Market Snapshot* DJIA
18308.15
++164.7
5312
++42.85
S&P 500
2168.27
++17.14
10-Year
1.623%
-7/32
Nasdaq
Monday, October 03, 2016
30-Year
2.3369%
-3/32
Euro
$1.12145
-0.0018
$48.81
+0.57
Nymex Crude
Source: SIX Financial Information, ICAP plc *preliminary values subject to adjustments
Stocks U.S. stocks pulled back after Friday's rally capped their best quarter of the year. Stocks briefly pared losses after a gauge of U.S. manufacturing rebounded in September. The Institute for Supply Management said its manufacturing index increased last month, after a contraction in activity in August.
Treasurys The U.S. government bond market was off to a rough start for the final quarter of 2016. A bout of selling hit the U.S. government bond market on Monday as fresh signs of a resilient U.S. economy bolstered the Federal Reserve's case to raise interest rates before the end of this year.
Forex The dollar rose Monday after a report showed the U.S. manufacturing sector rebounded in September. The WSJ Dollar Index, which measures the U.S. currency against 16 others, rose 0.3% to 86.61.
Commodities U.S. oil prices rose to a three-month high Monday on renewed optimism of an OPEC-production deal. Light, sweet crude for November delivery settled up 57 cents, or 1.2%, at $48.81 a barrel on the New York Mercantile Exchange, its fourth-consecutive rise, and ninth in the last 11 sessions. It is the highest settlement since July 1.
Tomorrow’s Headlines
US Auto Sales Slipped in September Light-vehicle sales sputtered last month despite generous Labor Day deals, with four of the six biggest sellers in the U.S. declining from the prior September as industry volumes continue to plateau. While the pace of sales remains historically strong, dealership traffic is leveling off after more than six years of steady growth. General Motors Co., Ford Motor Co., Fiat Chrysler Automobiles NV and Honda Motor Co. posted declines. Toyota Motor Corp. reported a modest increase and Nissan Motor Co. was the biggest gainer in the group. Retail demand has cooled from a robust clip set in the final six months of 2015. To keep volumes near last year’s record 17.5 million and North American factories humming, auto makers have cranked up spending on rebates and discounts and relied more heavily on fleet customers, including rental-car firms, government agencies and commercial clients.
NY Orders Trump Foundation to Halt Fundraising New York Attorney General Eric Schneiderman issued a notice to Republican presidential nominee Donald Trump’s charity organization to cease and desist from soliciting contributions in New York, following a probe. Mr. Schneiderman, a Democrat, put out a news release Monday claiming the Trump Foundation violated New York law by engaging in fundraising and solicitation activities this year without being properly registered. The law, Mr. Schneiderman’s office said, “requires charitable organizations that solicit contributions in New York state to register with the Charities Bureau and to provide annual financial reports and annual audited financial statements.” In addition to stopping all fundraising activities in New York, the foundation has 15 days from Sept. 30 — the day the notice was dated—to provide the state the annual reports and audited financial statements required by law. Failure to do so would be deemed a “continuing fraud upon the people of the state of New York,” according to the notice. A representative for the Trump campaign couldn’t immediately be reached for comment. Senior communications adviser Jason Miller has previously continued on page 2
Tomorrow’s Calendar 7:45 a.m.
8:55 a.m.
9:00 a.m. 9:45 a.m. 4:30 p.m.
10/01 The Retail Economist/Goldman Sachs Weekly Chain Store Sales Index Chain Store Sales, W/W% (previous +0.8%), Chain Store Sales, M/M% (previous +2.7%) 10/01 Johnson Redbook Retail Sales Index Ret Sales Mo-to-Date, M/M% (previous -0.5%), Ret Sales Mo-to-Date, Y/Y% (previous +0.4%), Latest Wk, Y/Y% (previous +0.2%) IMF World Economic Outlook forecast chapters published Sep ISM-NY Report on Business Business Index (previous 47.5) 09/30 API Weekly Statistical Bulletin Crude Stocks, Net Chg (Bbls) (previous -0.8M), Gasoline Stocks, Net Chg (Bbls) (previous -3.7M), Distillate Stocks, Net Chg (Bbls) (previous -0.3M), Refinery Runs
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Monday, October 03, 2016 4 p.m. ET
Tomorrow’s Headlines
which had revenue of $4 billion last year, has focused on the western half. Both are competing with giants like WalMart Stores Inc. as well as the shift to online shopping.
continued dismissed the attorney general’s probe and referred to Mr. Schneiderman as a “partisan hack.” This is not the first time Mr. Schneiderman has probed one of Mr. Trump’s enterprises. In a 2013 civil suit that is pending, the attorney general sued Mr. Trump’s real-estate school, Trump University, alleging it lacked the proper licensing and defrauded students out of thousands of dollars. Mr. Trump has denied the allegations, saying students got their money’s worth.
