Market Snapshot* DJIA
17847.63
+369.96
5142.27
+104.74
S&P 500
2091.69
+42.07
10-Year
2.2755%
15/32
Nasdaq
Friday, December 04, 2015
30-Year
3.0063%
1 9/32
Euro
$1.08735
-0.0076
$39.97
-1.11
Nymex Crude Source: SIX Telekurs, ICAP plc
Stocks U.S. stocks rallied after a strong jobs report and assurances from European Central Bank President Mario Draghi that the bank was open to further stimulus measures. The ECB would "no doubt" step up stimulus measures if needed, Mr. Draghi said Friday, speaking in New York. Mr. Draghi's comments appeared to reassure investors a day after the central bank eased policy less than many had expected, sending markets into a tailspin.
Treasurys The U.S. government bond market strengthened Friday after a solid U.S. jobs report, regaining some poise following the biggest one-day selloff since July 2013 in a prior session. Investors say a bigger-than-expected gain of 211,000 new jobs last month cemented already elevated expectations over an interestrate increase by the Federal Reserve in two weeks.
*preliminary values subject to adjustments
Tomorrow’s Headlines
US Employers Added 211,000 Jobs in November The U.S. economy posted another month of sturdy job growth in November, paving the way for the Federal Reserve to raise short-term interest rates for the first time in a decade. Nonfarm payrolls increased a seasonally adjusted 211,000 in November, the Labor Department said Friday. The unemployment rate was unchanged at 5%, reflecting an expansion in the labor force as more Americans came off the sidelines and began searching for jobs. “There’s nothing in the details that suggests anything other than a healthy and rapidly growing labor market,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. “By many measures, including the unemployment rate, the Fed’s own labor market conditions index, and common sense, the U.S. economy is very near or even at the level of full employment.” Revisions showed employers also added 35,000 more jobs in September and October than previously estimated. October’s payroll gain was 298,000, revised up from an initially reported 271,000. The upward revision leaves October the strongest month of job creation this year. September’s payroll gain was 145,000, revised up from 137,000. Economists surveyed by The Wall Street Journal had expected payrolls to rise by 200,000 and the jobless rate to hold at 5%.
Forex The dollar advanced against the euro and the yen on Friday as November's solid employment report boosted investors' expectations for the Federal Reserve to increase U.S. borrowing costs later this month. The dollar rose 0.6% against the common currency, as one euro bought $1.0871, leaving the U.S. currency down 2.6% for the week.
Commodities Oil prices dropped Friday after the Organization of the Petroleum Exporting Countries decided to maintain current production levels even as crude markets remain mired in a supply glut. Light, sweet crude for January delivery settled down $1.11, or 2.7%, at $39.97 a barrel on the New York Mercantile Exchange. Prices fell 4.2% on the week. Brent, the global benchmark, dropped 84 cents, or 1.9%, to $43 a barrel on ICE Futures Europe, posting a 4.1% weekly loss.
Draghi Says ECB Could Step Up Stimulus Efforts if Necessary European Central Bank President Mario Draghi sought to reassure financial markets Friday that the ECB would step up its stimulus efforts if needed to bring inflation back to target, a day after investors expressed disappointment in the central bank’s latest package of easy-money measures. “There is no particular limit to how we can deploy any of our tools” within the ECB’s mandate, Mr. Draghi said at an Economic Club of New York event. “There is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would,” he added. continued on page 2
Monday’s Calendar 10:00 a.m.
Nov Employment Trends Index ETI (previous 129.48), ETI, Y/Y% (previous +4.1%)
10:00 a.m.
Oct Metropolitan Area Employment & Unemployment
12:30 p.m.
FRB St. Louis President James Bullard speech in Indiana
1:00 p.m.
George Osborne discusses the UK's economy and its place in the world in New York
3:00 p.m.
Oct Consumer Credit Consumer Credit Net Chg (USD) (previous +28.92B)
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Tomorrow’s Headlines continued “‘We have the power to act, the determination to act, the commitment to act.”
The deadlock means OPEC members will likely continue to pump oil in near-record volumes over the next few months, especially since Iran is expected to emerge from international sanctions in that time allowing it to produce and export hundreds of thousands more barrels of oil each day.
Mr. Draghi was the most prominent of several ECB officials who Friday defended the central bank against criticism that it had failed to match the lofty expectations it helped stoke.
