U.S. Durable-Goods Orders Flat in August U.S. factories reported flat demand for big-ticket goods in August, suggesting the economy continues to be restrained by sluggish business spending.

Haver Analytics’ table shows the drought over the last 20 months…and the possible turn in the past 3…

…but here’s the possible turn in perspective:

 

OPEC IS STILL ALIVE!

Prospective OPEC Deal Lifts Stocks European equities followed Asian markets higher following the announcement of a prospective deal between major oil producing nations to cut production levels.

Members of the Organization of the Petroleum Exporting Countries said they had proposed cutting their collective output to between 32.5 million and 33 million barrels a day, down from August levels of 33.2 million barrels a day. The group, however, deferred the task of completing a plan to make those cuts until November. (…)

“We’re not actually talking about a very large reduction here, it’s more like a freeze at pretty high production levels,” said Mike Bell, global market strategist at J.P. Morgan Asset Management. “It’s very hard for oil to go much above $60 per barrel because U.S. producers pretty much all start to become profitable again.”  (…)

If OPEC cut output by up to 700,000 barrels a day, the production glut would disappear as soon as the end of this year, according to IEA estimates. The world’s inventories could then be drawn down and prices could rise.

“Today, an exceptional decision was made at OPEC,” said Iran’s oil minister, Bijan Zanganeh, according to state media. (…)

One factor that could make it easier for members to hash out a deal: The group is already pumping full tilt at levels that are hard to maintain. (…)

“In a way it’s like they’re agreeing to nothing,” said Jay Hatfield, a portfolio manager at Infracap MLP Fund in New York, likening the small cuts proposed to taking their collective foot off the gas pedal instead of stepping on the brake. (…)

Saudi Energy Minister Khalid al-Falih said this week that the market needed reassurance, “a gentle adjustment.” It wasn’t a call for significant action, but it represented a departure from Mr. Falih’s predecessor, longtime Oil Minister Ali al-Naimi, who had declared OPEC was no longer a cartel and that the days of production cuts were over. (…)

The meeting lacked the world’s largest producer of crude oil, Russia, which is pumping record levels of oil. Russia isn’t a member of OPEC but had been heavily involved in talks with the group about jointly slowing down output. A person familiar with the matter said the output cuts would be discussed with non-OPEC members soon. (…)

• OPEC ‘Understanding’ Is Easily Misunderstood

(…) With Iran still seeing output rise back to its presanctions level of around 4 million barrels a day and both Libya and Nigeria recovering from disruptions, the cartel’s output may be 1 million barrels above the suggested range. A million-barrel-a-day cut really would be meaningful, roughly eliminating excess production in one fell swoop. Who does the cutting is where it gets tricky. (…)

In the FT:

(…) But delegates from the country [Iran] say they have secured a production number close to 4m barrels a day — their stated post-sanctions target — and representatives from Gulf countries say there is an expectation that Iran caps production at this level. (…)

“In the end, Iraq proved far more rigid in discussions than Iran,” says one senior Gulf Opec delegate.

“The Iraq minister commented that secondary sources for oil production are too low, with his country’s output potentially 300,000 higher … a gap of nearly half of the proposed production cut,” note analysts at Goldman Sachs, the investment bank with the most clout in the commodities space. (…)

Saudis See Oil-Freeze Deal Possible in November, Not This Week

“Saudi Arabia will be a willing partner in this freeze agreement,” Falih said. “Three countries have special conditions, namely Libya, Nigeria and Iran.”

Bespoke Investment has the relevant chart:

But Bloomberg has the most important stuff:

• How Actual Nuts and Bolts Are Bringing Down Oil Prices

Fewer Defaulting On Loans After Leaving College The share of borrowers defaulting on student loans within three years of leaving college has fallen modestly, though the number remains exceptionally high despite low unemployment.

Just over 11% of the 5.2 million students who left school in the fiscal year through September 2013 have since defaulted on their federal student loans, the Education Department said in an annual report Wednesday that is closely tracked by college administrators. (…)

The official default rate for the 2013 class stood at 11.3%, down from 11.8% for the 2012 class. The default rate peaked at 14.7% for the 2010 class. (…)

But the cohort default rate only provides a snapshot into the troubles of the student-loan program. Other figures—which take into account all borrowers, not just those who recently left school—show a large number of students are failing to send in payments on their loans. The New York Federal Reserve estimates about 1 in 5 borrowers with student loans are least 90 days behind on a payment.

EURO BANKING

Commerzbank to Slash Jobs, Scrap Dividend in Broad Revamp Commerzbank said it plans a wide-ranging overhaul that includes laying off close to 10,000 jobs, or roughly 20% of its workforce, merging two large units and scrapping its dividend for this year.

What about Deutsche Bank, you might ask? First, this from The Economist:

• Justice calling: Deutsche Bank

State aid “is not an option”, says the chief executive, John Cryan. It’s not on offer, says the government. Even so, that a rescue is talked about at all is troublesome. Germany’s biggest bank is still reeling from a request a fortnight ago from America’s Department of Justice for $14 billion, to settle claims that it mis-sold mortgage-backed securities between 2005 and 2007. This week the share price sank to a 33-year low (it revived a little yesterday). No one expects it to pay anything like that much, but Deutsche Bank was already groggy. To thicken its capital cushion, which is thinner than at other leading banks, it is selling assets—including a British insurer yesterday—and cutting costs. An outsized legal bill will make a hard task harder, and another case is pending. With the DoJ hovering, Deutsche hopes not to have to tap investors. But how keen would they be anyway?

