QUOTE OF THE DAY
We are fugitives here.”
Amidst the cryptocurrency crackdown, Bitcoin and blockchain experts have pushed up a two-day conference in Hong Kong to lower the risk of it being canceled.
Market Snapshot
- The Dow and S&P finished slightly up after a significant announcement from the Fed.
- General Mills ended down 6% after bad earnings and slowing sales.
- AMD is up 4.5%. It’s working with Tesla on AI chips for self-driving cars.
- Oil prices nearly hit a 4-month high.
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The Fate of the Economy
The 12 members of the FOMC (Federal Open Market Committee) closed their binders and said their teary goodbyes after a two-day meeting on national monetary policy.
But not before releasing what many analysts considered a “historic” report. Let’s break it down:
Balance sheet
When the financial crisis hit nearly a decade ago, the Fed played Captain America, purchasing U.S. Treasuries and mortgage-backed securities to spark an economy that contracted over 4% and shed 8.7 million jobs.
The Fed’s balance sheet now holds an astronomical $4.5 trillion in assets. That number will finally start to “normalize” with the Fed reducing holdings by $10 billion in October, a figure that should grow in the coming months. It’s a clear sign from the Fed that the economy has undergone a full recovery from the Great Recession.
Interest rates
While the Fed said “no” to a rate hike this time around, 2017 looks ripe for one more (which would bring the total to three). Although strong economic growth and an unemployment rate at 4.4% are getting the thumbs up, inflation’s been the outlier.
Price increases (as measured by the PCE index) have been running under the Fed’s 2% goal for a couple years, and we shouldn’t expect much to change until 2019 (the goalposts have been moved back yet again). And until inflation gains momentum, anticipate gradual and intermittent rate hikes.
Looking to the future
When the Fed meets again in a couple months, it’ll do so without Vice Chairman Stanley Fischer, who announced he would step down in mid-October.
And just how many more meetings will Janet Yellen preside over? During her press conference, the Wise Dame of Wall St. was asked about her future as Fed chair (President Trump will decide her fate in February). Let’s just say she was as cool as Bill Belichick behind the mic.
As for the markets? They held steady, primarily because the details of the Fed announcement were less of a secret than the new iPhone X (especially to those of you who read our preview).
See you in December, folks!
The Tata Slide
ThyssenKrupp (thanks for all the elevators) and Tata Steel—two European steel giants that sound more like bad Russian dance moves—have agreed to a merger that will generate $18 billion in sales.
The deal, which will take shape in 2018, will form the second largest European steel company and comes at a tipping point for the steel industry. One word: China.
China accounts for over 50% of all global steel production, and its near-monopolistic control has priced competition out of the market. In fact, there is so much steel pile-up, China is now trying to cut back output by 50 million metric tons per year.
But ThyssenKrupp and Tata aren’t necessarily welding beams together by choice. The alliance offers nearly $700 million in cost synergies and increased production capacity. Even still, it’ll be just a blip on China’s all-encompassing steel radar.
Case in point: new alliance—21 million metric tons per year vs. China—74 million metric tons per month.
On the Road with Alexa
Amazon (+0.35%) is working on “smart glasses” for users to interact with Alexa even when that all-knowing black cylinder isn’t around.
They’ll work just like regular glasses, except…well, who are we kidding? They’re nothing like regular glasses. You’ll be able to hear Alexa’s voice without wearing headphones through technology called “bone conduction,” which sounds more painful than it actually is. And Amazon is likely getting rid of the camera and screen that caused performance and privacy issues for Google Glass.
But what’s Amazon really getting at? By wearing these glasses you’ll be able to take Alexa anywhere. Without a dedicated smartphone for its home-assistant (like Apple and Google), Amazon needed to find a way for its users to summon Alexa when they’re out of the house. With wearables like smart glasses, you can wirelessly connect to your phone and check in with Alexa via the app as well.
Don’t expect to wait too long, either. The glasses could be launched as early as this year.
Pfizer Gets Wiser
It’s a drug-eat-drug world out there. Pfizer (+1.52%) is suing Johnson & Johnson (-1.53%) for allegedly drafting unique contracts with health insurers to exclusively sell its flagship rheumatoid arthritis medication, Remicade.
Pfizer’s joints aren’t achy for no reason. Last November, the drugmaker released its own cheaper version of the medication (called Inflectra) to price J&J out of the market.
And here’s why Pfizer is raising a red flag:
J&J is forcing insurers to sign contracts that lock patients into using Remicade even if the medication isn’t working. It is able to leverage insurers into doing this because…
Drug companies like J&J pay fat rebates to insurance providers. Without these reimbursements, insurance companies wouldn’t cover the drugs upfront in the first place. And J&J may be withholding rebates as leverage.
So if J&J is pulling the timeless “one-two, no rebate for you” tactic…it could mean billions for Pfizer’s’ top line. Commence the lawsuit.
What Else Is Happening…
- Shipping leader Maersk is selling its oil tanker business for $1.7 billion.
- Toshiba is going with the Bain-Apple consortium for its $18 billion chip business sale.
- Google’s Waymo is asking for $2.6 billion for only one of Uber’s allegedly stolen trade secrets.
- Nest released a number of new security products. Its new alarm system is $499.
Economic Calendar
- Monday Earnings: No Events
- Tuesday Earnings: Adobe (+), Bed Bath & Beyond (-), FedEx (-)
- Wednesday Earnings: General Mills (-)
- Thursday Earnings: YogaWorks
- Friday Earnings: No Events
Economic Events: Housing Market Index (-)
Economic Events: Import and Export Prices (+)
Economic Events: MBA Mortgage Applications (-), Existing Home Sales (-), Petroleum Status (+)
Economic Events: Jobless Claims, House Price Index, Consumer Comfort, Fed Balance Sheet
Economic Events: PMI, Baker-Hughes Rig Count
The Backburner
Holy Grounds
It’s BYOB (bring your own beans) to the Great Coffee Showdown of 2017-18. We’ve got a complete preview:
Setting: Milan, Italy. It’s the home of the “perfect espresso,” according to Starbucks CEO Howard Schultz, who counts a 1983 visit to the city as one of the main inspirations for the brand.
The players: Starbucks, illycaffé, and Lavazza. Starbucks, we assume you’ve heard about. As for Lavazza and illycaffé? They are two popular Italian coffee brands that can’t touch Starbucks’ global presence, but still have loyal national followings of their own.
The backstory: Starbucks will be opening up a 25,000 square-foot “Roastery” in the historic city center of Milan. The Roastery is the Disney World of Starbucks joints, where visitors can watch the entire coffee-making process and order even more flamboyant (and expensive) drinks than usual.
The thing is, Starbucks isn’t planning on making landfall until late 2018, which leaves the Italian coffee companies plenty of time to mark their territory. Which is why Lavazza cut the ribbon on a new flagship location on Tuesday, and illycaffé opened a similar store near the future Starbucks site in May. For these coffee roasters, it’s all about whose latte is bigger.
The prediction: We expect Starbucks to do well in Milan, Italy’s financial capital and a city teeming with tourists. But making inroads with the rest of the country will be a different story. Italy already has about 150,000 coffee bars…that’s nearly 1 per 400 citizens.
The Breakroom
Question of the Day
You have four chains of three links each. Although it is difficult to cut the links, you wish to make a single loop with all 12 links. What is the fewest number of cuts you must make to accomplish this task?
(Give up?)
Rank by Market Cap
Pfizer, Tesla, Wells Fargo, McDonald’s.
Stat of the Day
$900–That’s how much the average low-level criminal makes per week. Apparently, petty theft and drug dealing earns more than the average worker at $885/week (not that we’re suggesting a career change).
