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Wednesday 10.26.2016

AT&T’s Merger Could Be A Bad Sign For The Economy

Almost as soon as word leaked out Friday about AT&T’s plan to buy Time Warner (the companies formally announced the deal late Saturday), politicians from both major parties lined up to oppose it. Donald Trump and Sens. Tim Kaine, Bernie Sanders and Al Franken all either raised questions about the merger or outright called for the government to block it. Sens. Mike Lee, R-Utah, and Amy Klobuchar, D-Minn., who lead the Senate’s antitrust subcommittee, promised to hold hearings on the deal. In the coming months, we’ll hear lots more about vertical versus horizontal integration, market concentration and the implications of consolidation in the media industry.

But beyond the specific questions raised by the deal itself, the proposed merger points to a broader issue: The U.S. economy is increasingly dominated by big companies. That trend worries a growing number of economists, who fear it suggests an economy that is becoming less dynamic and competitive over time.

In the late 1980s, according to data from the U.S. Census Bureau, about 40 percent of American workers were employed by companies with at least 1,000 employees. In 2014, the latest year for which data is available, that figure had risen to 46 percent. That may sound like a small change, but in the context of the entire U.S. economy — tens of millions of people working for millions of companies — it represents a massive shift. Since 1977, the earliest year for which data is available, the number of large companies (those with at least 1,000 employees) has doubled; small companies (those with fewer than 50 workers) have increased by only about half.

American companies aren’t just getting bigger; they’re getting older, too. About 68 percent of U.S. employees work for companies that have been in business for 20 years or more, up from 59 percent 20 years earlier, according to census data. Meanwhile, the startup rate — the share of U.S. companies that are less than a year old — has been falling for more than 30 years.

New Wells Fargo CEO to employees: 'We're sorry'

Newly appointed Wells Fargo CEO Tim Sloan told employees Tuesday that he is "sorry for the pain" that the bank's employees have suffered as a result of the company's sales practices scandal.

Sloan's company-wide speech given Tuesday is the latest effort by Wells Fargo's executives to atone for the fact that the bank's employees, pushed to the limit by impossible sales goals, opened as many as 2 million bank and credit card accounts without customers' authorization.

In the speech, Sloan acknowledged that the bank did not respond to the problems in its branches soon enough and that upper management dodged responsibility for the bad behavior and wrongly placed blamed on its branch employees.

"Many felt we blamed our team members. That one still hurts, and I am committed to rectifying it," Sloan said. Wells Fargo is enveloped in the biggest scandal in its 164-year history, which earlier this month forced the abrupt retirement this month of its CEO, John Stumpf. The bank faces several class action lawsuits, as well as criminal investigations by the Department of Justice and the California Attorney General's Office.

Obamacare push to use 17 partner companies

The Obama administration plans to partner with Lyft, Uber, Care.com and 14 other companies to promote insurance coverage during the Obamacare enrollment season, officials announced Tuesday.

The companies have agreed to provide their customers with information about plans sold on the marketplaces set up under the Affordable Care Act. The signup season begins Nov. 1 and runs through the end of January.

Together, the 17 companies represent more than 15 million professionals and reach more than 8.5 million customers, according to the Department of Health and Human Services. The administration is hoping its outreach this year can especially convince more enrollment among young people, which has lagged in the past.

"We're excited about this collaboration, which will boost our efforts to reach more Americans than ever this year and help them get covered," HHS Secretary Sylvia Burwell said.

Sonic CEO: Minimum wage a challenge for small businesses

Uber Self-Driving Truck Packed With Budweiser Makes First Delivery in Colorado

A tractor trailer full of beer drove itself down Colorado's I-25 last week with nobody behind the wheel. Uber Technologies Inc. and Anheuser-Busch InBev NV teamed up on the delivery, which they said is the first time a self-driving truck had been used to make a commercial shipment.

With a police cruiser in tow, the 18-wheeler cruised more than 120 miles while a truck driver hung out back in the sleeper cab, the companies said. The delivery appears to be mostly a stunt—proof that Otto, the self-driving vehicle group that Uber acquired in July, could successfully put an autonomous truck into the wild.

