Monday, October 17, 2016

European Stocks Open Lower As Dollar Touches 7-Month High; Central Bank Action In Focus

By Arjun Kharpal
October 17, 2016

European markets opened lower on Monday with the dollar holding firm near a seven-month high after comments from Federal Reserve Chair Janet Yellen, as investors remain cautious ahead of earnings, key data and a European Central Bank (ECB) meeting later this week.

The pan-European STOXX 600 was down 0.31 percent with all major bourses in negative territory.

European stocks followed the cautious tone set in Asia as traders mull future policy decisions by major central banks.

In a speech on Friday, Yellen said policymakers might want to consider the benefits of a "high pressure economy" and let inflation continue to rise.

This helped the dollar rise against a basket of major currencies on Monday, touching its highest level since March before paring some gains, while the 30-year U.S. Treasury yield hit a four-month high.

Some analysts suggested that Yellen's comments could suggest a looser for longer monetary policy stance, but others said that a December interest rate hike is still on the cards given positive retail sales and employment data from the U.S. in recent weeks.

"Nothing in last week's U.S. economic data appears to have altered expectations that the Federal Reserve will look to raise interest rates by the end of this year, probably at its meeting in December," Michael Hewson, chief market analyst at CMC Markets, said in a note on Monday.

"The currency markets already appear to be pricing in just such a prospect with the U.S. dollar index closing at its highest level since early March."

Investors will also be looking ahead to the ECB meeting on Thursday with hopes that President Mario Draghi could give some hints as to whether the central bank might extend its quantitative easing program which is set to end in March 2017.

Elsewhere, the banking sector will be in focus after shareholders approved a merger between Italy's Banco Popolare and Banca Popolare di Milano (BPM) on Saturday.

Article Link To CNBC:

Samsung Self-Tested Batteries In Galaxy Note 7 Phone

Apple, other handset manufacturers use third-party labs certified by U.S. wireless industry’s trade group.

By Ryan Knutson and Eun-Young Jeong
The Wall Street Journal
October 17, 2016

The batteries used in Samsung Electronics Co.’s troubled Galaxy Note 7 were tested by a lab that belongs to the South Korean electronics giant, a practice that sets it apart from other smartphone manufacturers.

To sell smartphones at major U.S. carriers, phone makers are required to test phone batteries at one of the 28 labs certified by the U.S. wireless industry’s trade group, the CTIA, to ensure compliance with standards set by the Institute of Electrical and Electronics Engineers.

Samsung is the only such manufacturer using in-house battery-testing facilities for CTIA certification, according to the association.

Samsung’s battery crisis has put a spotlight on cellphone battery testing, an otherwise mundane corner of a global industry that shipped some 1.9 billion units last year, according to research firm Gartner.

A spokesman for Samsung said its internal testing labs didn’t reveal any problems in the original and replacement Galaxy Note 7 phones. The device was recalled last month and then discontinued last week after original and replacement units caught fire.

Apple Inc. said it uses third-party CTIA-certified labs to test its batteries. Huawei Technologies Co. didn’t respond to requests for comment.

Lenovo Group Ltd.’s Motorola and Microsoft Corp.’s Nokia have operated CTIA-certified battery labs, though the association says both labs are being closed. Motorola said it tests batteries at its own labs but uses third-party labs for CTIA certification. Microsoft declined to comment.

In a statement Friday, Samsung said its plans to make “significant changes” in its quality-assurance processes in light of the Note 7 crisis. Samsung declined to comment on whether it has plans to use third-party labs for battery testing.

Tom Sawanobori, the chief technology officer at the CTIA, said the association audits test labs to ensure personnel are qualified, that they comply with standards, and that there is no undue influence from manufacturers. Test labs are typically in separate facilities and under separate control, he said.

“We’ve certified over 1,500 batteries,” he said. “This is the first time we’ve had an issue.”

Last week, engineers from CTIA certification labs gathered in Atlanta for an annual meetup. While the scuttlebutt was focused on what could be behind the Note 7’s battery problem, a CTIA representative told the gathering that neither the group nor Samsung would discuss it, two attendees said.

In the early 2000s, as cellphones were proliferating around the globe, a flood of cheap batteries from inexperienced manufacturers caused increasing failures, battery experts say. In response, the CTIA, the U.S. Consumer Product Safety Commission and the IEEE worked together in 2005 to create a voluntary program for battery testing, which the CTIA administers.

Eddie Forouzan, a member of the IEEE committee that developed the battery standard, says the process significantly reduced problems, and that safety failure rates in cellphone batteries went from being measured by the parts per million to the parts per billion. There have been at least 92 reports of batteries overheating in the Note 7, which went on sale in August.

Mr. Forouzan, who now runs his own lab in San Diego, says letting manufacturers test their own phones creates the potential for conflicts of interest.

John Copeland, who used to work for Motorola’s lab and now helps run a test lab in Atlanta, said it was normal for cellphone makers to use their own labs because it helps the companies protect trade secrets.

Phone makers are “very concerned about their proprietary information leaking out,” he said. Mr. Copeland said the audits were sufficient to ensure there wasn’t a conflict of interest.

Jason Howard, chair of the IEEE working group that wrote the battery certification standard, said that “on the outside that might make people nervous that a company is self certifying, but that’s common practice on a lot of standards.” Companies that use their own labs can get products out to market faster than if they had to wait in a queue at an outside test lab, Mr. Howard said.

Samsung has been testing phones at its internal CTIA-certified lab since 2009.

For CTIA certification, smartphone batteries are tested on their own and while being operated inside a device, says Kim Tae-young,director at the Korea Testing Laboratory, the only other CTIA-certified battery testing lab in South Korea. The tests mainly focus on whether batteries work properly while a phone is being charged or used for calls, which is when they are most likely to heat up. “We also put batteries in high temperatures that simulate summer conditions to monitor potential overheating or combustion hazards,” he said

A spokesman for Samsung said Thursday that it is “working around the clock” to identify causes for why some Note 7 devices caught fire and that it was “premature” to speculate on investigation outcomes.

Mr. Forouzan said he hopes Samsung quickly releases details about how the batteries failed so experts can determine if safety tests need to be improved. “They have to tell us what happened so we can fix it.”

Article Link To The Wall Street Journal:

What Can The Next President Do About Russia?

Moscow sees its ‘near abroad’ as one operational theater. To end the stalemate in Syria, exert NATO pressure in Eastern Europe.

By Robert D. Kaplan
The Wall Street Journal
October 17, 2016

Of the two great autocratic powers in Eurasia, Russia is emerging as a greater short-term threat than China. The Chinese hope to gradually dominate the waters off the Asian mainland without getting into a shooting war with the U.S. Yet while Beijing’s aggression is cool, Moscow’s is hot. When the current U.S. administration seems out of gas and a new one is not in place, there has never been a better opportunity for Russian President Vladimir Putin to veer toward brinkmanship.

Russia’s economic situation is much worse than China’s, and so the incentive of its leaders to dial up nationalism is that much greater. But the larger factor, one that Western elites have trouble understanding, cannot be quantified: A deeply embedded sense of historical insecurity makes Russian aggression crude, brazen, bloodthirsty and risk-prone. While the Chinese build runways on disputed islands and send fishing fleets into disputed waters, the Russians send thugs with ski masks into Ukraine and drop cluster bombs on unarmed civilians in Aleppo, Syria.

Not counting the cyber domain, where its interference in our politics is approaching an act of war, Russia is engaged in aggression in four theaters: the Baltic Sea, the Black Sea basin, Ukraine and Syria. Yet to Moscow this constitutes one theater—the Russian “near abroad” that includes the periphery of the old Soviet Union and its shadow zones of influence. Because Mr. Putin sees this as one fluid Eurasian theater, if the U.S. were to put pressure on him in Syria, say, he could easily respond in the Baltic states.

Such a reaction would be designed to split the Western alliance. Consider a scenario that came up during a war-game I participated in last winter in Washington: Russia could send only a few hundred uniformed troops a few miles inside one of the Baltic states and then stop.