Janus, Henderson Combine to Cut Costs Henderson Group PLC agreed to acquire U.S. rival Janus Capital Group Inc. for about 2.01 billion pounds ($2.59 billion) as the two active management firms look to cut costs in the face of pressure from low cost fund providers like BlackRock Inc. and Vanguard Group. The planned deal comes as active managers—who have posted net outflows in recent years—try to square up to their passive rivals by pursuing new deals or rethinking their product mix. “For active managers, it’s a double whammy right now: rising costs and regulatory burdens are squeezing profit margins at a time when passive investments are taking assets away,” said Kyle Sanders, an analyst at Edward Jones. Mr. Sanders said he expects more large deals in the asset management industry as active managers try to become more global and cut costs. Janus and Henderson aim to save money and boost revenue by expanding their global distribution of equity and bond funds, as investors continue to flock to competitors who specialize in exchange-traded products and other passive investments. These sorts of products typically cost less than the active funds for which both Henderson and Janus are best known.
Bass Pro Shops to Acquire Cabela’s for $4.5B Bass Pro Shops struck a deal to acquire Cabela’s Inc. for about $4.5 billion in cash, combining two of the biggest sellers of outdoor-sports gear in the latest shift in a rapidly changing sporting goods industry. The merger would create a national chain with more than 180 locations and roughly 40,000 workers. The combined company would control more than 20% of the $50 billion U.S. hunting, camping, and fishing market, according to Stifel analyst Jim Duffy. Both chains are famous for mega-sized stores filled with hunting and fishing supplies. Closely held Bass Pro Shops has opened most of its locations in the eastern half of the country since its founding in the 1970s, while Cabela’s,
The acquisition follows lengthy cost-cutting and restructuring initiatives at Cabela’s, which had struggled in recent years with lagging same-store sales, and had been under pressure from activist investor Elliott Management Corp. The Sidney, Neb.-based retailer said in December that it was reviewing strategic options, including a possible sale. Cabela’s shareholders will receive $65.50 a share, a 19% premium to Friday’s closing share price, in a deal the companies say will combine complementary product lines and domestic geographic markets. The companies valued the deal at $5.5 billion; company-provided deal values often include debt and other items.
Illinois to Suspend Investment Activity With Wells Fargo Illinois will suspend $30 billion in investment activity with Wells Fargo & Co., the state treasurer said Monday morning, the latest in a series of setbacks for the bank resulting from its continuing sales scandal. Illinois State Treasurer Michael Frerichs called Wells Fargo’s actions “downright shameful” and said that the state is suspending investments in Wells Fargo debt securities for one year and suspending the use of the bank as a broker/dealer for investment purchases for one year. Mr. Frerichs said the Office of the Treasurer is also opening an audit of the bank to see if it complied with Illinois law on returning unclaimed property to consumers.
Mylan Tapped for More Data On EpiPen Price Figures A U.S. House committee sent a letter to Mylan NV demanding a fuller explanation of why the company omitted key information it used to calculate the profit figure for the lifesaving EpiPen drug that its chief executive provided during a Congressional hearing last month. Mylan has been under fire for raising the price of EpiPen, which treats allergic reactions, by 550% to $608 for a twopack of injectors since Mylan acquired the product in 2007. At a Sept. 21 hearing before the House Committee on Oversight and Government Reform that was called to examine the price hikes, Mylan Chief Executive Heather Bresch testified that the company’s profit was $100 per two-pack. But Mylan last week clarified that figure and said operating profit was about 60% higher than what it told Congress—or about $166 before taxes—because the $100 figure reflected taxes based on the U.S. statutory rate of 37.5%. Mylan, which has a much lower overall tax rate, provided the additional information after questions from The Wall Street Journal.
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continued on page 3
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RBS to Pay $120M To Settle Connecticut Probe
Tomorrow’s Headlines continued House committee leaders, in a letter to Ms. Bresch dated Sept. 30 and released Monday, said her testimony “omitted key tax assumptions that affect the company’s profit per pack.” They said the omission “raises questions.” The letter was signed by committee chairman Jason Chaffetz (R., Utah) and ranking member Elijah Cummings (D., Md.). They noted that a Mylan graphic presented at the hearing summarized EpiPen profitability and made no mention of the tax assumption Mylan used to calculate it.