"We wanted to show that the basic building blocks of the technology are here; we have the capability of doing that on a highway," said Lior Ron, the president and co-founder of Uber's Otto unit. "We are still in the development stages, iterating on the hardware and software."

AB InBev said it could save $50 million a year in the U.S. if the beverage giant could deploy autonomous trucks across its distribution network, even if drivers continued to ride along and supplement the technology. Those savings would come from reduced fuel costs and a more frequent delivery schedule.

Caterpillar Stung by Global Economic Funk

Caterpillar's third-quarter profit was essentially cut in half with the global economy stuck in a funk, and the company said that it expects that malaise to extend into next year. The construction and mining equipment maker lowered its outlook for the year and shares of Caterpillar slipped almost 2 percent in midday trading Tuesday.

Falling commodity prices on the farm, in the mines, and in the oil patch have forced a deep reduction in equipment spending. The earnings report Tuesday was the first since Caterpillar announced that longtime CEO Doug Oberhelman was stepping down.

Oberhelman said in a company release that there is an abundance of used construction equipment in North America, as well as idle locomotives. Around the world, mining trucks are sitting around being unused, he said. "Economic weakness throughout much of the world persists," he said.

Caterpillar announced last week that Oberhelman will step down at the end of the year and be replaced by Jim Umpleby, an executive who has worked at the company for more than 30 years. Oberhelman will remain chairman through March and then retire. The company's stock is up about 40 percent since Oberhelman was named CEO in 2010, but Caterpillar has posted falling revenue for the past three years. Oberhelman said Tuesday on a conference call with investors and analysts that he decided to leave on his own, citing his age. "There's no drama here," the 63-year-old said.

Is the “Earnings Recession” Over?

Over the past five quarters, corporate profits have been shrinking, but the stock market remains near all-time highs. This divergence can’t persist forever, and will eventually break one way or the other. The question is, which way will things go? At the moment, it appears that earnings could be reversing course, which would provide a very helpful tailwind for equity prices.

Before we get into the current earnings picture, it’s important to understand just how bad earnings growth has been over the last five quarters. We can see this in the chart below, courtesy of FactSet.

In this chart, S&P 500 earnings growth is shown in blue, with S&P 500 earnings excluding the energy sector displayed in yellow. Notice that from Q2 2015 – Q2 2016, overall earnings growth (blue bars) have been negative, but that the decline peaked in the first quarter of 2016.

That quarter seems to have marked the trough in this cycle, with declining earnings growth subsequently slowing, although still negative. More importantly, if we look at earnings excluding the energy sector (which only represents 37 companies in the S&P 500), earnings growth only went negative for one-quarter – Q1 2016. The second quarter of 2016 already saw a rebound back to positive earnings growth. So, where does that leave us now?

Percentage of Insured Americans and Access to Doctors Worse than Nearly All Other Industrialized Nations

Many people are still unhappy with the Affordable Care Act. The main intent of the law was to expand the safety net (Medicaid), regulate the non-employer-based private insurance market (the insurance exchanges) and help people buy that insurance (subsidies) in order to reduce the number of Americans who are uninsured.

On those metrics, it appears to be succeeding. First and foremost, Obamacare was about improving access to health care. While it did improve access to insurance, in many, many other ways the United States is falling short. Things are likely to get worse before they get better.

Even with Obamacare, the United States still ranks poorly among comparable countries in insurance coverage. While the rate of insured in 2016 is the best it has ever been in the United States, a greater percentage of the U.S. population is uninsured than that of pretty much any other industrialized nation in the world. Access is about more than insurance, though. Every few years, the Commonwealth Fund conducts an international survey of patients. The last time the fund fielded the survey was in 2013, and it sampled patients in 11 countries, all of them on the high end of the worldwide socioeconomic spectrum.

When asked if patients could get a same-day or next-day appointment with their provider when they were sick or needed care, 52 percent of Americans said no. This placed the United States next to last among these countries. Only Canada (59 percent) was worse. Yes, we beat Canada. There’s a reason that politicians always seem to reach into that bucket when they want to provide evidence of U.S. health care exceptionalism. But comparing ourselves with only one country is cherry-picking. Many other countries outperform us.