Next this FT Alphaville piece yesterday:

• The Deutsche domino

(…) As Coppola notes, Merkel’s insistence that there will be no state aid available to Deutsche Bank turns this all into an uncomfortable game of chicken. Yet, it’s also not a game that Merkel is ever likely to win:

I suspect this is an attempt to bring down the penalty by making it clear that the bank is on its own. The message to the DoJ is that German taxpayers are not going to pay the US government one cent in redress for Deutsche Bank’s behaviour.

This is unfortunately not a credible threat. It is reminiscent of the Greek government’s cliff edge game last year. The German government cannot possibly take the risk that a US criminal penalty could result in the disorderly failure of the bank. So if push came to shove, the German government would have to rescue it. What form that rescue might take is a matter for some conjecture.

(…) So where does all this leave Deutsche?

We think bar a magical turnaround on the profitability front (because, you know, blockchain or Mars Space Colony bonds), there are only two potential paths for the bank. On one hand it can choose independence and gut itself until it achieves profitability (a.k.a survive as a much smaller institution) albeit without any guarantee of actual survival, or on the other hand it can become the founding member of the state-sponsored Eurozone banking cartel.

Given that, as Coppola reminds us, Deutsche Bank is much larger than Lehman, and far more interconnected, we think the political incentives to keep it in play are obvious. At the very least, political capital will be made available to ensure that a “controlled implosion” can be undertaken.

Yesterday:

Market reaction:  

Another big DB problem. This is about the UK but also coming in a company, city, state, country near you:

Defined benefit pension costs to hit £10.9bn in 2017 – Mercer

The post-Brexit plunge in UK bond yields means the cost of contributions to defined benefit pension schemes will rise by over £2bn to £10.9bn in 2017, according to research by Mercer. (…)

FTSE 350 companies’ combined pensions deficit hit another record high of £189bn in August, as falling bond yields drove the deficit up by £50bn in a single month – the biggest monthly widening on record.

The total UK pensions deficit has ballooned past £400bn since the Brexit vote.

Mercer says the cost of building up defined benefit pension schemes for FTSE 350 companies has risen to 42 per cent of an employee’s annual salary. That’s up from just 29 per cent in March, and 11 per cent in 2008.

The service cost of new defined benefit pensions in 2015 was £7.5bn, but that is likely to rise to £10.9bn in 2017 with bond yields at current levels, Mercer notes.

That amounts to 13 per cent of the £84bn pre-tax profit FTSE 350 companies earned in 2015. (…)

BTW, the UK is about to face a massive retirement wave. Tightening immigration will introduce some of the “Japanese effects” into the economy. (The Daily Shot)

EARNINGS WATCH

From FactSet’s Guidance Quarterly:

The Q3 earnings season begins in about 2 weeks and indications are that we will get essentially the usual. Positive pre-announcements have been steady for 5 quarters at about 34. Negative pre-anns are also fairly constant at 80.

Interestingly, 15 IT companies have issued positive guidance for Q3, 2 more than in Q2 and 5 more than in Q1. Eight of the 15 are related to the semiconductor industry. Furthermore, 28 companies in the IT sector have issued positive sales guidance. This number is above the number for Q1 2016 (19) and double the 5-year average (14).

At the industry level, 10 of the 28 companies that have issued positive sales guidance in this sector are in the Semiconductor & Semiconductor Equipment industry, while 6 of the 28 companies that have issued positive sales guidance in this sector are in the Software industry.

  

The 114 companies that have given EPS guidance for Q3 2016 have guided earnings 16.3% below the expectations of analysts on average. However, if Micron is
excluded from the analysis, the surprise percentage for guidance for Q3 would be -4.1% (5-year average: -9.7%)

On the other hand, many companies only guide on the total fiscal year as Factset reveals::

For the current fiscal year, 138 companies have issued negative EPS guidance and 129 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS guidance to date for the current fiscal year stands at 52% (138 out of 267), which is above the percentage recorded at the end of June (47%).

Since the end of Q2 2016, the number of companies issuing negative EPS guidance for the current fiscal year has increased by 16, while the number of companies issuing positive EPS guidance has decreased by 6.

At the sector level, the Health Care (+9) and Industrials (+6) sectors recorded the largest increases in the number of companies issuing negative EPS guidance for the current fiscal year relative to June 30. The Real Estate (73%), Financials (70%), and Consumer Staples (67%) sectors have the highest percentages of companies issuing negative EPS preannouncements for the current fiscal year. On the other hand, the Information Technology (67%) sector has the highest percentage of companies issuing positive EPS preannouncements for the current fiscal year.

 

It must be noted that the number of negative pre-anns for the 2015 fiscal year was 129 in September 2015, nine fewer than this year, which suggests that more companies are getting worried about their Q4 results. Analysts continue to expect Q4 EPS up 8.3% YoY per Thomson Reuters. Watch for the color provided during the Q3 conf. calls.

 “Ominous Shades Of 1987” – HSBC Shows Why 17,992 Is The World’s Most Important Number

The Dow Jones Industrials index has turned lower from a Head & Shoulders neckline re-test. A similar pattern occurred at this, often bearish, time of the year in 1987 before the index fell dramatically.