It would be daring NATO to escalate by declaring an Article 5 violation—in which an attack on one ally is an attack on all. Mr. Putin knows that the NATO members in southern Europe, Greece, Bulgaria and Italy, might hesitate to support an intervention, even while Russian troops vastly outnumber NATO soldiers in the Baltic region. By the time NATO deployed sufficient strength, Russia could overrun one of the Baltic NATO members.

As for the role of Syria: In 2011 the U.S. might have had strategic opportunities there had the White House acted. A half-decade later, the opportunities have narrowed and the risks have intensified. One precedent that has been invoked is the siege of Sarajevo in the 1990s, which helped lead to a Western military intervention. But then President Bill Clinton came up against a weak Russia, no competing outside powers and no indigenous fighters who were international terrorists.

The U.S. may be able to relieve the suffering in Aleppo, and military experts can advance that argument. But keep in mind there is a vast distance between making predatory aggression much harder for the Syrian regime in the northern part of the country (doable) and toppling that regime in Damascus (too ambitious at this point).

There is also a larger foreign-policy question that must be the first order of business for the new president: How does the U.S. build leverage on the ground, from the Baltic Sea to the Syrian desert, that puts America in a position where negotiations with Russia can make a strategic difference?

For without the proper geopolitical context, the secretary of state is a missionary, not a diplomat. Secretary of State John Kerry is a man who has a checklist of negotiations he wants to conduct rather than a checklist of American interests he wants to defend. He doesn’t seem to realize that interests come before values in foreign policy; only if the former are understood do the latter have weight.

For example, just as Western military intervention in Syria risks a Russian response in Europe, a robust movement of American forces permanently back to Europe may cause Mr. Putin to be more reasonable in Syria. This may offer a way out of the sterile Syria debate, in which all the options—from establishing safe zones to toppling Bashar Assad’s regime—are problematic and offer no end to the war. By seriously pressuring Russia in Eastern and Central Europe, the U.S. can create conditions for a meaningful negotiation whereby Moscow might have an incentive to shape the behavior of its Syrian client in a better direction.

Because the Syrian conflict is a regional war, the other powers—Turkey, Saudi Arabia, Iran—would have to be involved. Here, too, American diplomacy can be meaningful only if the U.S. can better reassure its Middle Eastern allies with, for example, a more-robust deployment of military assets, from special-forces trainers to warships in the Eastern Mediterranean and Persian Gulf. Even ending sequestration would help in this regard—anything that provides a better context for projecting power. Diplomacy is not a replacement for force, but its accompaniment. At root, this is what separates presidents like Richard Nixon and Ronald Reagan from Barack Obama.

In the cyber domain the U.S. has not sufficiently drawn red lines. What kind of Russian hacking will result in either a proportionate, or even disproportionate, punitive response? The Obama administration seems to be proceeding ad hoc, as it has done with Russia policy in general. The next administration, along with projecting military force throughout the Russian near abroad, will have to project force in cyberspace, too.

I am a realist—and realism dictates that Russia’s aggression in its near abroad has upset the balance of power and has for some time required a definitive response. The fact that President Obama has been wary of quagmires is merely a tactic. It does not give him an overarching philosophy or make him a realist. That is where the problem lies in Syria and elsewhere.

Article Link To The Wall Street Journal:

Now, Even Democrats Can See The ObamaCare Death Spiral

By Post Editorial Board
The New York Post
October 17, 2016

Another day, another Democrat finally owning up to the fact that ObamaCare is a disaster. And another state facing the implosion of its health-insurance market.

Minnesota Gov. Mark Dayton — once one of the Affordable Care Act’s most enthusiastic champions — is the latest Democrat to publicly eat crow for that support.

With good reason: Tens of thousands of Minnesotans are losing their coverage next year. And premiums on individual plans — which enroll 250,000 North Star State residents — will rise an average 50 percent to 67 percent.

“The reality is the Affordable Care Act is no longer affordable for increasing numbers of people,” Dayton admitted last week, calling the situation in his state “an emergency.”

This, just a week after former President Bill Clinton blasted ObamaCare as “the craziest thing in the world,” adding that “it doesn’t make sense.”

Which is a lesson that Dayton, other governors and, more significantly, millions of Americans are learning all too well.

A nationwide Bloomberg News survey found that at least 1.4 million people in 32 states will lose their health insurance next year, as private insurers — facing massive losses — flee the market.

And those unfortunates face fewer and fewer alternatives for their next policy: At least one in five Americans in the individual market next year will have only one insurer to choose from in their state.

An S&P Global Ratings forecast warns that, for the first time since ObamaCare got rolling, participation in the program will actually shrink by up to 8 percent.

The Obama administration insists this is all “part of the normal business cycle,” but that’s whistling past the graveyard.

Ever-higher premiums are keeping younger, healthier Americans — the ones whose premiums were supposed to subsidize insurance for everyone else — away in droves.

And what President Obama intended as his signature domestic achievement is well on the way to becoming his biggest failure.

Article Link To The New York Post:

Big Winner From London’s Brexit Exodus Isn’t Even In Europe

New York capital, expertise, regulation key to luring talent; Banks may move non-essential staff to U.S., says one executive

By Gavin Finch
October 17, 2016

The ultimate winner if Brexit forces banks to flee London may lie 3,500 miles away, far beyond the borders of Europe.

New York, even more than Frankfurt or Paris, is emerging as a top candidate to lure banking talent if London’s finance industry is damaged by Britain’s divorce from the European Union, according to politicians and industry executives.

That’s because the largest U.S. city, rather than European finance hubs, is the place that rivals the depth of markets, breadth of expertise or regulatory appeal boasted by London. Continental Europe will win some bank operations to satisfy regional rules ensure time-zone-friendly access to its market, but more may eventually shift across the Atlantic to the only other one-stop shop for business.

“There is no way in the EU there is a center with the infrastructure or regulatory infrastructure to take the role London has," particularly in capital markets, John Nelson, chairman of Lloyd’s of London, said in an interview. "There is only one city in the world that can, and that is New York."

For many global investment banks, London is their largest or second-biggest headquarters. If the benefits of scale are diminished by having to move roles to Europe, banks may look to shrink their London operations even further by moving any workers able to do their job just as well from a different time zone, including global-facing roles in merger advisory, trading and back-office technology and finance.

Clearing Business

Additional jobs may move as specific trading activities seek a new epicenter. London Stock Exchange Group Plc Chief Executive Officer Xavier Rolet was blunt, saying that if Brexit strips London of the ability to clear euro derivatives trades, the entire business would move to the only other city able to clear all 17 major currencies: New York.

“The big winner from Brexit is going to be New York and the U.S.,” said Morgan Stanley CEO James Gorman said at a conference in Washington this month. “You’ll see more business moving to New York.”

One major Wall Street bank has already begun reallocating U.K. headcount, and probably will end up moving many non-essential staff out of Europe altogether to the U.S. or Asia, said a senior banker at the firm, who asked not to be identified because the plan is private. New York, now mainly a hub for dollar-denominated securities, could lure trading desks that had used London as a base for macro trading, speculating on currencies, bonds and economic trends around the world, the executive said.

Lost Hope

Bank bosses have given up hope that British Prime Minister Theresa May will be able to strike a post-Brexit deal that preserves the right to sell goods and services freely around the EU, according to three people with knowledge of their contingency plans.

The problem they face is that it’s hard to match London’s advantages. Most local EU regulators are unlikely to be able to cope with an influx of investment-bank license applications, and many locations lack the necessary real estate, infrastructure or quality of life. When London this year topped the Z/Yen Group’s index for financial centers based on their attractiveness to workers in the sector, New York came second, ahead of 19th-place Frankfurt and Paris ranking 29th.

If the finance industry does leave London for elsewhere in the EU, it’s likely to fragment. That’s a particular problem for U.S. banks, which spent more than two decades centralizing European operations within the so-called Square Mile. The U.K. is home to 87 percent of U.S. investment banks’ EU staff and 78 percent of the region’s capital-markets activity, according to research firm New Financial.

Liquidity Trap

“The minute you move some businesses somewhere -- create a legal entity someplace -- you trap capital, you trap liquidity,” said Viswas Raghavan, JPMorgan Chase & Co.’s deputy CEO for Europe, the Middle East and Africa, said last month at Bloomberg Markets Most Influential Summit in London. “That brings inefficiencies. That drags down" profitability.

