funds, according to people familiar with the situation. Chevron is also shopping its geothermal assets in Indonesia, the people said. The company is weighing bids worth more than $2 billion, according to one person. Geothermal energy uses steam extracted from underground to generate electricity.

Goldman Sachs Struggling To Sell Private-Equity Stakes Goldman Sachs Group Inc. is no longer sure it can sell $7 billion worth of private-equity and hedge-fund investments by a July 2017 deadline set by regulators, according to a new filing. The bank had said in a March filing that it “expects to be able to exit the majority of such interests in these funds in orderly transactions prior to July 2017,” the deadline set by regulators as part of the Volcker rule. The line, however, was removed from Goldman’s secondquarter financial statement, filed Thursday. The Volcker rule, enacted in the wake of the financial crisis, is forcing banks to exit most of their proprietary investing activities, which includes private-equity investments and stakes in hedge funds.

Copyright © Dow Jones & Company, Inc. All Rights Reserved. www.dowjones.com

continued on page 3

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Thursday, August 04, 2016 4 p.m. ET

Facebook Takes Further Steps to Reduce ‘Clickbait’

Tomorrow’s Headlines continued Regulators have extended the deadline through July 2017, and banks may be able to seek further extensions for individual investments that are particularly difficult to sell. A person familiar with the matter said Goldman isn’t sure it will be able to meet the 2017 deadline, but expects some flexibility with regulators.

Jobless Claims Up Slightly, But Hiring Steady The number of Americans filing new applications for jobless benefits rose slightly last week, but remained at a level consistent with steady hiring. Initial claims for unemployment benefits, a proxy for layoffs across the U.S., increased by 3,000 to a seasonally adjusted 269,000 in the week ended July 30, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal had expected 265,000 new claims. Claims for the week ended July 23 were unrevised at 266,000. “There is no evidence that layoffs are rising,” said Stephen Stanley, economist at Amherst Pierpont Securities. The “labor markets are fine, even though the pace of job gains is probably cooling somewhat due to the ongoing tightening in labor markets.”

Facebook Inc.’s war on “clickbait” rages on. Starting Thursday, the social network is altering the formula for its news feed to punish publishers that churn out vague or misleading headlines designed to lure users into clicking. Under the new formula, posts from publishers that rely heavily on what Facebook considers clickbait will be placed in fewer news feeds and appear lower in those feeds. The latest tweak to Facebook’s news feed targets two types of headlines —those that “withhold information” and those that “exaggerate or mislead” users—said Adam Mosseri, Facebook product manager for news feed, in an interview. He offered an example of the first category: “Man jumps in pool with alligator—you won’t believe what happens next.” The second type might tease an outfit worn by singer Selena Gomez to the Emmys “but you click on it and it says she didn’t go,” he said.

Citi Sees Sale of Some S America Retail Units in September Citigroup Inc. expects to announce the sale of some of its South America retail operations by mid-September, said Helio Magalhaes, president of the bank’s Brazilian unit. Citi said in February that it planned to sell its consumer operations in Brazil, Argentina and Colombia.

Data on unemployment claims can be volatile from week to week. The Labor Department said no special factors affected last week’s figure.

“We should have at least a month ahead of us before we make a formal announcement,” Mr. Magalhaes said during an event in Rio de Janeiro. “It should be in the middle of September.”

Kellogg Raises 2016 Outlook

The head of Banco Santander Brasil, the Brazilian unit of Spain’s Banco Santander SA, said last week it would probably present a bid for Citibank’s operation in Brazil.

Tepid sales of Special K, Kashi and other cereals are continuing to weigh on Kellogg Co., but the company said Thursday that an accelerated cost-cutting plan will help its earnings outlook for the year. A few months ago, Chief Executive John Bryant, predicted U.S. cereal sales will return to growth this year. Now, he expects them to be flat. “We believe we can very modestly grow these cereal businesses over time, just maybe not quite as quickly as we would have liked,” he said in an interview. U.S. consumers have been moving away from sugary, carbohydrate-heavy breakfasts, like Frosted Flakes, in favor of higher-protein options like Greek yogurt and fruit-and-nut bars that can be eaten on the go. Cereal sales have declined over the past few years industrywide. In the latest quarter, Kellogg’s U.S. Morning Foods sales, including cereal, Pop-Tarts and other foods, fell 2%. U.S. snack sales were down 3.8%. The company said that less than 40% of its sales come from cereal products and that nearly half of its business is snacks, including Eggo waffles and Pringles chips.

Brazil Senate Panel Recommends Impeach, Remove Rousseff BRASI LIA—A Brazilian Senate committee voted Thursday to recommend conviction of suspended President Dilma Rousseff in her impeachment trial, and that she be permanently ousted if convicted, moving the grueling process forward another step. The case will now go to a vote in the full Senate, where a final decision is expected in the next few weeks. Ms. Rousseff is accused of using illegal accounting maneuvers to mask a widening budget gap, something she denies. “[Ms. Rousseff] will be ousted because of the very serious crimes she committed,” said Senator Cassio Cunha Lima, from the Brazilian Social-Democracy Party, or PSDB, a historic rival to Ms. Rousseff’s Workers’ Party, or PT. Ms. Rousseff was temporarily removed from office in May, when the Senate agreed to open a trial, after the case’s initial phase in the lower chamber. She was replaced by her former ally-turned-foe Vice President Michel Temer .

