Market Snapshot* DJIA Nasdaq S&P 500 10-Year
Monday, September 26, 2016
18094.83
-166.61
5257.49
-48.25
2146.1
-18.58
1.5866%
8/32
30-Year
2.3247%
9/32
Euro
$1.12535
+0.0026
$45.93
+1.45
Nymex Crude
Source: SIX Financial Information, ICAP plc *preliminary values subject to adjustments
Stocks Shares of banks slid Monday, dragging on major indexes worldwide. Investors sold bank shares in the U.S., Europe and Japan in the wake of recent central bank meetings that suggested easy money policies were likely to continue, with low interest rates typically hitting profits at financial firms.
Treasurys Investors piled into government bonds in the developed world on Monday, sending the yield on the benchmark U.S. 10-year note below 1.6% for the first time in two weeks, as a broad decline in global stocks stoked demand for relatively safe assets.
Forex The dollar fell broadly Monday, as investors became increasingly doubtful that the Federal Reserve will lift interest rates in coming months. The Wall Street Journal Dollar Index, which measures the U.S. currency against a basket of 16 others, was recently down 0.2% at 86.31, on losses against the euro, yen and emerging markets.
Commodities Oil prices rose Monday on renewed hope that major exporters might make progress on a deal to limit production and help whittle down the glut that has dragged down the market for more than two years.
Tomorrow’s Headlines
Fed to Ease Stress Tests for Regional Banks The Federal Reserve will propose easing stress tests requirements for banks with less than $250 billion in assets, a senior official said Monday, a major piece of good news for U.S. regional banks. Fed governor Daniel Tarullo, speaking at Yale University, said banks with less than $250 billion in assets that don’t conduct significant nonbank or international activity would be exempt from the “qualitative” part of the Fed’s annual stress tests under a Fed proposal to be issued later Monday. More than 30 U.S. banks with more than $50 billion in assets take the tests every year as part of rules the Fed adopted after the financial crisis. The exams have become costly undertaking for banks, particularly for firms closer to the $50 billion line. The Fed is also considering a separate proposal, to be issued at a later date, that would have the effect of raising capital requirements for the largest U.S. banks considered “systemically important” to the global economy, while reducing them for other banks taking the stress tests, Mr. Tarullo said.
Mylan’s EpiPen Pretax Profits Higher Than Number Told to Congress When Mylan NV’s chief executive testified before a congressional committee last week about steep price increases on its lifesaving EpiPen drug, House continued on page 2
Tomorrow’s Calendar 7:45 a.m.
8:30 a.m. 8:55 a.m.
9:00 a.m. 9:00 a.m.
9:45 a.m. 10:00 a.m. 10:00 a.m. 11:15 a.m. 4:30 p.m.
09/24 The Retail Economist/Goldman Sachs Weekly Chain Store Sales Index Chain Store Sales, W/W% (previous -0.2%), M/M% (previous +1.4%) Q2 U.S. International Investment Position 09/24 Johnson Redbook Retail Sales Index Ret Sales Mo-to-Date, M/M% (previous -0.5%), Ret Sales Mo-to-Date, Y/Y% (previous +0.5%), Latest Wk, Y/Y% (previous +0.2%) IMF World Economic Outlook analytical chapters published Jul S&P CoreLogic Case-Shiller Indices 10-City Idx, M/M% (previous +0.8%), 10-City Idx, Y/Y% (previous +4.3%), 20-City Idx, M/M% (previous +0.8%), 20-City Idx, Y/Y% (expected +5.2%), National Idx, M/M% (previous +1%), National Idx, Y/Y% (previous +5.1%) Sep US Flash Services PMI (previous 50.9) Sep Richmond Fed Business Activity Survey Mfg Idx (previous -11), Retail Revenues Idx, Services Rev Idx, Shipments Idx (previous -14) Sep Consumer Confidence Index Cons Conf Idx (expected 98.7), Expectation Idx (previous 86.4), Present Situation Idx (previous 123) Federal Reserve Vice Chair Stanley Fischer speaks at the Howard University Economic Convocation 09/23 API Weekly Statistical Bulletin Crude Stocks, Net Chg (Bbls) (previous -7.5M), Gasoline Stocks, Net Chg (Bbls) (previous -2.5M), Distillate Stocks, Net Chg (Bbls) (previous +1.4M), Refinery Runs
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Monday, September 26, 2016 4 p.m. ET
Tomorrow’s Headlines
would “preserve our option to split our businesses should factors materially change at some point in the future.”
continued members badgered her to provide more evidence for the company’s claim that its profit was $100 for a two-pack of the injectors, despite a $608 list price. The committee members left unsatisfied. Now it appears they were right to seek clarity. In response to questions from The Wall Street Journal, Mylan now says the $100 figure presented by CEO Heather Bresch included something the company didn’t clearly convey to Congress—taxes. The company substantially reduced its calculation of EpiPen profit by applying the statutory U.S. tax rate of 37.5%. Without the tax-related reduction, Mylan’s profit on the EpiPen two-pack would be closer to $160, or 60% higher than the figure the company gave Congress. The company sells about 4.1 million EpiPen two-packs in the U.S., analysts said.