There are limits to a wholesale transplant of London’s finance industry. A big one is the need to be inside the European Economic Area to sell goods and services to its more than 450 million citizens. Another is time. It’s 3 a.m. on the Eastern seaboard when European markets open, and 9 p.m. in London when the New York Stock Exchange rings the closing bell.

Transplant Challenges

Culture also matters. A foreign bank may struggle to convince regional companies that it understands their businesses better than a domestic firm. Some companies would have little reason to raise capital or issue debt in dollars. And Asian financial hubs like Singapore and Hong Kong will also try to attract business at London’s expense.

Not all firms want to start spreading the news. One U.S. bank says it won’t be moving people back to the U.S. after Brexit, with an executive there saying it can win more business by maintaining its European presence as other lenders pull back.

Chancellor of the Exchequer Philip Hammond has cautioned European governments that attacking London’s financial heft in the Brexit talks could end up costing them by driving financial services elsewhere. Bank of England Deputy Governor Jon Cunliffe also last week listed New York as an attractive place to do business outside of Europe.

Open Europe’s Vincenzo Scarpetta echoed such warnings. In a report released today, he and colleagues urge the government to give banks maximum certainty about the future and show EU governments how they benefit from the City of London.

“It’s not certain if banks move, they will move to another European hub,” said Scarpetta, a senior policy analyst at the London-based think tank. “New York, in particular, is a much bigger hub than Paris. If this happens Europe is worse off as a whole. This should be in everyone’s interest to avoid in the upcoming negotiations.”

Article Link To Bloomberg:

How Big Data Can Help Save Endangered Kids

By Naomi Schaefer Riley
The New York Post
October 17, 2016

“I do not know who to blame, but I do want people to be held accountable . . . Talk is cheap. We need some actual action.”

That was the Rev. Mark V.C. Taylor of the Church of the Open Door in Brooklyn delivering the eulogy last week at the funeral of 6-year-old Zymere Perkins.

Zymere, who allegedly was beaten to death by his mother and her boyfriend in September, is only the latest in a long string of children who have been failed by the adults around them and then by the Administration for Children’s Services.

No one has publicly revealed the extent of the involvement of ACS with the boy, but as far back as April, he was interviewed about various injuries by the police, the Manhattan District Attorney’s Office and child services. As Mayor de Blasio said, “I think what I can safely say is that there were warning signs.” No kidding.

But there might be a solution: Big Data.

According to Richard Gelles, dean of the School of Social Policy and Practice at the University of Pennsylvania, “Even the state-of-the-art assessment tools being used in New York are no better at predicting risk for a child than if you flipped a coin.” Gelles says social workers using “clinical judgment” and their own “expertise” to determine which children should be removed from their homes is “simply inadequate.”

His book “Out of Harm’s Way: Creating an Effective Child Welfare System,” will be released in the spring, and it’s the result of decades studying the problems with these bureaucracies. He has observations the mayor and his advisers should heed.

First, child-welfare agencies are confused about who their “clients” are. They think they’re supposed to be serving parents, not children. So when parents have drug problems, for instance, they try to get the parents into drug-treatment programs.

There’s nothing wrong with that, of course, but it’s not their job. Their job is keeping kids away from parents whose judgment is impaired by drugs.

Second, Gelles argues the agencies charged with maintaining children’s safety are often “siloed” — child services, the police, the District Attorney’s Office and the schools often have very little sense of how much contact the other agencies have had with a child. So it’s hard to determine even the number and severity of the incidents a particular child experiences.

Finally, Gelles notes the failure of existing policy. In the aftermath of high-profile failures, the state has instituted harsher punishment for abusers and established an abuse-reporting hotline. There’s also often a cry for more money and staffers and smaller caseloads for workers. But Gelles has seen no evidence these work.

The answer, says Gelles, is algorithms. Just as insurance companies use them to predict risk, there are ways to measure the risk for a child remaining in a home where there’s evidence of abuse. For instance, he says, social workers tend to underestimate the added risk of the presence of a mother’s boyfriend in the home.

In the past six months, Los Angeles County (the largest child-welfare agency in the world) and Allegheny County in Pennsylvania have both started using this approach. Emily Putnam-Hornstein, a director for the Children’s Data Network at the University of Southern California, helped to develop Allegheny County’s model.

Speaking to PBS Newshour in the spring, she explained, “We have 6 million children [nationwide] reported for abuse or neglect, and how you make triaging decisions early on absolutely impacts outcomes for that child and family.”

Even before these districts tried it out, though, IBM ran a test on data they already had. The algorithm predicted which children were going to be abused again with 90 percent accuracy.

Many will be skeptical at the idea of turning over life-altering decisions to a computer. Aren’t unhappy families, to borrow a phrase, each unhappy in their own way? How will a computer know the difference? We can’t know for sure. But the process is already an informed guessing game; data will just make officials more informed.

One lesson many have taken from these tragic cases is that the state isn’t very good at caring for children. Indeed, there’s no substitute for a stable, married, two-parent family. Sadly, there are communities where such households are a rarity today.

But we can’t simply throw our hands up. There has to be a better way, and now, it looks like there is.

Article Link To The New York Post:

Everyone’s Worst Investing Fears

With assets in a funk, interest rates at zero and IPOs scarce, what’s capital to do?

By Andy Kessler
The Wall Street Journal
October 17, 2016

Snapchat is not about to disappear—this newspaper reported earlier this month that the firm may go public next year with a $25 billion valuation. Don’t you wish you had invested at a $500 million value? Lots of investors underwater this year sure do.

Last month Perry Capital, which peaked with $15 billion under management in 2007, closed its flagship fund. Richard Perry, a Robert Rubin protégé, complained in a recent letter to investors that “this market environment has not worked well for us.” Really? The Dow is now within a hair of its all-time high.

Some 10,000 hedge funds invest almost $3 trillion. More funds closed than opened over the last year. With $20 billion in assets, Lansdowne Partners is down almost 15% this year. The Rhode Island State Investment Commission is cutting hedge-fund holdings by half, following Calpers dropping hedge funds altogether last year. What’s going on? This isn’t a nasty bear market.

So many asset classes are in a funk. Macro investing, making bets based on major geopolitical trends, was all the rage over the last 25 years. But George Soros breaking the Bank of England is a thing of the past. Debt is now monetized rather than rationalized. There is a glut of commodities—from forests to food. Energy is fracked. Private equity probably peaked a few years ago, but it hasn’t yet marked to market. And bonds? When you have to pay Germany to own its sovereign bonds, it is tough to make money. That leaves stocks.

Equity investors have loved lower interest rates, because they make stocks more attractive than bonds and increase the value of future earnings. But at zero and even negative interest rates, it is a mess. Think of zero rates as a compass that can’t point north and only spins around. Dividend-discount models to value stocks are driven by a discount rate that at zero makes every stock worth infinity. So stocks look cheap, even though they’ve never been more expensive.

What to do? The first rule of investing, unlike Fight Club, is that there are no rules. Investing is like fashion. What’s hot and what’s not changes at the whim of the market. It used to be every fund owned Apple, until it stopped working. Right now we are in what CNBC’s Jim Cramer calls a Fang market, because of the power of FacebookAmazon, Netflix and Google. Google has done the worst of the bunch since January 2015—up only 50%. Netflix and Amazon have both doubled. In an economy with 2% GDP growth, not much else works.

Tomorrow’s fashion? If I knew for sure, I’d be on a Bora Bora beach. But I can point to the right neighborhood. It’s the New over the Old. New productive companies destroying the old ways of doing business.

The market does the dirty work, providing access to capital for those it thinks will be the next wave of great companies. It starves those in decline. This is why BlackBerry doesn’t make phones and why General Motors is throwing good money after bad into technology and partners for autonomous vehicles. SoFi is hurting banks.

But even being the New can be fleeting. Apple’s iTunes stung music companies by offering reasonably priced songs instead of full albums. And now streaming companies like Spotify offer unlimited music for $10 a month. The Newer destroying the New. I call this Lily Pad investing: You’ve got to hop from one company to another before the first one drowns. But it’s hard.

