Fed Talk & Earnings

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DOW – 51 = 18,086
SPX – 6 = 2126
NAS – 14 = 5199
10 Y – .03 = 1.76%
OIL – .31 = 50.04
GOLD + 3.90 = 1,260.50

Kurdish forces advanced on villages near Mosul, the start of a campaign to reclaim Iraq’s second-largest city from Islamic State militants who seized it more than two years ago. U.S. warplanes are providing air support for the operation, which involves nearly 30,000 Iraqi and Kurdish troops.

Government bond yields climbed around the world after Friday’s comments by Federal Reserve Chair Janet Yellen fueled bets that U.S. policymakers may be prepared to tolerate faster inflation in the interests of a more emphatic economic recovery.

By the middle of next year, Federal Reserve Bank of Boston President Eric Rosengren says he expects unemployment to fall to 4.7 percent and inflation to beat the Fed’s 2 percent target, leaving policymakers at risk of having to squelch the recovery with faster-than-expected rate increases. Rosengren said: “If you wait too long … the more likely you are going to have to do it more quickly … The less likely you are to calibrate it just right.”

The result: a jobless rate that might dip to an ultra-low level, but then force the Fed to risk a recession with faster increases. Rosengren argues the Fed might instead engineer a soft landing that brings the economy to full employment and “we would basically stay there.”

Fed Vice-Chair Stanley Fischer spoke this afternoon at the Economic Club of New York; Fischer suggested that low rates can lead to longer and deeper recessions, making the economy more vulnerable. He added they can also threaten financial stability, although the evidence so far doesn’t show a heightened threat of instability.

His remarks contrasts with those of Fed Chair Janet Yellen on Friday, when she suggested that the Fed may want to run a “high-pressure economy” with low interest rates. Fischer said technology and demographics are contributing to low rates, but are out of the Fed’s control. Fischer said other reasons contributing to weak growth include productivity and labor force growth, an aging population, weak investment and weak foreign growth.

It is probably worth noting that the Fed does not have a great track record of preventing recessions or bear markets. The Fed seems to be pretty good at creating bubbles, not so much at preventing the aftermath. Booms lead to busts and the Fed has not been able to repeal the business cycle.

Wall Street investors now place a 67% chance of a Fed rate hike in December. Today, Treasuries rebounded from a four-month low and the dollar fell after mixed economic data bolstered the case for accommodative monetary policy. Oil declined.

Output at U.S. manufacturers rose for the third time in four months on production of consumer goods and construction materials, a sign the industry is recovering from a prolonged spell of weakness. The 0.2 percent gain at factories, which make up 75 percent of production, followed a 0.5 percent decrease the prior month.

A rebound in manufacturing and mining output was offset by surprisingly weak demand for utilities. In September, mining production rose 0.4 percent as gains in oil and gas well drilling offset a drop in crude oil extraction. That left mining output rising at a 3.7 percent rate in the third quarter following six consecutive quarterly declines.

Energy services firm Baker Hughes (BHI) reported on Friday oil firms increased drilling rigs last week for the 16th straight week. So, in case you were wondering, oil prices around $45 to $50 a barrel is the level where US drillers pump up their production. That doesn’t mean companies in the oil patch will turned profitable in the third quarter; Oilfield service providers Halliburton (HAL) and Schlumberger (SLB) are expected to reported significantly lower earnings (or even losses) later this week.

More than 80 companies in the S&P 500 are set to report earnings this week, according to Thomson Reuters. So far, 34 companies have reported third-quarter results and 62% have topped forecasts, just above the long-term “beat” average of 59%. Earnings of S&P 500 companies are expected to have dipped 0.4 percent in the third quarter, according to Thomson Reuters data.

Bank of America’s (BACthird-quarter profits rose nearly 6 percent from a year earlier, helped by strong results in investment banking and trading, as well as lower expenses. BofA earned $4.4 billion in the three months ending in September, up from $4.1 billion in the same period a year earlier. The per-share figure rose to 41 cents versus 38 cents a year ago, easily beating the 34 cents per share analysts were expecting. While revenue was relatively flat year over year, the bank managed to cut expenses.

