Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW – 90 = 18,313
SPX – 13 = 2157
NAS – 46 = 5137
10 Y + .03 = 1.53%
OIL – .43 = 39.67
GOLD + 10.40 = 1363.80

The Dow logged its seventh straight drop, while the Nasdaq snapped its five sessions winning streak. The S&P 500 broke out of a very tight consolidation pattern, but still managed to close with a loss of less than 1%. WTI crude oil erased an early gain and closed down 1.1% at a four-month low.

Consumers boosted spending by 0.4% in June — the third straight strong increase — but they’ve also been saving less to fund their purchases.  Income growth has not been keeping pace with spending. Incomes rose 0.2% in June for the second straight month.

As a result, the personal-savings rate dropped to 5.3% and matched a 15-month low. Savings had hit a four-year high earlier in the year. Inflation as measured by the PCE index edged up 0.1% in June. The PCE index, the Federal Reserve’s preferred inflation barometer, increased 0.9% in the 12 months ended in June. That’s unchanged from in the prior month.

The annual rate of core inflation was also flat at 1.6%.Although inflation has been creeping higher lately, there still are no signs of widespread price pressures in the U.S. economy.

CoreLogic (CLGX) reports home prices were 5.7% higher in June compared to a year ago, and prices were up 1.1% from May to June. They forecast a 5.3% increase in home prices over the next year. Including distressed sales, national single family home prices remain 6.7% below peak values recorded in April 2006. Mortgage rates dipped in June to their lowest level in more than 3 years. Among major metro areas, Denver had the lowest unemployment rate and the strongest home price appreciation. Arizona saw a 5.5% increase in home prices over the past 12 months.

Japanese Prime Minister Shinzo Abe’s cabinet approved a $274 billion stimulus package. The Bank of Japan last week only tweaked its monetary stimulus. By total size, the stimulus package ranks among Japan’s biggest since the global financial crisis, but three quarters of the stated value comprises targeted low-interest loans from the government and state-owned companies. The program will include money for infrastructure projects, including a magnetic-levitation train line connecting Tokyo and Osaka, as well as reconstruction projects in the southern region hit by earthquakes in April.  It also will pay for cash handouts to 22 million low-income people.

The Federal Reserve reports loan standards to commercial and industrial firms and commercial real estate tightened for the fourth straight quarter in the three months ended in June. The survey also found standards on all categories of residential real estate mortgage loans were little changed, except some easing for loans that can be bought or guaranteed by Fannie Mae and Freddie Mac. The report also showed that demand for most types of residential real estate loans strengthened over the second quarter.

Major automakers in the U.S. market reported July vehicle sales slightly below expectations as the pent-up demand that has helped drive sales since 2009 plays itself out. In a continuing trend, consumers shunned passenger cars in favor of SUVs and pickup trucks. GM sales dropped 2%. Ford (F) sales slipped 3%. Fiat Chrysler (FCAU) sales rose 0.3%. Nissan (NSANF) reported a 1.2% increase. Honda (HMC) surprised with a 4.4% increase. Ford shares dropped 4.3% today and are down 14% in the last 4 sessions.

Shares in Biogen (BGEN) jumped almost 10% today, after the Wall Street Journal reported that Merck (MRK) and Allergan (AGN) have each informally expressed interest in a possible acquisition. A takeover of Biogen would be the biggest of a biotech company since 2008, and one of the largest takeovers by a drug company on record. Biogen makes drugs that treat multiple sclerosis and hemophilia, and its main focus overall is on neurological and autoimmune diseases, as well as rare diseases.

Pfizer said it has reached a $486 million settlement of shareholder litigation accusing it of causing big losses for shareholders by concealing safety risks associated with its Celebrex and Bextra pain-relieving drugs. Pfizer (PFE) pulled Bextra from the U.S. market in April 2005, and agreed in September 2009 to pay $2.3 billion to settle a U.S. government probe into the marketing of Bextra and other drugs. The accord is subject to negotiation of a final settlement agreement and court approval, and would end more than 11 years of litigation against the drug maker.