Finding the next wave of hot companies can be a pain in the assets. The minor leagues for this crop of the New is often venture capital. The New firms are then swallowed up by public investors during initial public offerings. Yet companies are staying private much longer. There is no public market for SoFi or Spotify. Thanks to “financial reform” acts like Sarbanes-Oxley and Dodd-Frank, the market for IPOs has been a ghost town.

Trillions in assets are itching to invest in these markets, but for now investors are stuck with firms that are under attack. Try to find investment in virtual reality, genome editing, drones, voice-control interfaces, artificial intelligence, chatbots or robots. Even immunotherapy and gene-therapy investments are far and few between. These companies become billion-dollar unicorns because they stay private. And not all of them will work. Hyperloop is aptly named.

Just recently, the IPO window has cracked open in a small way. Nutanix—an integrator of servers and storage that hopes to destroy Hewlett-Packard, IBM and Dell EMC—saw its stock almost triple in the first few days of trading last week. Earlier IPOs would sure be nice.

The king of the New, Uber founder Travis Kalanick, remarked at a German technology conference this summer, “I say we are going to IPO as late as humanly possible. It’ll be one day before my employees and significant others come to my office with pitchforks and torches. We will IPO the day before that. Do you get it?” And that tells you why so many are showing such runty returns.

Article Link To The Wall Street Journal:

China's Bad Credit

By Christopher Balding
The Bloomberg View
October 17, 2016

There is good news when it comes to China's scary and still-growing pile of debt: At least the government recognizes the problem. Its attempts to mitigate those risks, however, seem doomed to fall short.

The government's recent decision to create a market for credit default swaps is a case in point. The idea, as elsewhere, is to give banks and investors a means of pricing and trading the risk of Chinese companies defaulting on their debts. The need is obvious: Official measures of non-performing loans are worsening, while unofficial estimates say their share may have reached anywhere from 8 percent to 20 percent. Anything that spreads that risk should improve financial stability.

Yet, as envisioned, this new CDS market is unlikely to do much to improve the situation. For one thing, all but the largest companies already have to purchase credit insurance when taking out loans from giant state banks. There's no pricing differential on this insurance, of course. But for the new system to function effectively, the government would have to let markets freely set the price of credit risk.

China doesn't exactly have a stellar record of allowing markets to set prices in any field, whether in stocks, real estate or currencies. If credit default swaps started to indicate a rising risk of default at a major state-owned company, it's hard to imagine officials wouldn't intervene to reverse that impression.

This is dangerous on multiple levels. Already, several Chinese credit insurance firms have collapsed because they underestimated credit risk, forcing government bailouts. Continuing to underprice risk will only encourage the over-allocation of credit that's gotten China into trouble thus far.

There's also little reason to think that creating a CDS market would shift risk away from the most vulnerable banks. In a heavily concentrated banking and lending market such as China, where major financial institutions all trade with each other, swaps are likely to produce no net change to risk levels.

Think of a simple example. Assume that Bank A has loans totaling 100 billion yuan but wants to protect itself against the risk of default by buying a CDS from Bank B that covers these companies. Now assume that Bank B does the same to cover its 100 billion yuan of loans, with A as the counter-party. If we assume these are similar baskets of loans -- a reasonable assumption for major banks within a single country -- then there's been no net change in credit risk for either bank. All they've done is swap credit risk, convinced that as outsiders, they can assess the health of loans better than the loan officers involved.

Finally, unless major outside investors enter the market to relieve the burden on China's banks, risks will remain concentrated. The likelihood of such an influx is slim; foreign investors are the ones most concerned about the explosion in Chinese credit. Even the Bank for International Settlements and International Monetary Fund, neither of which can be described as anti-China scaremongers, have raised major concerns about the blistering pace of credit growth.

Given outsiders' inability to invest at truly market-dictated prices -- or to repatriate earnings at will or, at least, in sufficient quantity to fundamentally alter their risk calculations -- there's little reason to believe they're going to assume the liability for China’s credit bubble.

If China wants to avoid symbolic gestures, there are better ways to address credit worries. Despite the unveiling of its much anticipated debt for equity program last week, neither banks nor firms seem anxious to participate. As one banker noted, “If you’re a good company, you wouldn’t want to give banks any of your shares. And if you’re a bad company, we wouldn’t want any of your shares.”

Shifting risks between the same group of banks and related financial institutions isn't going to solve this problem. Banking regulators need to press actual deleveraging and what are expected to be significant recapitalizations.

China should also introduce stricter rules on financial transparency, to produce higher-quality information for listed firms. Even though official data for major banks indicates non-performing loans are only about 1.5 percent of the total, bank stocks are being priced as if all their equity will be required to cover loan losses. Since investors have no faith in the data, they latch onto worst-case scenarios, which itself creates greater risk.

None of this is to say that China is wrong to introduce credit default swaps. But, given the way the government has interfered in other markets, not to mention other existing hurdles, the new system is unlikely to improve credit allocation as dramatically as is needed. At some point, China will have to learn that simply creating an asset to trade doesn't make a market.

Article Link To The Bloomberg View:

Six Reasons To Be Wary Of Brexit Optimism

By Victoria Bateman
The Bloomberg View
October 17, 2016

Many of the prominent Conservative Party politicians who led the "leave" campaign in Britain's referendum on the European Union did so with good intentions. They argued that leaving the EU would allow Britain to escape growth-shackling European policies, freeing markets both internally and externally.

It is on this basis that "Economists for Brexit” predicted a Brexit boost of up to 4 percent of U.K. gross domestic product. It's a comforting thought for those of us who would like to see a positive outcome to Britain's withdrawal from Europe. But there are six good reasons to be skeptical of this kind of free-market boast from Brexiters.

First, and beginning with internal markets, removing all the supposed EU red tape and regulations is of questionable benefit. Britain is already a top performer when it comes to economic freedom. According to the OECD product market regulation index, Britain has a score of 1.08 (on a scale of zero to six where zero represents no impediments). Only the Netherlands does better.

In terms of the ease of doing business index, Britain ranks sixth out of 189 countries, one position ahead of the U.S. And while Britain will have the freedom to dismantle EU regulations after Brexit, it will also have the freedom to add more: to subsidize failing businesses and prioritize domestic firms in public procurement, neither of which should be welcomed by free-marketers and neither of which is possible under EU law. One of the most economically damaging sets of regulations in the U.K. at present -- that which restricts planning for new buildings -- does not originate in Brussels.

Second, it's unrealistic to expect Britain to walk into global markets on better terms than if it remained a member of the EU. Britain accounts for only 2.5 percent of global trade in goods and services compared with 16.3 percent for the EU. While the EU accounts for 14 percent of global imported goods and 20 percent of global imported services, the equivalent figures for the U.K. are just 2.2 percent and 2.9 percent. Britain has much less to offer foreign countries in return for them giving British firms tariff-free access to their own markets.

Third, Britain seeks to be a globalizing force at a time of rising protectionism and a slowdown in global trade growth. The pro-Brexit British member of the European Parliament, Dan Hannan, argues that given the declining share of British exports (now 44 percent) going to Europe, Britain’s future exports will be better served by growth outside of Europe, where 90 percent of future global growth is predicted to come from. But trading free access to European markets with what is hoped will be improved access to the rest of the world is wishful thinking at a time of increased protectionism outside of Europe.

Fourth, it's hard to exaggerate the difficulty the U.K. will encounter trying to negotiate eight separate bilateral trade agreements to cover the majority -- 80 percent -- of its present trade, and another 150 to cover all of its existing trade. Given that Britain’s export mix is complex and multifaceted compared with, say, Norway and Switzerland, negotiating these trade agreements will take considerable time. This matters because history shows that regaining markets after even temporary disruption can be very difficult, a phenomenon known as trade hysteresis.

Fifth, there's history. What the globalizing Brexiters seem to think is a bold new plan has, in fact, been tried before. In the first half of the twentieth century, and following an earlier period of integration, the world began to de-globalize. By the 1930s, global trade was collapsing, falling 25 percent between 1929 and 1933. In an effort to boost its own exports, Britain entered into a system of preferential trade deals with its vast global empire known as Imperial Preference. The system sought to promote trade and specialization as advocated by the classical economist David Ricardo.