Value of Gold – Unlike Paper Currency Gold Maintained Value Throughout Ages

“Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages.” Jill Kerby, personal finance expert and Mark O’Byrne, Research Director of GoldCore were interviewed by Sinead Desmond of ‘Ireland AM’ on TV3 this morning about the “value of gold” as a store of wealth and financial insurance in our “electronic age”.

The ‘What’, ‘Why’ and ‘How’ of owning physical gold were discussed and a range of gold bullion coins and bars displayed. Jill Kerby made the important point that paper and electronic money today has no real value in and of itself due to separation of them from the original sources of money – gold and silver:

“Digital money now is taking the place of what we used to use, not that long ago, people actually had real silver and real gold and we have paper money that generally represented how much gold and silver we had, just a hundred years ago. But the problem now of course is the seperation between that real money and the paper and ink stuff that we have and the electronic money we have today and as a result what you could buy a hundreds of years ago with a dollar bill or a pound note … Mark what is it, 90%?

There has been massive depreciation and devaluation of money over time. The depreciation has continued and the big danger now is that central banks don’t want us to have gold, they hold onto it but they do not want us using real money or even holding onto real money because it undermines their desire to keep inflating or depreciating the real value or the spending value of money. I think we are moving to a cashless society as well. There are pros and cons with that. Lot of pros and a lot of people think it is a good idea and certainly central banks do. The problem is that what it means is that you won’t even have the paper money to be able to take it out of the bank when they start with negative interest rates which is what we are moving towards as everyone knows.

How the Fed could pull a November surprise

The Fed meeting next week is widely expected to be a snoozer, but there is a way the Fed could wake up markets. Fed officials have been suggesting a December rate hike is possible — including dovish New York Fed President William Dudley who is closely allied with Fed Chair Janet Yellen.

But how the Fed signals that it really is ready to hike for the second time in a decade next month is going to be important.

Some market players believe the Fed will be fairly blunt in its statement next Wednesday, just like it was last year in late October when it injected the possible timing into its post-meeting statement. It said given the right conditions, it could hike at its "next meeting." Others believe Fed officials will not want to change the status quo, given the factthe election, six days after the Fed meeting, could change the outlook if markets react wildly.

"That's what they did a year ago. It's possible they could do that. I think the market already thinks that, but I think the Fed made it clear and that's what they expect to happen," said Ward McCarthy, chief financial economist at Jefferies. "I think the market would react somewhat, but at the same time, prior history suggests even with that type of pledge, some skepticism is warranted."

Apple iPhone sales fall

Apple Inc posted a third quarter in a row of declining iPhone sales on Tuesday, but beat Wall Street targets for its flagship product and forecast higher-than-expected revenue for the critical holiday shopping season.

Shares of the world’s most valuable publicly traded company fell 2.6 percent to $115.10 in after-hours trading. Apple executives said demand for the new iPhone 7, the company’s best hope to revive flagging sales, was strong, despite fiscal fourth-quarter revenue dips in China and the Americas, its two most important markets.

Chief Financial Officer Luca Maestri said it was “impossible to know” if there was any effect yet from rival Samsung Electronics halting production of its fire-prone Galaxy Note 7 phones earlier this month. Apple said it sold 45.51 million iPhones in the three months ended Sept. 24, beating the average analysts’ estimate of 44.8 million, according to research firm FactSet StreetAccount.

Revenue fell 9 percent to $46.85 billion, a touch behind Wall Street targets, according to Thomson Reuters I/B/E/S. “Apple didn’t have a great (fourth quarter) as iPhones, Macs, China, the U.S. and what appears to be Watch were down,” said Patrick Moorhead, an analyst at Moor Insights & Strategy. Revenue from Greater China, once seen as Apple’s next growth engine, fell almost 30 percent in the quarter, after dropping 33 percent in the preceding period. Revenue from Greater China doubled in the year-earlier quarter.

Corporate America's bogus blame the election excuse

This contentious and seemingly never-ending presidential election campaign makes me want to eat more comfort food to boost my spirits.