CBOE Holdings to Buy Bats for $3.2B CBOE Holdings Inc. will buy Bats Global Markets Inc. for about $3.2 billion, in a deal that would create a new global exchange behemoth in the trading of stocks, options and exchange-traded funds. The deal, if consummated, would pair two very different businesses. CBOE, operator of the Chicago Board Options Exchange, the country’s largest options platform, is a fourdecade-old operator that still uses trading pits. Bats, the second-largest U.S. stock exchange by shares traded, is a technology-focused upstart founded in 2005. It also speaks to the growing importance in the market of exchange-traded funds and products, which generally track indexes and trade on exchanges. Executives said Monday on an analyst call that the combined company would be a powerhouse in this area, in which both CBOE and Bats have tried to build a bigger presence in recent years.
Shares of Pfizer fell 1.7% in trading on the New York Stock Exchange Monday morning. Mr. Read had been considering a breakup for years as a way to reduce the big pharmaceutical company’s complexity while rewarding shareholders with the windfall from a split into two stocks. Toward that goal, Pfizer shed its animal-health business and created two internal organizations.
Iran Plays Down Prospects of OPEC Oil Production Deal ALGIERS—Iranian officials played down expectations for an oil-production deal, calling an OPEC gathering here this week “consultative,” and renewed their vow to pump output higher. Iran’s Oil Minister Bijan Zanganeh’s comments to Iranian state media came as energy ministers from across the world arrived in Algiers for a three-day conference that is set to culminate Wednesday in an informal gathering of the Organization of the Petroleum Exporting Countries. The 14nation cartel is considering output limits, known as a production freeze, that some members hope would lift oil prices out of a two-year funk. Oil prices were trading up about 2% on Monday on the hope that an OPEC deal in Algiers would help alleviate a global oversupply of oil. But Mr. Zanganeh said Wednesday’s talks were merely negotiations ahead of OPEC’s regularly scheduled meeting on Nov. 30 in Vienna. The Algiers talks “can be regarded as preparation,” Mr. Zanganeh told Shana, a state-run media service reporting on the Iranian oil industry. “The ground is being paved for market stabilization.”
The combination would vault CBOE into the top tier of global exchange operators, pushing its market capitalization to about $9 billion, near rival Nasdaq Inc.’s $11.5 billion value.
When oil prices crashed in 2014, OPEC, led by its biggest producer, Saudi Arabia, abandoned its traditional role of cutting production and making oil more scarce to lift the market up. The American oil boom made the prospect of OPEC’s output moves less effective, the Saudis have said, making it better for them to simply produce as much as possible and compete for market share.
Pfizer Throws Out Plan to Split Into Two Companies
Deutsche Bank Falls on Investor Worries About Capital Needs
Pfizer Inc. said Monday it would remain a single company, deciding not to split into one business focused on patentprotected drugs and another on cash-rich older products. The decision means the New York City-based drug company would remain one of the industry’s largest. It projects at least $51 billion in revenue this year from a growing portfolio of cancer drugs and vaccines as well as a pipeline with copies of expensive big-molecule drugs. Pfizer spent at least $600 million preparing for a potential split, a spokeswoman said. Chief Executive Ian Read said staying whole was “the best structure,” though the company
Deutsche Bank AG shares fell sharply Monday on investor concerns about the German lender’s capital position ahead of an anticipated legal settlement with the U.S. Justice Department. The shares closed down 7.5% in European trading, at 10.55 euros, their lowest price in decades, according to FactSet. They have declined 53% this year, whittling Deutsche Bank’s market value to $16.4 billion. European bank stocks broadly fell Monday. The Stoxx Europe 600 Banks index declined 2.3%. The index is down 24% this year.
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Monday, September 26, 2016 4 p.m. ET
Tomorrow’s Headlines
July sales were revised up to a 659,000 rate from an earlier estimate of 654,000, a jump of 13.8% from June to the strongest monthly sales pace since October 2007.
continued
More broadly, through the first eight months of 2016, newhome sales were up 13.3% compared with the same period in 2015.