However, what this system did not do was to expose British firms to countries with a similar enough production structure to its own. It is this intra-industry as opposed to inter-industry trade that is key to rich economies staying at the cutting edge.

Unsurprisingly therefore, Britain’s trade arrangements with its colonies and dominions did not prove sufficient to stop British firms falling behind their competitors. Between 1891 and 1973, Britain’s productivity deficit in industry relative to the U.S. increased to over 100 percent from 40 percent. Competition is vital for productivity growth and, as the University of Warwick economic historian Nick Crafts has shown, competitive pressures were lacking in twentieth century Britain until the 1970s, which brought membership of the European Union followed by Margaret Thatcher’s pro-market reforms. Only then did British productivity begin to recover.

Sixth, trade has benefits not only through the countries with which one directly exchanges goods, but also through the fact that domestic firms are disciplined by the market to keep up with rival producers, many of which in Britain’s case are in the EU. If British firms cannot sell to foreign consumers on the same terms as its rivals in Europe, British firms will not have the sharpening benefit of that competition. That is why bilateral trade deals with countries outside of Europe are not enough.

Optimism is positive, when not misplaced. But in an effort to free Britain to do more and better deals, the Brexiters may well have slowed it down.

Article Link To The Bloomberg View:

Syrian Rebels Seize 'Doomsday' Village Where ISIS Promised Final Battle

By Angus McDowall and Tom Perry 
October 17, 2016

Syrian rebels said they captured the village of Dabiq from Islamic State on Sunday, forcing the jihadist group from a stronghold where it had promised to fight a final, apocalyptic battle with the West.

Its defeat at Dabiq, long a mainstay of Islamic State's propaganda, underscores the group's declining fortunes this year as it suffered battlefield defeats in Syria and Iraq and lost a string of senior leaders in targeted air strikes.

The group, whose lightning advance through swathes of the two countries and declaration that it had established a new caliphate stunned world leaders in 2014, is now girding for an offensive against Iraq's Mosul, its most prized possession.

The rebels, backed by Turkish tanks and warplanes, took Dabiq and neighboring Soran after clashes on Sunday morning, said Ahmed Osman, head of the Sultan Murad group, one of the Free Syrian Army (FSA) factions involved in the fighting.

"The Daesh myth of their great battle in Dabiq is finished," he told Reuters, using a pejorative name for Islamic State.

Turkish President Tayyip Erdogan's spokesman said that Dabiq's liberation was a "strategic and symbolic victory" against Islamic State.

U.S. Defense Secretary Ash Carter also welcomed the retaking of Dabiq as both a military and symbolic blow to Islamic State and thanked Turkey for the role it played. "Its liberation gives the campaign to deliver ISIL a lasting defeat new momentum in Syria," Carter said, using an alternative name for the group. ‎

The Free Syrian Army is an umbrella group for rebels seeking to overthrow President Bashar al-Assad in a civil war that has killed hundreds of thousands and displaced millions, dragging in regional and global powers and creating space for jihadists.

An Islamic prophecy names Dabiq as the site of a battle between Muslims and infidels that will presage doomsday, a message Islamic State used extensively in its propaganda, going so far as to name its main publication after the village.

It also chose Dabiq as the location for its killing in 2014 of Peter Kassig, an American aid worker held hostage by the group, by Mohammed al-Emwazi, better known as Jihadi John.

However, it has appeared to back away from Dabiq's symbolism since advances by the FSA groups backed by Turkey had put it at risk of capture, saying in a more recent statement that this battle was not the one described in the prophecy.

The village, at the foot of a small hill in the fertile plains of Syria's northwest about 14 km (9 miles) from the Turkish border and 33 km north of Aleppo, has little strategic significance in its own right.

But Dabiq and its surroundings, where the Syrian Observatory for Human Rights said Islamic State had brought 1,200 fighters in recent weeks, occupied a salient into territory captured by the Turkey-backed rebels.


Ankara launched the Euphrates Shield operation, bringing rebels backed by its own armor and air force into action against Islamic State, in August, aiming to clear the group from its border and stop Kurdish groups gaining ground in that area.

"Euphrates Shield will continue until we are convinced that the border is completely secure, terrorist attacks against Turkish citizens out of the question and the people of Syria feel safe," Erdogan's spokesman, Ibrahim Kalin, said.

The Turkish-backed forces would now continue their advance toward the Islamic State-held town of al-Bab, southeast of Dabiq, he said.

A Turkish military source said that while Dabiq was largely under control, some rebels had been killed in blasts by landmines and other bombs.

The rebels and Turkish military were working to secure Dabiq's surroundings to prevent any remaining Islamic State fighters trapped in the area from escaping.

Since early 2016 Islamic State's territorial possessions in Syria have been steadily eroded by the Syrian Democratic Forces, an umbrella group of Kurdish and Arab militias backed by the United States, which in August took the city of Manbij.

Turkey's campaign has since cut the jihadist group off from the Turkish border, long its most reliable entry point for supplies and foreign fighters.

Meanwhile air strikes have killed a succession of Islamic State leaders in Syria, including its "war minister" Omar al-Shishani and Abu Mohammed al-Adnani, one of its leading strategists and an architect of its shift toward plotting attacks in Europe.

In Iraq the army backed by Shi'ite Muslim militia groups has this year recaptured Falluja and is now poised for an offensive on Mosul, where Islamic State's leader, Abu Bakr al-Baghdadi, in 2014 declared himself heir to Islam's caliphs.

However, the militants still hold most of Syria's Euphrates basin, from al-Bab, 26 km southeast of Dabiq, through the group's capital of Raqqa and to the Iraqi border.

Article Link To Reuters:

Financial Crisis 2.0?

By Robert J. Samuelson
The Washington Post
October 17, 2016

While everyone fixates on the U.S. election, developments in the world economy threaten to create problems for the next president and, possibly, trigger a major financial crisis. A little-noticed study by the International Monetary Fund (IMF) delivers the bad news. It finds that global debt — including the debts of governments, households and nonfinancial businesses — reached a record $152 trillion in 2015, an amount much higher than before the 2008-2009 financial crisis.

What’s worrisome about this is that the global economic recovery has assumed widespread “deleveraging” — the repayment of debt by businesses and households. Initially, the theory went, these repayments would slow the economy. To reduce their debts, households would cut consumption and companies would cut investment. But once debts had receded to manageable levels, consumer and business spending would bounce back. The economy would accelerate.

It hasn’t happened. With a few exceptions, little deleveraging has taken place, the IMF shows. One exception is the United States, where there has been some deleveraging among households. But generally, just the opposite has occurred. Many countries have become more indebted. On a worldwide basis, the $152 trillion of debt (again: both private and governmental) is up from $112 trillion in 2007, before the financial crisis, and $67 trillion in 2002.

Recall that the pre-crisis economy relied on debt-driven growth. People and firms could spend more, because they’d borrowed more. This was not just true in the United States with its housing bubble. Borrowing financed housing booms in Europe (Spain and the United Kingdom), consumer goods and investments in factories and machinery. Government debt has played a bigger role since the crisis, but private debts — borrowings by firms and people — represent two-thirds of all debt.

Still, debt-driven growth has limits. The more that is borrowed, the more likely that borrowers, lenders — or both — will pull back, further undermining economic growth. The IMF study fears “a vicious feedback loop”: High debts discourage more borrowing. A slowing economy then makes it harder to repay debts. Deleveraging is stymied. This is a pervasive dilemma. Private debt is “high not only among advanced economies” but also in many emerging-market countries (China, Brazil).

These fears, of course, may be overblown. Economist William Cline of the Peterson Institute for International Economics, a think tank, notes that although debt is high, interest rates are low. What matters for borrowers is how easily they can service their loans by paying interest, and low rates clearly help. “Compared to the early 1980s, when interest rates were very high, there may be more space for higher debt levels,” Cline says.