But maybe I'm alone. Executives from several food companies -- as well as other big consumer brands -- have warned in recent weeks that the Donald Trump versus Hillary Clinton battle for the White House is actually hurting their results. The CEO of Dunkin' Brands (DNKN), which owns both Dunkin' Donuts and ice cream chain Baskin-Robbins, said in an earnings call last Thursday that franchisees were nervous because of "the overwhelming dampening effect of the presidential election."

"I think we'll all be pleased when that's passed," Travis added. "The consumer is definitely in a little bit of a funk." McDonald's (MCD) CEO Steve Easterbrook also suggested that election angst is one reason for soft sales in the U.S. during the last quarter.

"Consumer confidence is muted. We're at a rather unusual stage of the election cycle. So none of that's really providing a tailwind for us," Easterbook told analysts after McDonald's reported its latest quarterly earnings. Yum! Brands (YUM), owner of KFC, Taco Bell and Pizza Hut, thought that the election was making customers wary as well.

Keiser Report: Clinton 2.0

AT&T Being Paid by U.S. Government to Spy on Users

A secret program named “Project Hemisphere” is run by AT&T and often used by law enforcement officials to search through trillions of phone call records and cellular data to locate a specific user. Hemisphere first came to light in 2013 when the New York Times exposed the project, which was being used by the Drug Enforcement Agency at the time. It was described by the Times as a “partnership” between AT&T and the U.S. government and was described by the justice department as an essential counter-narcotics tool.

However, recently released documents seem to show that the Hemisphere project was used for much more than previously described. Hemisphere was allegedly developed by AT&T and sold to the U.S. government under the agreement that the existence of Hemisphere would not be made public.

A statement of work document from 2014 states: “The Government agency agrees not to use the data as evidence in any judicial or administrative proceedings unless there is no other available and admissible probative evidence.”

“This document here is striking,” Aaron Schwartz, staff attorney of Electronic Frontier Foundation, told The Daily Beast. “I’ve seen documents produced by the government regarding Hemisphere, but this is the first time I’ve seen an AT&T document which requires parallel construction in a service to government. It’s very troubling and not the way law enforcement should work in this country.”

Deutsche Bank Considering Alternatives To Paying Cash Bonus

It has been at least a few weeks since Deutsche Bank appeared in the flashing red breaking news sections of newswires, with news that was - mostly - negative. And while the stock has since rebounded materially, wiping out all losses since the DOJ's $14 billion RMBS settlement leak, it appears that not everything is back to normal for the largest German lender. Because in what may be the worst news yet for DB's employees, moments ago Bloomberg reported that the German Bank is exploring "alternatives to paying bonuses in cash" as Chief Executive Officer John Cryan seeks to boost capital buffers.

According to Bloomberg, DB executives have discussed options including giving some bankers shares in the non-core unit instead of cash bonuses. Another idea under review is replacing the cash component with more Deutsche Bank stock.

The supervisory board may discuss the topic of variable pay at a meeting on Wednesday though no final decisions are expected, the people said, the day before it reports third-quarter earnings. The measures, if pursued in the coming months, would mostly impact the investment bank, the people said. The Frankfurt-based lender is still considering other alternatives, they said.

As Bloomberg adds, any bonus-related decision will depend on the size and timing of Deutsche Bank’s settlement with the U.S. Department of Justice over a probe into the the sale of faulty real-estate securities. Last year, Deutsche Bank awarded staff 2.4 billion euros ($2.6 billion) of bonuses for 2015, 1.45 billion euros of which was for the combined investment banking and trading unit. Of the 2.4 billion euros, 49 percent was deferred stock and cash while the remainder was paid out immediately. It appears that DB wants to take the 49% number and make it bigger.

After 20,000 Job Cuts, World’s Biggest Shipyards Brace for More

South Korea’s shipbuilding industry -- home to the world’s top three manufacturers -- has eliminated more than 20,000 jobs this year. They may not even be halfway through.

Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co. are among builders that have sent workers home and the industry could lose as many as 40,000 more positions by the end of this year, the Korea Labor Institute estimated. The sector employed 163,000 people at the end of June, down from 183,000 at the end of December, according to the Korea Offshore & Shipbuilding Association.