The group had been producing more than 31 million barrels a day for much of 2015 and is now adding another 890,000 barrels a day from a new member inducted on Friday, Indonesia.
FBI Probes San Bernardino Attack As Terrorism
Norfolk Southern Rejects Canadian Pacific’s Offer
The Federal Bureau of Investigation is now probing the mass shooting in San Bernardino, Calif. as terrorism and said the alleged killers showed signs of radicalization and possible foreign inspiration.
Norfolk Southern Corp. soundly rejected Canadian Pacific Railway Ltd.’s acquisition offer on Friday, saying the combination of the two companies would create a “smaller, geographically inferior” railroad to those that would result from mergers triggered by the deal.
“Based on information and the facts as we know them we are now investigating these horrific acts as acts of terrorism,” David Bowdich, the assistant director in charge of the FBI in Los Angeles, said at a news conference. Meanwhile, FBI Director James Comey said that while the killers showed signs of radicalization and possible foreign inspiration, there was no indication the suspects were part of a larger cell or plot. Mr. Bowdich said authorities had learned of extensive planning by the married couple, Syed Rizwan Farook and Tashfeen Malik, who were killed hours after allegedly opening fire on a holiday party of county workers on Wednesday, killing 14 people and injuring 21 others. Mr. Bowdich said investigators found two cellphones belonging to the suspects in a trash can. The phones “were crushed,” but he said investigators were still able to “exploit data” from the phones and glean new clues into the shooting. The suspects “attempted to destroy their digital fingerprints,” he said.
OPEC Fails To Reach Agreement on Production Levels The Organization of the Petroleum Exporting Countries ended a contentious meeting without any agreement to restrain production, leaving members to continue pumping crude at near-record levels into an already oversupplied market. The meeting at OPEC headquarters dragged on for more than six hours and was marked by deep fissures within the group, as some members pushed hard for a cut in production that might push oil prices up from their recent $40-$50-abarrel range, less than half what they were 18 months ago. But as in two previous meetings, the group couldn’t overcome a fundamental divide: members demanding output cuts, such as Iran and Venezuela, were unwilling or unable to offer production cuts themselves, while those most able to cut, Saudi Arabia and its neighboring Persian Gulf states, refused to do so unless all members participate along with some producers from outside the organization.
“The lack of scale and scope” of the combination would disadvantage the new railroad and damage shareholder value, Norfolk Southern CEO James Squires told analysts in a conference call as he announced that his board had unanimously turned down CP’s offer. Aiming squarely at CP CEO Hunter Harrison and its major shareholder and activist investor William Ackman, Mr. Squires said CP’s offer, made last month and valued at more than $28 billion, had been “opportunistically timed” to take advantage of a challenging rail industry environment and a new management team. Mr. Squires became CEO on June 1. And the industry’s biggest business, coal, has continued its slide, falling 10% in carloads this year, according to the Association of American Railroads. Mr. Squires predicted the regulatory challenges to the deal could force Norfolk Southern into limbo for two years or more, with a “high probability” it would be rejected by the Surface Transportation Board, a U.S. rail-industry regulator. “We can’t help that Hunter Harrison seems to have led shareholders down the garden path in terms of regulatory risk here,” Mr. Squires said in an interview, adding that Norfolk Southern had consulted with a number of regulatory experts and lawyers. “We view, based on that advice, the hurdles as very substantial.”
US Trade Gap Widened 3.4% in October The U.S. trade deficit widened in October as exports resumed a steady decline, the latest sign a slumping global economy is draining foreigners’ appetite for American-made goods. The trade gap expanded 3.4% from the prior month to $43.9 billion, the Commerce Department said Friday. Exports fell 1.4% to a three-year low. Imports declined 0.6%. Friday’s report also showed the trade gap in September was larger than previously reported.
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Tomorrow’s Headlines continued Economists surveyed by The Wall Street Journal expected a $40.5 billion deficit in October.
resolved. SunTrust said on Twitter that some of its customers were affected by the issue as did smaller institutions like Dupaco Community Credit Union in Dubuque, Iowa. A SunTrust spokesman couldn’t be reached for comment.
Trade figures are imprecise and swing month to month. Over a broader period, the U.S. trade deficit has widened by 5.3% in the first 10 months of 2015 compared with the same period a year earlier—due to several factors tied to a sluggish world economy.
Kinder Morgan Seeks to Reassure Investors on Cash Flow, Dividend
GM Posts China Sales Record in November
Kinder Morgan, a pipeline giant that has been hurt by tumbling commodities prices, said it has completed its budget process for next year and expects to generate enough cash flow to support the dividend growth goal of 6% to 10% it set on its third-quarter earnings call.
General Motors Co. said it set a China sales record in November with a 14% increase in vehicle deliveries, representing a sharp turnaround from a sales slump over the summer that worried investors and suggested the world’s largest automobile market was slowing. The auto maker—among the biggest in China—sold 346,000 vehicles last month, including deliveries logged by its Chinese joint ventures. Stronger demand for sport-utility vehicles, which represented nearly 20% of the company’s China sales in November, is fueling the performance. China recently initiated a new government-supported incentive program to help spark sales after growth stalled in the summer months. Full industry results are expected in coming days. GM sells more cars in China than in any other country. It sold about 229,000 vehicles in the red-hot U.S. market in November, by contrast, representing about 17% of industry sales there. While the U.S. is by far the most profitable market for GM, analysts closely monitor the health of Chinese operations. The Detroit auto giant has a large manufacturing footprint in China and is planning billions of dollars in additional investments in that country in coming years.
First Data Hit By Card-Processing Glitch First Data Corp. said it experienced an outage on Friday morning that affected the authorization of transactions made on certain credit cards and debit cards. The scope of the outage wasn’t immediately known, but issuers including PNC Financial Services Group Inc. and SunTrust Banks Inc. both said their cards had been affected by a processing glitch. “First Data’s technical support teams identified and contained the issue and card authorizations have now been fully restored,” the company said in a statement. The company, which processes transactions for card-issuing financial institutions and millions of merchants, attributed the outage to a hardware issue that affected a cardprocessing platform. It is one of the nation’s largest thirdparty card processors. A PNC spokeswoman said the outage affected some customers’ credit and debit cards and that the issue has been
Kinder Morgan Inc. on Friday sought to reassure investors about its dividend and cash flow after investor concerns sent the company’s shares to new lows this week.
Shares of pipeline giant Kinder Morgan have fallen as much as 30% this week amid worries about the company’s ability to pay its dividend—currently yielding about 12%— and following Moody’s Investors Service raising concerns about the company’s debt load. The latest developments came as the entire energy industry continues to deal with the fallout from low oil prices. Kinder Morgan’s statement Friday did little to assuage the investor concerns, as shares continued to slide after its release. Kinder Morgan shares were recently down 9% to $17.53 a share in midday trading, bringing its decline for the week to around 27%.
Chipotle-Linked E. Coli Outbreak Widens U.S. health authorities said illnesses in an E. coli outbreak linked to Chipotle Mexican Grill Inc. had occurred in three additional states, as the restaurant chain announced new measures to enhance its food-safety practices. The illnesses in Illinois, Maryland, and Pennsylvania bring to nine the number of states affected by the outbreak, the Centers for Disease Control and Prevention said Friday. The CDC said a total of seven more people over the past two weeks have reported becoming sick in the outbreak, for a total of 52—though all fell ill in October and November.
FCC OKs Transfer of LightSquared Spectrum Licenses Federal regulators Friday approved LightSquared’s request to transfer its valuable spectrum licenses to a newly formed company, paving the way for the wireless venture to emerge from bankruptcy protection by the end of the year. The Federal Communications Commission approved the company’s change-of-control application, allowing the transfer of its licenses to spectrum, the limited pockets of airwaves that mobile-phone and Internet companies use, to a “New LightSquared,” a condition of the plan to exit bankruptcy after more than 3 1/2 years under court protection.
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Talking Points
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Life Insurance Rates Go Up On Existing Policies
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Major insurers are breaking a long-standing industry taboo of raising rates on life-insurance policies they sold to consumers years ago, in the latest fallout from a prolonged stretch of low interest rates. In recent months, several insurers have notified tens of thousands of people who own a type of coverage known as “universal life” that they are exercising littleused contractual rights to raise costs. Universal-life policies combine a death benefit with a tax-advantaged savings account. Since the 1980s they have accounted for at least a quarter of all new individual life-insurance sales, and more than a third over the past decade. The latest moves mean that more people in their 70s and 80s are facing higher annual charges for life insurance they bought as far back as the 1980s. And this could be just the beginning: Industry consultants expect other insurers to follow suit, which could mean higher annual costs for potentially millions of Americans holding various types of insurance. “If interest rates stay low for another three or four years, all bets are off as to how many follow,” said Lawrence Rybka, president of ValMark Securities, an insurance and brokerage firm in Akron, Ohio. Depending on the insurer, the extra annual cost ranges from about $150 for people with $250,000 policies to six-figure sums for those whose coverage tops $10 million, financial advisers say. The increases, which relate to the annual charge for the death benefit, stretch from the mid-single digits to above 200% in some instances, according to ITM/TwentyFirst, which provides policy-management services to trustees and institutional clients. Insurers are under pressure to improve results as years of low interest rates have squeezed investment income, and industry executives say the right to increase rates is clearly disclosed to customers. Consultants and analysts say many insurers have cut expenses and taken numerous other steps to maintain their profitability over the years and are running out of options. Still, the moves are riling policyholders. “I find it really challenging that the insurance industry has the ability to institute sharp increases such as this, and the consumer is left with very little option as to what to do,” said Michelle Clements, president of Synergy Trust Co., a private family trust company in Sioux Falls, S.D. Her family faces a 15% increase next year, amounting to tens of thousands of dollars, for an 80-year-old family member’s multimillion-dollar coverage, with additional increases over the next few years. Among her options: selling the policy to investors in the industry’s secondary market. Cost increases are permissible under many policies, though the circumstances under which this is allowed varies by contract. “Contractual maximum charges are clearly disclosed at the inception of the policy,” said Paul Graham, an official with trade group American Council of Life Insurers. However, exercising any right to boost costs on older policies “used to be taboo,” said Henry Montag, a principal with TOLI Center East in Long Island, N.Y., an adviser to trusts on insurance issues. “Insurers feared doing so would create mistrust” among agents and consumers and adversely affect future sales, he said. “But now the insurers feel the [cost] increase is worth the risk.” Life insurers rely heavily on interest from bonds bought with premium payments, and dollars they invest today yield less than anticipated when insurers sold the policies. The 10-year Treasury peaked at 15% in the 1980s, and declined gradually until 2008, when it fell sharply as the Federal Reserve sought to rev up the economy. It currently yields 2.328%. continued on page 5
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Talking Points continued The Fed is expected soon to boost a key rate, but likely only by a quarter of a percentage point. It is uncertain when rates would move high enough to make a measurable difference to life insurers. The policy owned by the Clements family was bought in 2006 from a U.S. unit of AXA SA. The insurer doesn’t comment on individual instances. As for the increased charges, a spokeswoman said the company had concluded one of its older life-insurance products wasn’t performing as expected because policyholders were dying sooner and investments were earning less than forecast when the policies were sold. AXA’s changes affect about 1,700 policies sold between 2004 and 2007. With universal-life policies, owners deposit money into the policy’s “cash-value account,” where tax-deferred interest accrues. From this account, the insurer deducts for expenses, including the annual cost of the death benefit.
How To Improve Accuracy Of Predictions Six years after the Second World War, the probability of a third seemed high and rising. The Soviets had the bomb; Europe was riddled with tripwires. Yugoslavia was a major
concern. Its Communist government had broken with the Soviet bloc three years earlier and relations were worsening. Would the Soviets invade? In March 1951, information generated by American intelligence agencies was gathered and distilled. The result was National Intelligence Estimate 29-51— “Probability of an Invasion of Yugoslavia in 1951”—which concluded that a Soviet assault was “a serious possibility.” The report was read in the State Department. Policy planners got busy. But one day, Sherman Kent, a legendary CIA intelligence analyst, had a casual chat with an official from the State Department. Say, the man asked Kent, “what kind of odds did you have in mind” when you used the phrase “serious possibility”? Kent said he was pessimistic. He thought there was about a 65% chance of an invasion. The official was jolted. He had assumed “a serious possibility” meant a much lower probability. Kent was jolted, too. He asked his colleagues—in numerical terms—what they thought “serious possibility” meant. The answers were all over the scale of probability. The highest put the likelihood of invasion at 80%, the lowest at 20%. Kent was stunned. But if you think a misunderstanding like that is freakishly unusual, think again. The only thing unusual about the fog of confusion surrounding NIE 29-51 is that it was identified.
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