Manufacturing PMI Shifted Back Into Expansion The U.S. factory sector regained its footing in September, though overall growth remains tepid amid weak business spending and lackluster economic expansion. The Institute for Supply Management on Monday said its manufacturing index increased to 51.5 in September from 49.4 in August. A reading above 50 indicates that factory activity is growing, while a reading under 50 signals contraction. While the return to growth is encouraging, the sector is only inching ahead this year. “The bottom line is that the manufacturing sector still faces challenging conditions,” said Richard Moody, chief economist at Regions Financial Corp.
US Suspends Talks With Russia Over Syria Cease-Fire The Obama administration on Monday said it was calling off talks with Russia over a cease-fire and military cooperation plan in Syria, following days of airstrikes and fingerpointing over who caused the failure of the deal. The decision ends for now prospects for a truce and threatens to send the long civil war into a perilous new direction, with hopes for a political settlement more distant. The end of the talks also put the onus on the Obama administration to consider other options for Syria, including the provision of more powerful weaponry from the U.S. and other allies for rebels fighting the government of President Bashar al-Assad. The White House confirmed the decision at a news briefing in Washington. “There is nothing more for the United States and Russia to talk about in regard to trying to reach an agreement that would reduce the violence inside of Syria,” said White House Press Secretary Josh Earnest. “And that’s tragic.” Secretary of State John Kerry was en route to Europe on Monday for consultations with allies. The State Department said in a statement that it did not take the decision to end talks lightly.
Royal Bank of Scotland Group PLC will pay $120 million to settle a four-year investigation by Connecticut into the U.K. lender’s underwriting of residential mortgage-backed securities before the 2008 financial crisis. RBS and Connecticut’s banking department had reached a preliminary agreement in June regarding the investigation, an RBS spokesman said. He added that the final settlement with Connecticut is covered under provisions that the bank previously has set aside to cover such matters. In January, RBS disclosed an additional 2.5 billion British pounds ($3.21 billion) to cover a slew of regulatory issues. “We are pleased to have resolved this matter,” the RBS spokesman said in prepared remarks Monday. “Putting these issues behind us remains a priority; there is more work to be done, but we are making progress.” According to the Connecticut attorney general’s office, from early 2005 through 2008, RBS was the main underwriter for 250 RMBS deals valued at a combined $250 billion and as such was required to conduct due diligence on pools of mortgages that served as the underlying collateral.
Canada Takes Measures to Cool Housing Markets Canada took a series of steps Monday aimed at cooling housing markets in the country’s biggest cities, including addressing concerns about foreign investors’ influence in driving up home prices to frothy levels. Among the measures announced by Canadian Finance Minister Bill Morneau was a provision to prevent foreigners from claiming a so-called capital-gains tax exemption on Canadian homes bought and then sold in the same year. The move follows months of mounting worries about how foreign cash has contributed to soaring house prices in Toronto and Vancouver, British Columbia. Mr. Morneau said the fresh round of policy measures are meant to address affordability in Canada’s biggest cities. That includes in Vancouver, on Canada’s west coast, where Prime Minister Justin Trudeau has said housing had become a “significant crisis.” “We are recognizing that there are multiple issues that are impacting the market over the long term and we need to have measures in place that ensure its stability,” Mr. Morneau said at a press conference in Toronto.
Oversupply Hurts Meat Prices Cattle and hog prices have fallen to the lowest levels in years as U.S. meatpackers produce the largest volume of meat in history. Last week’s 9.2% slide in hog futures on the Chicago Mercantile Exchange was a dramatic turnaround for what was the best-performing commodity market in the first half of this year thanks to strong pork exports to China.
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Monday, October 03, 2016 4 p.m. ET Copyright Dow Jones & Co., Inc.
Talking Points
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Trump’s Bad Week
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This is a recurring pattern in Mr. Trump’s world, raising the question of how it keeps happening—and whether it is destined to continue happening over the next five weeks.