Management at Deutsche Bank (DB) has discussed cutting back investment-banking operations in the US to save money. Reducing US operations could be part of a deal with the US Department of Justice over mis-selling of mortgage-backed securities in the run-up to the 2007 US housing crisis. This is devastating news for the 3 or 4 people who actually wanted to apply for a job with Deutsche Bank.

Financial shares have been a decent performer in the past month, up about 1%, but year-to-date the financial ETFs have been the second worst performers.

At the closing bell, Netflix (NFLX) reported earnings, more specifically Netflix crushed earnings. Third quarter earnings per share came in at .12 cents compared to estimates of .06 cents. Revenue jumped 36% to $2.29 billion. US subscriber growth grew to 370,000, beating estimates of 300,000. International subscriber growth came in at 3.2 million, beating estimates of 2 million. Shares popped about 20%.

IBM reported its smallest drop in quarterly revenue in more than four years, helped by continued growth in the company’s cloud and analytics businesses. Revenue fell to $19.23 billion from $19.28 billion a year ago. Net income fell to $2.85 billion, or $2.98 per share, from $2.95 billion, or $3.01 per share.

IBM is betting on Watson, its artificial intelligence technology, to help it expand, employing about 10,000 workers on the project and investing billions of dollars. The company does not report separate financial results for Watson, but UBS estimates that it may generate $500 million in revenue this year and grow rapidly, nearing $17 billion by 2022.

Intel (INTC), Yahoo (YHOO), and Goldman Sachs (GS) release earnings results tomorrow, and Morgan Stanley (MS) on Wednesday.

Minneapolis-based grocery chain Supervalu (SVU) has reached a deal to sell grocery discount chain Save-A-Lot to a private equity investor. Onex Corp. agreed to pay $1.4 billion in cash for Save-A-Lot, which owns 472 stores and licenses naming rights and supplies another 896 locations. Supervalu, which has 3,342 stores, including the Save-A-Lot locations, said it would use the cash from the transaction to pay down debt.

Apple has drastically scaled back its automotive ambitions, leading to hundreds of job cuts and a new direction that, for now, no longer includes building its own car. Hundreds of members of the car team, which comprises about 1,000 people, have been reassigned, let go, or have left of their own volition in recent months. Apple (AAPL) executives have given the car team a deadline of late next year to prove the feasibility of the self-driving system and decide on a final direction.

Tesla Motors said it would collaborate with Panasonic to manufacture solar cells and modules in New York. Under the agreement, which is a non-binding letter of intent, Tesla (TSLA) said it will use the cells and modules in a solar energy system that will work seamlessly with its energy storage products Powerwall and Powerpack. Panasonic is already working with the U.S. automaker to supply batteries for the Model 3, its first mass-market car. Panasonic is expected to begin production at the Buffalo facility in 2017.

Samsung Electronics said its system chips business has started mass production of semiconductors using 10 nanometer technology, adding it was the first company in the industry to do so. Samsung said in a statement a tech product launching early next year will use chips made with its 10-nanometre production technology without specifying the device.

Chemical companies including Honeywell (HON) and Chemours are ramping up efforts to produce alternative coolants used in air-conditioners and refrigerators, following a global pact to reduce planet-warming greenhouse house gas emissions.

On Saturday, some 150 nations struck a global agreement in Kigali, Rwanda, on ways to phase down hydrofluorocarbon (HFC) gases, which are currently used in air-cooling systems and refrigerators, and help curb the release of climate-warming emissions. As per the agreement, developed countries such as the United States have to move first to reduce HFCs. Equipment manufacturers will switch to making systems with alternative coolants as chemical makers produce new HFC substitutes.

Honeywell began developing HFC alternatives as far back as 2000 and has invested $500 million to date. The company has committed $900 million in total. Chemours, which was spun off from DuPont Co in 2015, said in May it will invest “millions of dollars” to set up a new plant to produce an auto refrigerant substitute in Texas.

Twitter has lost another potential buyer after Salesforce chief executive Marc Benioff said the company does not intend to bid for the social firm, marking yet another potential high-profile buyer turning its back on the site. Salesforce (CRM) follows Google (GOOGL) and Disney (DIS) in walking away from Twitter (TWTR), which at one point appeared to be in the middle of a potentially lucrative bidding war.

However, investors will now wonder whether any company will buy Twitter, which has struggled to grow or generate much revenue, especially when compared with rival Facebook (FB), despite its sizeable and loyal user base.

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