The "Big Three" yards have lost a combined 6.6 trillion won ($5.8 billion) in the last six quarters amid delivery delays and a plunge in demand for new vessels and shipping platforms used for drilling oil in deep sea. Once South Korea’s biggest export, shipbuilding has now slipped down the ranks of the top 10, prompting a state-led support package.

“If things don’t start to turn around next year, we could be on a long and painful path,” said Hong Sung-in, a researcher at the Korea Institute for Industrial Economics & Trade in Sejong, South Korea.

Forgiveness Won’t Solve the $1,300,000,000,000 Student Loan Problem

With outstanding student loan debt now exceeding $1.3 trillion, it is no wonder that the sticker price of college tuition has gotten a lot of attention in 2016. Yet few proposals have gotten to the root of the college cost problem.

Despite overwhelming evidence that more federal subsidies for higher education increase tuition prices, policies such as “tuition-free” or “debt-free” public college are attracting attention. But such plans do nothing to address price increases and shift more of the financial burden onto taxpayers.

Unfortunately, discussions of higher education policy have increasingly fixated on proposals that would fail to address college costs, and would instead exacerbate prices by creating the wrong incentives for both universities and students.

Income-based repayment, which caps loan repayments at a percentage of a student’s discretionary income, became more generous under the Obama administration. When the program was instituted in 2007, repayments were capped at 15 percent of discretionary income. That amount fell to just 10 percent of discretionary income under President Barack Obama, and, as George Leef, of the John William Pope Center for Higher Education Policy, notes, included “zero measures intended to prevent students from binging on foolhardy borrowing.” The Pope Center is a nonprofit that advocates improving higher education.

Is Obamacare too sick to heal itself?

Housing Bust 2? Subprime No-Down-Payment Mortgages Surge, “Shadow Banks” Dominate

The value of the US housing market has ballooned to $26 trillion. In many markets, prices exceed even the peak or the prior bubble that blew up so spectacularly. This construct is weighed down by $14 trillion in mortgage debt, or about 76% of US GDP. Of that, $10 trillion is owed on one- to four-family residences. The numbers are big – and they matter.

But who’s doing the lending? More and more: nonbanks, evocatively called “shadow banks.” They have now overtaken commercial banks “to grab a record slice” of government-guaranteed mortgages, Attom Data Solutions reported in its housing report.

And these shadow banks are different: [T]hey typically borrow from Wall Street hedge funds, private investors, or banks to make loans, then quickly sell these mortgages to Fannie Mae and Freddie Mac and other buyers, so they can repay their loans and start the process over again.

Nonbank lenders dominate the origination of mortgages insured by the Federal Housing Administration (FHA) and by the Veterans Administration (VA), the riskier corner of housing lending due to no down payment or low down payment loans and poor-credit buyers.

Nomi Prins: Deutsche Bank in the Dumps

Nomi Prins spoke with Edward Harrison at RT on the current new out from Deutsche Bank, the troubled German bank that is facing a $14 billion fine by the U.S Department of Justice. “The problem is, Deutsche Bank does not have $14 billion dollars set aside. Its market cap is around $17 or $18 billion. It really does not have the funds… And now it is negotiating to get a better deal on its deal.”

She went on to note that the stocks have taken a considerable hit over the year. When asked about the massive derivatives in position by the German bank Prins said, “If you look at the derivatives positions of Deutsche Bank, which is around $47 trillion… You start to have contracts throughout the system, and banks have interactions with each other on all of these derivatives… They are all coordinated. They are all connected.”

She then pointedly stated, “These things don’t just net out as the banks would like regulators and some in the media to believe. These things have tremendous risk.” Nomi Prins is a former Managing Director on Wall Street and is now a best selling author and investigative journalist. She is currently working on her forthcoming book, Artisans of Money, that focuses on central banks and the dark connections in global finance. Nomi is scheduled to speak at the Tokyo Stock Exchange (JPX) next month where she will discuss the lessons from the ongoing financial crisis.

When asked about what risk that Deutsche Bank poses to the United States and the world Ms. Prins said, “It does not take a lot of domino effect derivative risk to bring down a financial system. We saw that in the subprime crisis. It was not like everyone had all their positions separated. All of the positions were interdependent.”

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