Also, Pfizer reported better-than-expected quarterly results, driven by lower taxes and sales of generic medicines, but revenue from its array of branded patent-protected medicines brought disappointment. Pfizer did not offer any hints on whether it plans to split into two separate companies, a long-mulled potential decision that has kept investors in suspense.

Of the 353 companies in the S&P 500 that have reported earnings through Tuesday morning, 71 percent have topped analyst expectations, according to Thomson Reuters data. Earnings for the second quarter are expected to show a decline of 2.6 percent, an improvement from the expected 4.5 percent decline on July 1.

Emerson Electric (EMR), which makes factory automation equipment, said it would sell two units for a total of $5.2 billion as the company focuses on its high-growth businesses. Emerson will sell its network power unit to investment firm Platinum Equity in a deal worth $4 billion, while Japan’s Nidec Corp will buy its motors and electric power division for $1.2 billion.

Australia cut rates to a record low. The Reserve Bank of Australia lowered its benchmark interest rate to a record-low 1.50%, as expected. The central bank’s board noted “that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

European bank stocks were crushed again today. The sector remains under pressure after the results of the European Banking Association stress tests were released after markets closed on Friday. Europe’s STOXX Banking Index traded lower by 2.8%, taking this year’s total losses to more than 30%; with Germany’s Commerzbank pacing today’s decline among individual names, down 8.2% after reporting a 32% drop in quarterly profits.

Credit Suisse (CS) and Deutsche Bank (DB) – will be dropped from the STOXX 50, an index of Europe’s top 50 blue-chip companies next week. Credit Suisse and Deutsche Bank shares have lost half their value this year. Exclusion from a benchmark generally means that exchange-traded funds and other passive investors that track the index will be forced to sell the shares.

Deutsche’s plight should be of particular concern. Its shares are now worth barely a quarter of its book value. That is a twofold bind: proof that investors distrust the bank; and a practical block on being able to raise the equity needed to boost regulatory capital and absorb the cost of fines; and Deutsche faces considerable fines.  Investors are again pricing in a risk that the bank’s coco (or contingent convertible) bonds will be bailed in. Last month, the International Monetary Fund issued a report that concluded Deutsche is probably “the most important net contributor to systemic risks in the global banking system”.

And as bad as that is, the worst of the lot, is Italy’s Banca Monte dei Paschi, which utterly failed the stress test last week and now requires recapitalization. The Financial Times reports: “The proposal is being presented as “the last bailout” for Monte dei Paschi, with the expectation that, if the lender cleans up its bad loans, it will become a takeover target. Still, senior bankers admit it is highly risky and will prove a tough sell to drum up support for the recapitalization with the bank’s past history of burning investors. Bankers do not rule out that, if the recapitalization fails to find enough buyers, Monte dei Paschi may be forced to swap some of its debt for equity.”

The only good news is that Monte dei Paschi is nowhere near as big as Deutsche Bank. Italy is turning into the next Greece. Non-performing bank loans have risen to 18% in Italy. Monte dei Pachi has non-performing loans around one-third of its assets. I’m not sure how this plays out but it will probably be messy.

The Centers for Disease Control and Prevention advised pregnant women not to go to a Miami neighborhood where new, confirmed cases of Zika virus that appeared to be locally transmitted were reported. It was the first time the government health agency tasked with preventing the spread of disease has issued such an advisory for the Zika virus within the 48 contiguous US states, and it appeared to be the first time the CDC has warned against visiting any part of the continental United States for health reasons.

The warning applied to a one-square-mile area north of downtown Miami. Despite the narrowness of the warning, it may be problematic for Florida’s important tourism industry. The state drew in more than 100 million visitors and generated more than $89 billion of economic activity last year

At the end of last year, the FAA mandated—arguably as a stopgap against potentially stricter regulations from Congress about how citizens can use drones—that anyone wishing to fly a consumer drone weighing more than a half pound needed to get a registration number from the FAA for $5.

At a conference at the White House today on the future uses of drones in US airspace, Federal Aviation Administration director Michael Huerta told the gathered crowd that more than consumer 500,000 drones had been registered with the agency since December. According to the FAA, it took 100 years for about 320,000 regular aircraft to be registered with US officials—a feat that drones have surpassed in a matter of months.