A report from the bond rating agency Moody’s makes a similar point about businesses. “Like homeowners, companies can afford larger loans at low rates,” the report says, “and since debt markets are flush with cash, few [borrowers] get turned down.” The extra cash may be a cushion against a future crisis.

Also, there isn’t any magic threshold beyond which a country’s debts automatically become unsustainable. It depends on the country and on circumstances. Japan’s private and governmental debts equaled 416 percent of its economy (gross domestic product) in 2015, a level — in relation to GDP — almost two-thirds higher than the United States’. Yet, Japan’s debts have not caused a financial crisis. (Nor, it must be added, have they fixed the economy’s underlying problems.)

Perhaps societies can operate with debt levels that once were considered imprudent. Or perhaps such debt will prove, as with the United States’ housing bubble, a mirage that bursts destructively. What’s called the “debt overhang” is already acting as a drag on the world economy, says Hung Tran of the Institute of International Finance, an industry research group. Much evidence supports his view.

Whether or how this might become a full-blown crisis is uncertain. Economist Desmond Lachman of the American Enterprise Institute, another think tank, says that the private debt of companies and households in China has inflated faster than the U.S. housing bubble. “China has been an engine for global growth,” he says. “Now it’s sputtering.” The Bank for International Settlements in Switzerland worries that some emerging-market firms won’t repay dollar loans.

To increase economic growth, some economists urge more “infrastructure” spending on roads and ports by countries that can still borrow. This might help, but a little arithmetic suggests that the potential is limited. The world economy is about $75 trillion . Boosting growth by 1 percentage point would require $750 billion in extra annual spending. Does that seem likely?

The next president cannot escape these issues. Compared with many countries, the United States survived the Great Recession in relatively good shape. But we are inevitably affected by the broader global economy. The delay of deleveraging suggests a slowing world economy and a continued political backlash against global trade and investment.

Article Link To The Washington Post:

Monday, October 17, Morning Global Market Roundup: Asian Shares Fall, Dollar At Seven-Month High After Yellen Comments

By Hideyuki Sano
October 17, 2016

Asian shares fell on Monday while the dollar held firm near seven-month high against a basket of major currencies after comments from Federal Reserve Chair Janet Yellen boosted long-dated U.S. bond yields.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dropped 0.7 percent, with Hong Kong's Hang Seng .HSI hitting 1-1/2-month lows.

Japan's Nikkei .N225 pared early gains to stand flat.

"Although Japanese shares had rallied in the past few weeks, many investors are cautious ahead of earnings, where downward revisions are quite likely," said Tatsushi Maeno, senior strategist at Okasan Asset Management.

U.S. stock futures ESc1 also fell 0.3 percent.

Yellen said on Friday the Fed may need to run a "high-pressure" economy in order to reverse damage from the global financial crisis that depressed output.

Her remarks were not addressing immediate policy concerns directly and did not change prevailing view that the Fed is likely to raise interest rates in December.

Yet speculation that she may prefer to keep an easy monetary policy stance for a long time even if inflation exceeds its 2 percent target pushed up long-dated U.S. bonds, The 30-year bond yield hit a four-month high of 2.565 percent US30YT=RR and last stood at 2.554 percent.

As higher U.S. bond yields could attract more foreign investors, they helped the dollar post its largest weekly rise against a basket of six major currencies in more than seven months last week.

The dollar index, which rose 1.4 percent last week, hit a seven-month high of 98.158 in early Monday and last stood at 98.1103 .DXY.

The euro EUR= slipped to 2 1/2-month low of $1.0964 early on Monday while the yenJPY= traded at 104.25 per dollar, near its 2 1/2-month low of 104.635 touched last Thursday.

There is a reason for investors to be concerned about inflation as recovery in oil prices has lifted inflation in some countries.

The U.S. producer price index for final demand increased 0.3 percent last month. In the 12 months through September, the PPI jumped 0.7 percent, the biggest increase since December 2014.

On Friday, China also reported higher than-expected inflation in September for consumers and producers alike, with producer prices rising for the first time since January 2012.

In the United States, a gauge of investors' inflation expectations, the breakeven inflation rate based on inflation-linked bonds US10YTIP=RR, rose to its highest level in about five months.

Oil prices logged their fourth straight week of gains last week, extending their advance since the Organization of the Petroleum Exporting Countries announced last month its first planned output cut in eight years.

U.S. crude futures CLc1 traded at $50.17 per barrel in early Monday trade, down 0.4 percent from last week.

Brent crude futures LCOc1 stood at $51.88 per barrel, down 0.1 percent.

Chinese economic data on Wednesday, including third-quarter GDP, will be a key focus of this week.

China's economy likely grew by a steady 6.7 percent in the third quarter from a year earlier, the same pace as in the previous quarter, as increased government spending and a property boom offset stubbornly weak exports, according to a Reuters poll of 58 economists.

But the expected rate of expansion would still be near the weakest since the global crisis, and analysts are increasingly worried that growth is becoming too reliant on government spending, ballooning debt levels and a housing market that is showing signs of overheating.

Some market players are wary of a possible hit to investors' risk appetite after Iraq's Prime Minister Haider al-Abadi on Monday announced the start of an offensive to retake Mosul, the capital of Islamic State's so-called caliphate in Iraq.

The assault on Mosul is backed by the U.S.-led coalition and could be one of the biggest military operations in Iraq since the 2003 U.S.-led invasion that toppled Saddam Hussein.

Elsewhere, the Thai baht THB=TH weakened 0.5 percent as Thailand has sought to dispel any concern about a royal succession after Crown Prince Maha Vajiralongkorn said he would delay his ascension to the throne while he mourns his father.

"The passing of King Bhumibol has great significance, and Thailand will not only be entering a period of mourning, but one of dynamic changes and political uncertainty," said Mark Mobius, executive chairman of Templeton Emerging Markets Group.

"Under such circumstances, market observers will be looking out for potential issues over political friction and royal succession, and investors should be prepared for volatility. In the long run however, we believe the market uncertainty will ultimately be outweighed by Thailand’s strong fundamentals," he said.

Article Link To Reuters:

Surf, Suds And Stock Tips: Millennials Find Place At Stocktoberfest

By Melissa Fares
October 17, 2016

Actress Rachel Fox was just 15 when she made her first, and worst, stock market trade using money she had earned on "Desperate Housewives."

"Never again. That was a one-time thing," Fox said about the underperforming penny stock. "You gotta think long term."

The actress, best known for playing the troubled stepdaughter Kayla Huntington on the hit ABC television show from 2006 to 2008, was one of dozens of millennials who turned up at "Stocktoberfest" at San Diego's landmark Hotel del Coronado this weekend to give and get investment advice.

The weekend-long event run by online site StockTwits attracts a number of younger investors, who between presentations on fintech, fundamentals and the future of finance are known to don wet suits for a quick surf or party on the beach with beers.

At only 20, however, Fox was too young to be served alcohol. Instead, she spent her time drinking bottled water, refreshing her Twitter feed to monitor stock prices and googling unfamiliar financial terms that came up in conversation about the bond market and company debt.

Invited to speak on a panel with portfolio manager and former Yahoo Finance host Jeff Macke, Fox talked about Starbucks, Pokemon and Snapchat. The actress, who also writes a blog called "Fox on Stocks," argued that investors - young and old - needed to harness social and digital content to make better financial decisions.

Being the "resident millennial" at Stocktoberfest didn't bother Fox one bit. "It gives me leverage," she said. "I have people coming up to me and asking: "What's the millennial secret?'"

Patrick Dunuwila, however, was at least one millennial at Stocktoberfest happier to get advice than give it. Dunuwila, 23, said he manages $3 million of his family and friends' money. During the keynote address of the conference, he thought he was off to good start when he opened up the StockTwits mobile app and made two trades that earned him a quick $300.

Then, in a networking session between panels, he said he was "torn apart" by Lee Munson, a former Wall Street stockbroker turned author and founder of Portfolio Wealth Advisors.

"He told me I need to be more aggressive with asking people for money. Get up there and say 'I'm 23, I'm hungry,'" Dunuwila said. "You walk away from that, your ego gets slashed, but I needed to hear it."