You could argue that Donald Trump had the strongest 30 minutes of his presidential campaign at the beginning of the first presidential debate, when he delivered a direct and succinct summary of his argument that American jobs are being shipped overseas by trade deals and big-business defections and can be lured back. And then... Well, after those opening minutes the debate shifted away to his comments about women and why he pursued for years the debunked assertion that President Barack Obama was born overseas. In the days since, the focus has been, bizarrely, on how he assailed weight gains by a Miss Universe and, more substantively, the performance and tax treatment of his businesses. It culminated in a Saturday night rally in which, among other things, he mocked unkindly the way Hillary Clinton walked to her car while suffering a bout of pneumonia.
The usual explanations are that the candidate lacks the self-discipline to avoid being lured down dead-end alleys, and has a temperament that allows him to be baited into self-defeating controversies. There is obvious credence to both arguments, though they also held true while the same style was succeeding during the Republican primary season. But there are two other, more subtle explanations for this pattern. The first is that Mr. Trump has over time planted some time bombs in his own pathway that now are starting to go off. The most obvious one has to do with his tax returns. The conversation now under way — what those returns show about his actual income, what they might show about the state of his business empire, the amount of federal taxes he has or hasn’t paid — would have been better held five months before the election, not five weeks before the election. Mr. Trump decided, though, to resist calls then, not from Democrats but from fellow Republicans, to release his returns. Now the conversation is being driven instead by a leak to the New York Times, timely or untimely depending on your point of view, of portions of his 1995 return showing a staggering business loss of almost a billion dollars, providing a tax carryforward that likely reduced or eliminated Mr. Trump’s federal tax liability in the years since. Calmly explaining that would have been difficult months ago, but it’s twice as difficult in the generalelection hothouse. As a consequence, Mr. Trump now gets the worst of both worlds on the tax front. He is taking hits because of the presumption he’s paid very little in federal income taxes for the last decade, while still suffering from the perception that he may be hiding something else by not releasing the returns.
Meet The New Investor: Joe Sixpack Who owns the U.S. stock market? Increasingly, the answer is households. They owned 37% of the U.S. equity market at the end of June, the most since 2007, according to an analysis of Federal Reserve data by Goldman Sachs. The household categorization broadly includes retail investors, non-profits, endowments, private equity funds, and personal trusts. Household ownership of the equity market was at more than 90% at the end of World War II, but has been steadily declining as mutual funds and pension funds began buying up more stocks. That’s reversed a bit since the beginning of 2010, continued on page 5 Copyright © Dow Jones & Company, Inc. All Rights Reserved. www.dowjones.com
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Talking Points
outstretched fingertips of their respective record highs, even with Monday’s weakness.
continued
But there is a serious fight brewing on the charts, one that could pitch the market to new highs or send it reeling.
with household ownership increasing by 3.5 percentage points. It continued in the April-to-June period, with households buying a net $87 billion of stocks. That’s gone alongside household wealth climbing to a record in the second quarter, driven by a robust stock market and increasing home prices, according to Fed data. Still, stock ownership isn’t necessarily divided equally. New York University economist Edward Wolff estimated that in 2013, about 90% of stocks and mutual funds were owned by the richest 10% of households, The Wall Street Journal reported last month. At the same time as this shift, mutual fund ownership of the market has slipped to 24% from 26%. Plus, exchange-traded funds now own 5% of the market, double their levels from eight years ago, according to the Goldman analysts, led by David Kostin.
Bulls And Bears Square Off At Technical Crossroads U.S. stock market seems to be in pretty good shape as the fourth quarter gets underway. Friday’s rally pushed the Dow Jones Industrial Average and S&P 500 within their
Among the more colorful formations in technical analysis is the so-called head-and-shoulders formation. It occurs when a stock or index has a rise, followed by a drop and another rise that takes the asset higher than the first rise, followed by a another drop and a third rise that goes back to the level of the first one. On a chart, it vaguely resembles a person’s head and shoulders, thus the name. The pattern shows up in the charts over and over, and what it seems to represent is a fulcrum point for an asset, when buyers and sellers are testing critical ranges. On the one hand, a head-and-shoulders formation can represent the onset of a big selloff if the price falls below the “neckline” formed by the pattern. On the other hand, you can also have an “inverse” head and shoulders, where the rises are drops, and a move above the neckline represents an oncoming rally. While head-and-shoulders pattern in fairly common, what’s less common is to have multiple, competing head-andshoulders patterns in a chart. With the S&P 500, that is exactly what’s happening right now. “If we take a closer look at the last few weeks, we see that two dueling H&S patterns are present,” said market technician Frank Cappelleri over at Instinet, “one bearish, one bullish.”
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