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Thursday, August 04, 2016 4 p.m. ET Copyright Dow Jones & Co., Inc.

Talking Points

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A Decider Jobs Report

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Will the real jobs report please stand up? May’s disappointing 11,000 payroll gain was followed by June’s robust 287,000 increase. The July data will be the tie-breaker. Projections suggest the U.S. jobs market is somewhere in between the previous two months’ numbers. That would put it in a sweet spot of solid but not overheated growth. Economists polled by The Wall Street Journal forecast July nonfarm-payroll gains of 179,000. That would be roughly identical to the six-month average of 172,000, but lower than the monthly averages of 229,000 last year and 251,000 in 2014. The unemployment rate is expected to have dropped to 4.8% from 4.9%. Slowing job growth is consistent with labor-market performance in the latter stages of economic expansions. If that is true, the number to watch is average hourly earnings, which rose 2.6% in June, matching the biggest increase since 2009. That would show that hiring is slowing as workers become scarcer and, therefore, more expensive. Higher wages often translate into inflation. That is one reason the jobs report has broader implications for the Federal Reserve. Between disappointing second-quarter U.S. growth, the Bank of England’s rate cut and expanded stimulus package, and the coming U.S. presidential election, investors are betting that a U.S. rate increase later this year looks increasingly unlikely. Federal-funds futures show only a 12% likelihood of one happening at the Fed’s September meeting and 30% odds in December. It would take at least decent jobs data to keep the prospect of a rate increase alive. A bad number would likely shut the door on such a move in 2016. Investors cheered upbeat jobs numbers last month, sending the Dow Jones Industrial Average up nearly 200 points. There was more relief that the jobs market rebounded than worries about the Fed raising rates. This time, a very strong or a very weak number might make investors nervous. Even though the Dow snapped a seven-session losing streak earlier this week, it remains up more than 5% for the year and within striking distance of its record high. After two extreme jobs reports, one that falls in the middle might be just right for investors.

Companies Steer Analysts Toward Surprises In April, AT&T Inc. shares rose after it reported quarterly revenue that narrowly topped the average estimate from analysts. The surprise wasn’t as surprising as it looked. Before AT&T’s announcement, investor-relations employees at the telecommunications giant encouraged analysts to look back at comments made by finance chief John Stephens in early March, say analysts who spoke with the company. He had implied some customers were waiting longer to upgrade their mobile phones, an important revenue source. Analysts at three research firms cut their sales estimates by an average of about $1 billion in the week before AT&T issued first-quarter numbers. William Blair & Co. analysts cited Mr. Stephens’s comments. The average estimate of all 22 firms following AT&T fell $323 million in three weeks, according to FactSet. AT&T wound up reporting $40.54 billion in quarterly revenue, beating the lowered target by $76 million. Quarter after quarter, about 75% of companies in the S&P 500 index meet or exceed analysts’ earnings forecasts, a statistic that has held up in good times and bad. One reason for such consistently impressive results is that some companies quietly nudge analysts’ numbers, almost always lower. continued on page 5 Copyright © Dow Jones & Company, Inc. All Rights Reserved. www.dowjones.com

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Thursday, August 04, 2016 4 p.m. ET

Talking Points

That can turn what might have been an embarrassing “miss” for the company into a positive surprise.

continued

The Journal examined daily changes in analysts’ estimates at S&P 500 companies since the start of 2013, comparing the estimates with what the companies ultimately reported for each period.

A federal rule bars companies from selectively disclosing material nonpublic information but doesn’t prohibit private conversations in which companies can gently push analysts in helpful directions, as AT&T did. “We understand the rules, and we follow them diligently,” says Mike Viola, senior vice president of investor relations at AT&T, based in Dallas. Some analysts, investor-relations officials, securities lawyers and executives say the signals have become so commonplace that the all-important question of whether a company beat estimates is more about theatrics than reality. Companies send the signals to make themselves look better—and boost their stock prices—even though their fundamentals haven’t changed at all. And the signals often go to just a small number of analysts, giving them and their investing clients a potentially unfair advantage. Media mogul Barry Diller, chairman of Expedia Inc. and IAC/InterActiveCorp, says analysts and investor-relations executives work together to keep estimates low. “It is a rigged race,” he says, adding that the problem exists even at those two publicly traded companies. An analysis by The Wall Street Journal found that earnings estimates often decline steadily after the end of a quarter.

Nearly 2,000 times from the start of 2013 through this year’s first quarter, companies would have missed the average earnings estimate if analysts hadn’t changed their numbers in the 40 trading days before the company’s quarterly earnings report. In about one-fourth of the instances where companies would have missed the average earnings estimate, the average projection fell enough that the company wound up meeting or beating analysts’ expectations instead, the Journal’s analysis shows. The 40 trading days cover the period from when companies typically have a good sense of the quarter’s performance to the day before earnings are announced. Lowered earnings forecasts helped 66 companies, including Citigroup Inc., Coca-Cola Co. and Viacom Inc., each meet or exceed earnings expectations during at least three of 13 quarters examined by the Journal. CBS Corp., U.S. Bancorp and seven other companies met or beat reduced estimates in about half the quarters. Viacom says its analyst interactions are consistent with industry practice. Citigroup says it provides financial updates at conferences between earnings releases. CocaCola, CBS and U.S. Bancorp wouldn’t comment.

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