Munson, 41, said the harsh advice he gave Dunuwila was advice he wished he had received when he was 23.

"I spent my whole life in New York not knowing that I needed to be aggressive early," said Munson. "You come to a place like Stocktoberfest where you've got all the freaks and all the freedom to just talk. That's what I was doing with Patrick."

Later, Dunuwila said thanks by buying Munson a tequila at the hotel bar after midnight. Fox, on the other hand, had already headed home to work on a new investment app.

Article Link To Reuters:

Germany Says Tesla Should Not Use 'Autopilot' In Advertising

By Vera Eckert
October 17, 2016

German Transport Minister Alexander Dobrindt has asked Tesla (TSLA.O) to stop advertising its electric vehicles as having an Autopilot function as this might suggest drivers' attention is not needed, his ministry said on Sunday.

A spokeswoman for the ministry, confirming a report in the daily Bild am Sonntag (BamS), said the Federal Motor Transport Authority (KBA) had written to Tesla to make the request.

"It can be confirmed that a letter to Tesla exists with the request to no longer use the misleading term Autopilot for the driver assistance system of the car," she said in a written response to a Reuters' query.

A Tesla spokeswoman said the Autopilot term, describing a system operating in conjunction with a human driver, had been used in aerospace for decades, and that the company had always made it clear to customers that the assistance system required drivers to pay attention at all times.

"Just as in an airplane, when used properly, Autopilot reduces driver workload and provides an added layer of safety when compared to purely manual driving," she said.

On Friday the KBA - which reports to Dobrindt - wrote to owners of Tesla cars, warning them that their vehicles could not be operated without their constant attention and that under traffic regulations they must remain alert.

According to the BamS report, the KBA letter to Tesla said: "In order to prevent misunderstanding and incorrect customers' expectations, we demand that the misleading term Autopilot is no longer used in advertising the system."

Tesla's Autopilot has been the focus of intense scrutiny since a Tesla Model S driver was killed while using the technology in a May 7 collision with a truck in Florida.

Article Link To Reuters:

Oil Prices Fall On Rise In U.S. Drilling, Strong Dollar

By Henning Gloystein 
October 17, 2016

Oil prices fell early on Monday, pulled down by a rising rig count in the United States, a strong dollar and record OPEC-output which comes amid slowing global economic growth that could erode fuel demand.

U.S. West Texas Intermediate (WTI) crude oil futures were trading at $50.16 per barrel, down 19 cents from their last settlement.

Traders said that WTI was pulled down by another rise in U.S. oil drilling activity.

A closely watched report on Friday by oil services provider Baker Hughes showed U.S. drillers added four rigs in the week to Oct. 14. It was the 16th week in a row that oil drillers had gone without making cuts, indicating more production to come.

International benchmark Brent crude oil futures LCOc1 were also down, shedding 11 cents from their last settlement to $51.84 per barrel.

Traders said that a seven-month high of the dollar against a basket of other leading currencies .DXY, which was due to an expected hike in U.S. interest rates later this year, was also weighing on crude prices.

Since oil is traded in dollar, a stronger greenback makes it more expensive for countries using other currencies at home to purchase fuel, potentially undermining demand.

Brent was also weighed by fresh production records from the Organization of the Petroleum Exporting Countries (OPEC), which pumped out a record 33.6 million barrels of crude oil per day in September PRODN-TOTAL.

"Record supply from OPEC year-to-date, weaker global GDP estimates, and still elevated inventories cause us to lower and flatten our oil price outlook," Bernstein Energy said in a note to clients on Monday.

"We reduce our Brent forecast to $60 per barrel in 2017 ($70 per barrel before) and $70 per barrel in 2018 ($80 per barrel before)," it added.

Despite Monday's falls, analysts said that traders were cautious about driving the market much further down, largely because of a plan by OPEC to cut output in an initiative to rein in a global production overhang, which currently sees around half a million barrels of crude pumped every day in excess of demand.

OPEC is scheduled to meet on Nov. 30 to discuss a production cut. The producer cartel hopes non-OPEC members, particularly Russia, will join a potential cut.

"With (non-OPEC member) Russia expressing an interest to join the agreement, investors are reluctant to get too bearish," ANZ bank said on Monday.

Article Link To Reuters:

Oil Majors Experiment With Technology To Weather Crisis

By Karolin Schaps and Jessica Jaganathan 
October 17, 2016

Oil majors including Statoil, Shell and Chevron are experimenting with various technologies, from drones and drill design to data management, to drive down costs and weather a deep downturn.

Crude prices have more than halved since mid-2014, forcing companies to cut billions of dollars in costs. Determined to shield dividends and preserve the infrastructure that will allow them to compete and grow if the market recovers, they are increasingly looking to smarter tech and design to make savings.

French oil and gas major Total said it was now using drones to carry out detailed inspections on some of its oil fields following a trial at one of its Elgin/Franklin platforms in the North Sea.

Cyberhawk, the drone company that led the trial, said this kind of work was previously carried out by engineers who suspended themselves from ropes at dizzying heights. It said the manned inspection used to take seven separate two-week trips with a 12-man team that had to be flown in and accommodated on site.

The drones do the work in two days and at about a tenth of the cost, according to the Britain-based firm's founder Malcolm Connolly, who said it had also worked with ExxonMobil, Shell, ConocoPhillips and BP.

Total declined to comment on how long the manned or drone inspections took, or specify how much money was saved.

Statoil's giant Johan Sverdrup field, the largest North Sea oil find in three decades which is due to start production in 2019, is a leading industry case study for cutting costs in the era of cheap oil.

The Norwegian company has cut its development costs for the first stage of the project by a fifth compared with estimates given in early 2015, to 99 billion crowns ($12.2 billion).

The savings have largely been made by focusing on the most efficient technology and designs from the beginning, Statoil's head of technology Margareth Oevrum told Reuters in an interview.

Executives say the growing attention on technologies that have been around for some time shows how wasteful the global industry had been in the years before the downturn when - with crude at above $100 a barrel delivering bumper profits - oil companies' had little incentive to develop fields efficiently.

For example, simply finding a more efficient route for the oil pipeline that would carry the crude from the Sverdrup field to the onshore refinery cut 1 billion crowns, Statoil said.

Robots, Foam

Statoil has also developed a drilling "template" that is acting as a guide for the first eight wells to be drilled at the field. It said it had reduced the overall drilling time by more than 50 days, saving about 150 million crowns per production well compared with what it would have cost with 2013 techniques.

"By far the biggest driver (of savings) has been simplification," said Oevrum. "To think much simpler and start from the bottom, or the bare bone, and then rather add to that, instead of starting very big."

The company could not give a figure for its group savings made from improved technology and design. But it said that, partly because of such innovations, projects set to start production by 2022 would be able to make a profit with an oil price at $41 a barrel, down from $70 in 2013.

Global upstream - exploration and production - oil and gas spending has fallen by more than $300 billion across the industry in 2015-16, according to the International Energy Agency (IEA), roughly equivalent to the annual GDP of South Africa. Around two-thirds comes from cost cuts, rather than cancelling or shelving projects, it said.

Shell, for example, has developed a new type of pipe, called a steel lazy wave riser, to carry oil and gas from its deepwater Stones field in the Gulf of Mexico for processing. It bends to absorb the motion of the sea and the floating platform, which the company says boosts production at extreme depths.

The Anglo-Dutch major could not say how much the pipes contributed to increased efficiency, but said innovations at Stones had played a significant part in cost savings of $1.8 billion in its projects and technology division last year - equivalent to the 2015 core profits in its upstream division.

The fall in oil prices has led to the introduction of other new engineering and maintenance techniques.

Chevron is using a robotic device to clean and check the inside of pipelines on their Erskine field in the North Sea more quickly. The improvement has helped raise the field's daily production rate to the highest in two years.

Oil services firm Amec Foster Wheeler, working for BG Group which is now part of Shell, has applied a new technique to remove the pillars of an old platform, a procedure that is often dangerous because corroded elements can slip off.

It pumped in expanding foam to hold the pillar's elements together, allowing workers to safely cut the metal away. This work took just over seven weeks instead of the 22 weeks typically needed using traditional methods.