The Wall Street Journal reported this month that the U.S. Justice Department proposed Deutsche Bank pay $14 billion to settle a set of mortgage-securities investigations. In response to the report, Deutsche Bank said it had no intention of paying “anywhere near” that figure and said that negotiations were just beginning. Investors and analysts expect any settlement ultimately would be much lower than $14 billion.
Fed’s Lacker: Case For Rate Hike Remains Strong
On Monday, a Deutsche Bank spokesman, Jorg Eigendorf, said the lender is “fundamentally strong” but is suffering from “pure speculation” in the market, which is fueling uncertainty.
Federal Reserve Bank of Richmond President Jeffrey Lacker reiterated his call for increasing short-term interest rates, saying the central bank’s employment and inflation benchmarks point to “substantially higher” rates.
Monogram Residential Trust Explores a Sale
Mr. Lacker said in an interview with Fox Business Network that “I thought the case was strong” for an increase last week, and based on current data, he believes there will be a strong argument for a December rate raise.
High-end apartment owner Monogram Residential Trust Inc. is weighing a sale amid a wave of real estate mergers, according to people familiar with the matter.
The Fed left rates unchanged Wednesday, but signaled it still expected to raise them before year-end.
The Plano, Texas, real estate investment trust has recently sounded out potential buyers, one of the people said. Deal talks are in early stages, this person added, and may not lead to a deal.
Merrill Lynch To Pay $12.5M Fine for Mini-Flash Crashes
Monogram had a market value of $1.7 billion Monday afternoon and with a typical deal premium could be valued at more than $2 billion.
Merrill Lynch has agreed to pay a $12.5 million fine for maintaining ineffective trading controls that led to at least 15 mini-flash crashes between late 2012 and mid-2014.
Draghi Urges Governments To Help ECB Boost Economy
The Securities and Exchange Commission said an investigation found internal controls set to prevent erroneous trading orders at Merrill Lynch, the brokerage unit of Bank of America Corp., were set at levels so high that it rendered them ineffective.
European Central Bank President Mario Draghi issued a fresh plea to eurozone governments on Monday to help out the ECB by enacting growth-boosting overhauls, underlining how central banks are moving closer to the limits of what their stimulus policies can achieve.
A representative from Merrill Lynch said erroneous trades were canceled by the relevant exchanges in most instances, and the company is “not aware of any client who was harmed as a result.” He added the company believes it is compliant with regulators’ expectations.
At a hearing in the European Parliament in Brussels, Mr. Draghi warned of adverse side effects of keeping interest rates low for too long, and said ECB action was “not enough for delivering real and sustainable growth in the long term.”
The erroneous orders that passed through Merrill Lynch’s internal controls caused certain stock prices to skid and then suddenly recover within seconds, the SEC said. For example, Merrill Lynch applied a limit of 5 million shares per order for one stock that traded about 79,000 shares a day, according to the SEC. Another order led to a nearly 3% decline in Google’s stock in less than a second in April 2013.
“It’s quite clear that other policies should complement [central-bank] action,” Mr. Draghi said.
New-Home Sales Fell 7.6% in August Sales of newly built homes pulled back in August after surging the prior month, though the broader trend showed solid momentum in the market for single-family houses. Purchases of new, single-family homes declined 7.6% in August from the prior month to a seasonally adjusted annual rate of 609,000, the Commerce Department said Monday. It was the largest one-month drop since September 2015. Economists surveyed by The Wall Street Journal had expected sales would fall 8.0% to a 602,000 pace in August.
Adobe Makes Microsoft’s Azure ‘Preferred’ Service Adobe Systems Inc. threw some weight behind Microsoft Corp.’s cloud-computing efforts Monday, making the software giant’s Azure technology the “preferred” service for some of its offerings to business customers. Adobe continues to work with Amazon.com Inc.’s Amazon Web Services, but plans to put Azure at the center of its cloud-computing developments going forward.
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Monday, September 26, 2016 4 p.m. ET Copyright Dow Jones & Co., Inc.
Talking Points
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Energy Firms Ask For Investor Patience
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Rocked by the fall in oil and gas prices, some energy-focused private-equity funds are pleading with their investors for more time and money. EnerVest Ltd., a Houston-based investment firm that says it operates more U.S. oil and gas wells than any other company, is asking investors in two of its funds to put up hundreds of millions of dollars to bolster the troubled funds or risk losing the billions they have already invested. “No question, this is a giant disappointment,” said Chief Executive John Walker in an interview. First Reserve Corp., meanwhile, is negotiating with investors to extend the life of a $7.8 billion fund from 2006 to give it time for oil prices to rebound, according to pension records and people familiar with the matter. The fund has lost more than a third of its original value, and investors are pushing First Reserve for a break on the management fees it charges them. Private-equity firms were among the most avid financiers in the shale-drilling boom of the last decade, which helped produce market-flooding supplies of oil and gas. Two years ago, oil prices collapsed, and they have languished at about $45 a barrel. The decline has vexed investors across Wall Street who financed the shale boom with $100-a-barrel oil in mind. The woes of private-equity energy funds are rippling to pensions and other institutional investors that pumped more than $400 billion into these pools since shale drilling took off. Funds raised a decade ago are proving particularly painful for investors. Fund typically have a limited life span, promising to sell their assets and return investors’ money after 10 years. Many are filled with assets worth less than they cost and face the prospect of liquidating at losses. The alternatives are for investment firms to negotiate deals with their investors to extend the fund or bring in outside investors with fresh cash. “There are no good options when an energy fund reaches the end of its life at the bottom of the cycle,” said Jay Yoder, head of real assets at Pavilion Alternatives Group, a Sacramento, Calif., firm that advises private-equity investors. “The number of energy funds that need more time is at a level we’ve not seen before.” The price slump has left old funds reluctant to unload assets. At year end, private-equity funds specializing in oil and gas that were raised between 2005 and 2007 held $34.5 billion worth of assets, or about half the $71.1 billion that those 131 funds started out with, according to data provider Preqin. EnerVest built a network of 40,000 wells by pairing its investors’ cash with borrowed money. Now, EnerVest’s lenders, led by Wells Fargo & Co., are forcing it to repay a big chunk of the money borrowed by two funds because the oil and gas reserves used as collateral lost much of their value when energy prices collapsed. That has put the funds at risk of default. Mr. Walker said he and other EnerVest executives put $90 million of their own toward repaying lenders, and some of the firm’s investors have committed $250 million. But about $150 million is still needed. Enervest is asking investors to contribute roughly 10%-12% of their original investments in its $1.5 billion and $2 billion funds. “We have some limited partners that are mad as hell at us,” said Mr. Walker, referring to the funds’ investors. “We’ve had some chew us out and hang up on us.” In 2013, EnerVest borrowed $1.4 billion for its 13th fund. Mr. Walker said EnerVest paid back much of that debt, but the fund was still leveraged when oil prices plummeted in late 2014. “We thought we were underleveraged,” said Mr. Walker, a former Wall Street analyst who founded the firm in 1992. EnerVest’s funds have typically returned more than 30%, and the firm in November raised $2.4 billion for its 14th and largest-ever fund. continued on page 5 Copyright © Dow Jones & Company, Inc. All Rights Reserved. www.dowjones.com
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Monday, September 26, 2016 4 p.m. ET
Talking Points
A conservative Supreme Court majority intervened in February to stay the EPA rules while the case proceeds, putting the measures on pause. That 5-4 order came four days before Justice Antonin Scalia died, creating uncertainty about the court’s direction.
continued
Obama Emissions Rule Faces Court Challenge The Obama administration’s power-plant emissions rule faces a courtroom showdown this week, and the outcome could have big repercussions for Washington’s ability to meet its promises under a landmark climate-change accord. The Environmental Protection Agency issued the regulations a little more than a year ago, requiring a 32% reduction in power-plant carbon emissions by 2030. Industry associations and a group of mostly Republican-led states filed over three dozen lawsuits challenging the rules while the GOP has made regulatory relief an issue in the presidential campaign. It is the latest clash between the White House and conservatives who say President Barack Obama has exceeded his authority on a range of issues, including immigration and health care. The U.S. Court of Appeals for the District of Columbia Circuit will hear several hours of oral argument Tuesday on the power-plant regulations.
In another unusual development, the appeals court is skipping its usual routine of using a three-judge panel to hear the case, opting instead for a roster of 10 judges, a sign of the case’s gravity. “It’s a very pivotal issue on several levels,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis. “On one level, it’s a political issue over the power of the executive branch, and on another, it’s pivotal for different stakeholders in the clean tech and coal industries.” The EPA rules, called the Clean Power Plan, aim to push utilities to shift from coal plants to cleaner energy sources like natural gas, wind and solar. It gives states flexibility on how to reduce power-plant emissions within their borders, but alternative energy is a necessary component because the emissions targets couldn’t be met solely by making existing coal-fired plants more efficient. Mr. Obama touted the regulations in the run-up to the United Nations climate talks in Paris last December, where about 200 countries agreed to undertake ambitious efforts to cut greenhouse emissions.
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