Alex Brooks, oil and gas equity analyst at Canaccord Genuity, said tech innovation in the industry was about "100 tiny things", adding: "The bottom line is you end up with a much lower cost."

The downturn has presented opportunities for some services firms that can offer cost-saving innovations. Inspection drone firm Cyberhawk, for instance, said its revenue from oil and gas had doubled from mid-2014 to mid-2016, while the wider inspection market had shrunk.

Vast Data

Another way oil companies are looking to cut costs is by using their vast amounts of data to better predict their needs.

Since the price slump, companies including Shell, ExxonMobil and Statoil have started using software that can better manage their data to cut wastage in the ordering of construction materials.

Stuck with excess material, some companies suffered huge losses because the resale value was much lower and in some cases they even took to burying unwanted material, according to Intergraph, a unit of Swedish tech firm Hexagon that develops such systems for oil industry clients.

"Previously, it was industry standard to order 3-5 percent more materials than needed, which in a billion-dollar project is a lot of money," said Patrick Holcomb, executive vice president at Intergraph.

Better managing data has helped oil firms understand exactly how much material is needed and when it will be delivered, cutting excess to one or two tenths of a percent, he added.

Gunnar Presthus, Nordic energy lead at consultancy Accenture, who advises oil majors and national oil companies, said the downturn had led to the industry waking up to the potential of the data they store.

"The oil industry, to some extent, is one of the most digitalized industries," he said. "Companies are now able to use this wealth of data to make changes that will save money."

Article Link To Reuters:

Lack Of New Blood Casts Doubt Over Wells Fargo's Change Plan

By Dan Freed
October 17, 2016

Wells Fargo & Co's decision not to introduce new names onto its board or into the ranks of its senior management in the wake of a sales scandal has raised questions about whether it can truly fix the culture which caused its problems.

The United States' third-largest bank by assets has been plunged into crisis by revelations that its branch staff created as many as 2 million accounts without customers' knowledge in order to meet internal sales targets.

John Stumpf, the bank's chairman and chief executive, left last week in response to a public outcry and the bank put Tim Sloan, a 29-year Wells Fargo veteran and Stumpf's heir apparent, into the CEO role.

Once viewed as an unambiguous asset, Sloan's long tenure at the bank is now prompting questions about whether he has the necessary critical distance to overhaul an aggressive sales culture that allowed the misconduct to fester for years.

"There's something wrong with Wells on a cultural basis and you'd think they'd need to bring in an outsider to fix it," said Paul Miller, an analyst with FBR Capital Markets.

Wells Fargo declined comment.

The San Francisco-based bank has long had a reputation as a place where a tight-knit group of senior managers worked together to deliver industry-leading returns.

But the recent episode has made the closeness of top executives look like a handicap.

During Sloan's first earnings call last week, Miller asked him whether the bank would bring an outsider into its executive leadership ranks.

"It's a fair question and one we've been getting asked," the new CEO replied. However, Sloan said that following recent changes, the board "is comfortable with and very supportive of the management team."

Change Is Hard

While the bank needed to make a change quickly and Sloan is a proven commodity, Columbia Business School professor William Klepper said the board should have named Sloan CEO on an interim basis so it could conduct a thorough search including outside candidates.

"It's very difficult for anyone within that organization to make a change," Klepper said. "The last thing they might sense is the water they're swimming in."

Klepper pointed to Lou Gerstner, a longtime American Express Co executive who came in as Chairman and CEO of International Business Machines Corp in 1993 to lead a successful turnaround of the lumbering computer giant, as the prime example in U.S. business of the value of bringing in fresh blood.

Most major U.S. and European banks have seen shake-ups of top management and their boards of directors following the financial crisis of 2008.

Wells Fargo, which avoided the sort of crises suffered by rivals during the financial meltdown, has seen very little change at the top, and that seems set to continue.

The bank did separate the roles of chairman and chief executive following Stumpf's departure, with Stephen Sanger, the board’s lead director, chosen as chairman.

But the bank did not announce any new faces to its board, which has some of the longest-tenured members among major U.S. banks.

Board Veterans

Three of Wells Fargo's directors have been in place since the 1990s. The trio helps put the average duration of service for a Wells Fargo director at 9.7 years, compared to 8.5 years for companies in the S&P 500 Index, according to a report by executive search firm Spencer Stuart.

There have also been questions about the wisdom of appointing Mary Mack, a former wealth management executive, to lead the retail division at the center of the scandal.

The consumer bank had previously been led by Carrie Tolstedt, a 27-year Wells Fargo veteran. She left the bank last month.

Mack joined Wells Fargo when it acquired Wachovia at the end of 2008. Wells Fargo declined to make Mack available for an interview.

"Can you just give us a sense why, because we're looking for a culture shift or culture enhancement change in the business model and that's a big ask, so I'm just wondering what you saw in her," Morgan Stanley analyst Betsy Graseck asked Sloan last week on the earnings call.

Sloan responded: "I saw an executive with decades of experience in the financial services industry and decades of experience at Wachovia and Wells Fargo, who has been through a variety of challenges in her career, and who is an incredibly effective leader."

Article Link To Reuters:

Boston Fed's Rosengren Maps Case For A Dove's Rate Hike

By Howard Schneider 
October 17, 2016

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.

When Rosengren surprised markets with his dissent at September's Fed meeting and argued for an immediate rate rise, it was with that forecast in mind, and a concern that the best way to protect future job growth is to slow things a bit now even if it is a risk, he said.

"We have the luxury right now to make a change, wait a little while, see what the impact is," Rosengren said at the conclusion of the Boston Fed's annual economic conference in an interview with Reuters.

"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."

His view puts him in the odd position of lodging dissents in recent years from different directions. In 2013 he opposed the decision to cut monthly bond purchases because "patience remains appropriate" in an economy yet to prove its strength.

Now, he is itchy to pull the trigger, though arguing his aim is the same, to maximize employment through the business cycle.

The dissent, in essence the "dovish" case for a rate hike, comes amid renewed discussion over how much room U.S. labor markets have to improve. At her press conference last month Fed Chair Janet Yellen said she felt there was still "room to run."

During the conference here, a spate of research suggested low-growth and other trends apparent since the crisis may continue. Yellen said it is possible that running a "high-pressure economy" could reverse damage from the 2007-2009 crisis that depressed output, sidelined workers, and risks leaving permanent scars.

Rosengren does not dispute that. But he argues his approach is consistent with an effort to "probe" just how tight labor markets can get, without tying the Fed's hands.

"I want to probe, I don't want to plunge," he said. "I am getting more concerned about the optionality we are losing if we wait too long."

Article Link To Reuters:

Airbus To Overtake Boeing On Aircraft Output Rates By 2020: CEO Tells Paper

By Vera Eckert
October 17, 2016

European aircraft maker Airbus (AIR.PA) aims to overtake arch rival Boeing (BA.N) in terms of annual plane deliveries by 2020, having fallen behind in recent years, Chief Executive Fabrice Bregier said in a German newspaper interview published on Monday.

"In 2020 we will deliver more planes than Boeing again," Fabrice told the Welt daily newspaper.

While Airbus has been leading in terms of new orders for years, its American rival has been ahead since 2012 in terms of deliveries.

Bregier said Airbus would particularly focus on its A320 neo narrowbody and A350 widebody planes.

He said that Airbus was hopeful it would deliver 50 A350 aircraft this year, although deliveries by the end of September stood at only 26.

Article Link To Reuters:

Tesla, Panasonic To Collaborate On Solar Cells Production

By Vishal Sridhar
October 17, 2016

Elon Musk's Tesla Motors said it would collaborate with Japan's Panasonic Corp to manufacture solar cells and modules in New York.

Under the agreement, which is a non-binding letter of intent, Tesla 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.

The Japanese company 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 and Tesla intends to provide a long-term purchase commitment for those cells, Tesla said in a statement, adding the agreement is contingent on shareholders' approval of its acquisition of SolarCity.

Last week Tesla and SolarCity Corp shareholders agreed to vote on the proposed merger on Nov. 17, and the automaker said it would provide plans for the combined company ahead of the vote.

Article Link To Reuters: