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They join a growing list of companies affected in one way or another by the storms:
Hurricane Impact on Earnings
Southwest Airlines: lowered Q3 revs.
Sherwin-Williams: cut Q3 guidance
Carnival Cruise Line: cut Q4 EPS
DR Horton: cut Q4 guidance
CarMax: closed six Houston stores for week
AutoZone: closed 600 stores
FedEx: $0.02 hit to earnings
Cintas: $0.05-$0.08 hit to 2018 EPS
Harvey alone may have caused up to $108 billion in damages, according to initial estimates from Moody's Analytics. A recent CNBC analysis revealed that all the big hurricanes live on in earnings commentary for several quarters following their landfall in the U.S.
Here's the key question: Are these warnings as a whole enough to materially affect S&P 500 earnings expectations for the third and fourth quarters?
The short answer: It's not entirely clear yet, because many companies may wait until their earnings are released before commenting.
However, based on the data so far, David Aurelio, who tracks S&P 500 earnings as senior research analyst at Thomson Reuters, told me "the overall impact appears to be minimal" on S&P earnings.
He hedged by saying he was waiting for more clarification on losses from insurance companies, and that there will likely be additional comments from retailers and other airlines.
Still, the preliminary data is a relief to market watchers. S&P earnings have been on an upswing since the fourth quarter of 2016, after a year and a half of declines. That down period — from mid-2015 into 2016 — saw the S&P 500 drop more than 15 percent until recovering in mid-2016.
The markets have remained in record territory largely because traders continue to believe that earnings are still growing and not peaking out. A strong economy, coupled with the prospects of tax cuts, are the key to earnings growth into 2018.
And now some analysts think the rebuilding efforts may provide an additional benefit.
Christine Short, who follows earnings for Estimize, is one of them. "You do potentially have the strength of some of the machinery names (Caterpillar, Deere) and home improvement retailers (Home Depot, Lowe's) to offset, but still need to consider how the disruption in service/property destruction impacted those companies as well," she wrote in an email to me.
There may already be signs of a rebound. There are strong indications auto sales may soon increase. That's according to Eric Ross, chief investment strategist at Cascend Securities. He uses a proprietary model that measures consumer demand by monitoring what people are searching for on major websites, looking for specific phrases that identify people who are online to make a purchase of cars.
His concluded that growth in auto demand doubled in mid-September.
"I am pretty confident there will be an uptick in car sales in the next three to six months," Ross told me, noting that his model typically predates the actual purchase of cars between three and six months.
Ross noted that there was an increase in new car buying over the summer, even before the hurricanes, but it has notably picked up since. His firm upgraded the entire automotive sector in July.
Edmunds, which tracks car sales, also is optimistic.
"We anticipate that the recovery from the recent hurricanes will give vehicle sales an incremental boost in September, and will likely continue to slightly lift the market in the months to come," Jessica Caldwell, Edmunds executive director of industry analysis, said yesterday. "When you have hundreds of thousands of people affected by an event of this magnitude, not everyone will hit the market at once."
We haven't even started third-quarter earnings season, and already the debate focuses on what could be called peak earnings.
Is this the top for the cycle of rising earnings that began last year?
Not yet, and you can partly thank the renewed prospects for tax cuts. The markets took a leg up to historic highs late in the day Wednesday as the House Freedom Caucus endorsed the GOP tax plan.
Here's what's going on:
Earnings have been growing through 2017, after a six-quarter period in 2015 and 2016 of negative earnings. Not surprisingly, this was a period when the market traded sideways or down.
Earnings are still growing in the third quarter, but at a slightly slower rate. Overall earnings for the S&P 500 are expected to grow 6.2 percent, a bit slower than the 15.3 percent in the first quarter and 12.3 percent in the second quarter.
S&P Earnings Growth in 2017
Q117: up 15.3 percent
Q217: up 12.3 percent
Q317 (est.): up 6.2 percent
Q417 (est.): up 12.2 percent
Source: Thomson Reuters
Why the slowdown? Some of the sectors that had big moves higher are hitting tougher comparisons, principally energy and tech stocks. Energy, for example, bottomed in the second quarter of last year and had a huge boost in the second quarter of this year, so the comparisons are tougher.
Energy: Tougher Comps
Q2: up 563 percent
Q3: up 133 percent
Source: Thomson Reuters
Are we near the end of the long bull market?
It's a good question because the current bull run is now 9 years old, the second-longest in recent financial history.
Astute investors have started to concentrate on whether there are any signs that a bear market might be beginning. A bear market is when there are declines of 20 percent or more in the markets.
That is a hard question to answer, but not impossible.
Why concentrate on the signs of a bear market? Because almost all bull markets have brief corrections (declines of roughly 10 percent) that don't last long. They can often send "false signals" about a more serious decline.
Bear markets are more serious and have many causes, but Goldman Sachs has noted that they tend to fall into three broad categories:
1) Cyclical bear markets are a function of the economic cycle, typically caused by some combination of rapidly rising interest rates, impending recessions, rising unemployment and decline in profits.
2) Structural bear markets are triggered by imbalances and financial bubbles. The most recent examples are the dot-com bust of 2000 (technology bubble) and the financial crisis of 2008 (real estate bubble).
3) Event-driven bear markets are triggered by some significant macro or geopolitical event such as a war or an oil shock. They are "one-off" events that usually do not lead to a recession. Investors simply remove exposure to the markets and are not typically concerned with earnings or valuations. Examples include the 1973 oil crisis, the October 1987 market crash, the Russian debt default of 1998 and the 2011 European debt crisis.
Goldman researchers say that of 12 bear markets they have studied since 1960, five have been event-driven, three have been structural and four cyclical.
What are the chances we are heading for any of these bear markets? Let's leave out event-driven bear markets because they are, by definition, difficult to see in advance (though North Korea, should it ever come to a head, would certainly qualify).
Let's look at the chances of a structural and cyclical bear market.
Structural bear markets are driven by bubbles and investor exuberance.
Alan Greenspan's warning of "irrational exuberance" at the end of 1996 correctly presaged the dot-com bubble. Everyone was all-in on tech stocks; volume and volatility were huge and no bears were to be found. With a bull market peak, a lot of money gets in late and gets burned when the market turns.
But we don't have that today. Investor sentiment is anything but exuberant. Vast swaths of the investing public remain deeply skeptical. And volume and volatility? I've noted often that investors, while happy with the returns this year, seem bored and complacent.
But low volume and low volatility are not classic signs of a market peak, and other internals, such as the advance/decline line, remain healthy. Lowry, the nation's oldest technical analysis service (founded 1938), reviews market internals in great detail and recently told clients that all the indicators "suggest a bull market still in a healthy primary uptrend with the likelihood of further gains in the months ahead."
Are there bubbles in asset prices? Opinions may differ, but Goldman Sachs noted "the post financial crisis era has [brought] with it a raft of regulation that has led to lower leverage in the financial sector and in the corporate sector. The lack of imbalances also makes a structural bear market less likely."
As for cyclical bear markets, Goldman looked at a combination of factors that were important cyclical indicators of a bear market in the past, including recessions, rate hikes, inflation, unemployment, yield curves and valuations. It concluded that while the risks were elevated, "we think the outlook for equity markets over the next 12 months is likely to be very low returns rather than a sharp decline."
1. Recessions. The relationship between stocks and recessions is very well-studied, but unfortunately, the relationship is very tenuous. All recessions since World War II have been preceded by a decline in stocks of at least 10 percent. But many recessions never saw stocks drop into bear market territory — declines of 20 percent or more. The recessions of 1953, 1960 and 1980 were preceded by S&P 500 declines of 15 percent, 14 percent and 10 percent, respectively, according to my old friend Sam Stovall, chief investment strategist at CFRA.
The reverse is also true: You can have bear markets without recessions. This happened in 1961, 1966 and 1987.
"Bull markets often don't die of old age, they die of fright," Stovall told me. "In 1987 everyone was convinced there would be a recession [after the October market crash], but there wasn't one."
Right now, all we can say is that we have not had a 10 percent decline in a long time, so even this tenuous indicator is not sending a warning signal about a recession.
2. Aggressive rate hikes. The Fed raising rates aggressively were a factor in bear markets in 1966 and 1968-1970, among others, but Goldman thinks the chances of really aggressive rate hikes is low: "Without monetary policy tightening much, concerns about a looming recession — and therefore risks of a 'cyclical' bear market — are lower."
3. Rising inflation, along with the Vietnam War, was a factor in the 1968-1970 bear market, and again in bear markets in 1976-1978 and 1980-82. Goldman noted that "confidence in the low future path for inflation is leading to similar confidence that low interest rates today are not likely to spike sufficiently to generate a recession."
4. Profit declines or high valuations. Profits are still rising. Its true valuations are high: The forward P/E ratio (earnings estimates for the next four quarters) for the S&P 500 are at roughly 18.0, which is in the top 89 percent of where it has been since 1976, according to Goldman.
But that is not predictive of anything: While high valuations are a feature preceding most bear markets, you can have high valuations for very long periods. As Goldman noted: "Valuation in isolation is unlikely to be the trigger for a bear market." It notes that the rise in valuation is largely a function of very low inflation, bond yields and the impact of quantitative easing.
The bottom line on a bear market risk: The combination of low inflation, low risk of sharp monetary tightening and low risk of recession is what has led Goldman to tell clients that very low returns are more likely than a sharp decline.
Stovall agrees. "People are working themselves into a bit of a frenzy, but the risks [of a bear market] are low right now," he told me. "So many are waiting for a decline in prices that it offers fuel for the market to go higher. And I think the chances of a tax cut are high, which will add to earnings."
His assessment: "The risks are to the upside, not to the downside," for the markets.
There is one risk that keeps him up at night: geopolitical. "How do you put logic onto an irrational despot" like North Korea's Kim Jong Un, he asks. "That is scary and impossible to model."
Oh man, it's happening again. Oil is rallying, and so are oil stocks. Both are up about 10 percent in a month.
And almost no one thinks it will last.
Here's the story this time: Oil supply is tightening. OPEC compliance with production levels has increased. The shale guys have increased activity, but not as much as some feared, and demand numbers have been steadily on the increase.
The result: a big oil rally, with Anadarko, Marathon, Hess, Devon, and Apache up double digits this month, and even Exxon and Chevron up 6 percent and 9 percent, respectively, both among the leaders of the Dow Jones industrial average for the month
We'll see. The whole energy story this year follows one heartbreak after another, and investors don't want anything to do with this sector.
Who could blame them? On at least three occasions, investors have had their heads handed to them, and we may now have a fourth heartbreak. Let me explain.
The first big energy rally occurred at the election, when energy stocks climbed 10 percent into the first weeks of December. The sector was far better than the 5 percent rally in the S&P 500 at the time.
But oil stocks were already off their highs as we entered the new year. They dropped steadily for the first two months of the year and accelerated their decline when oil dropped below $50 in March. They fell 12 percent from their highs, giving back all their postelection gains. That was the first heartbreak.
The second began when oil rallied in late March, going to almost $54 by mid-April, and investors again began buying oil stocks, pushing them up 6 percent in a month.
But it didn't last — oil resumed its slide and was again below $45 by early May and down to $42 in late June. The Energy Select Sector SPDR, the XLE, went almost straight down, losing 12 percent.
Then came the third heartbreak. A six-week rally took oil to $50 by early August, and oil stocks rose 6 percent, but again they gave it all back when oil dropped into the mid-$40s.
You'd think everyone would give up by now. But oil rallied 10 percent this month to its highest level since April, and we get the biggest oil stock rally of the year. The XLE is up 10 percent in a little more than a month.
Is the fourth heartbreak coming? Who knows. Looks to me like it's a rally based on fundamentals — so far. Investor sentiment is about as bad as you could ask for. There's little money in the sector, and that is certainly a plus. The energy weighting in the S&P 500 is 7 percent. It hasn't been that low in more than a decade.
So once again, the analysts are saying, you have some fundamental improvement, and you've got a lot of cheap stocks here. Anyone interested?
The SEC disclosed on Wednesday that EDGAR, its corporate filing system,
EDGAR is where Corporate America goes to file statements on their businesses. Brad Bondi, an attorney with Cahill Gordon and Reindel and former council at the SEC, called it "the Fort Knox" of the SEC. It's where the important stuff is stored: quarterly earnings reports, market-moving news, IPOs, mergers and acquisitions, it all goes into the EDGAR system, and is often filed before the news is made public.
I'll oversimplify this a bit with an example: suppose a company was going to announce that their fourth quarter earnings were going to be well below expectations due to some outside event. They have to notify the SEC of this, and they would do it through a filing in the EDGAR system.
Under some circumstances, they may file the report before it is actually released to the public.
The low market volatility is making some investors a bit crazy.
In the past two weeks, the S&P 500 Index has moved in a four to five-point trading range on many days, just one-third of its typical range. Jefferies recently said its trading revenues were the worst in a year-and-a-half as investors have shown little interest in trading.
The S&P may be moving in a narrow range, but look beneath the hood and you will see a market that is showing healthy rotation and no signs of breaking down. Investors used to investing in nothing but index-backed ETFs need to get their eyes off the S&P 500, and focus a little more carefully on the market nuances.
I called my old friend Laszlo Biryinyi, who has been a market watcher for 43 years. Biryinyi raised eyebrows back in June when he said the S&P 500 would hit 2.500 by the end of September, but he was proved right.
He, too, has been inundated with calls from investors worried about the low volume and low volatility, and he has a simple message for them: "I tell them to stop whining. There is no law that says the markets need heavy volume or high volatility to advance. If all you are going to do is look at the S&P and volume, you're not going to understand what's going on in the market."
He's right. There is a real dynamism in the market just below the surface that isn't captured by just watching the S&P 500.
In the past month there has been big rallies into energy and materials stocks, and biotech and semiconductors have again reasserted market leadership. Even banks — a huge underperformer all year — have begun outperforming:
Biotech: up 9.5 percent
Energy: up 8.3 percent
Semiconductors: up 7.0 percent
Retail: up 6.5 percent
Materials: up 6.1 percent
Banks: up 4.5 percent
S&P 500: up 3.2 percent
Birinyi's solution to a low-volatility environment is simple: "Individual stocks are where the market action is. There's plenty of volatility. The S&P may be up 1, but today Google is up 11, Apple is down 4. Look at Goldman," he said, which is up 7 percent in the past two weeks.
The big issue, Birinyi said, it that today's investors have had seven years of doing really well with indexes and ETFs. Meanwhile, so many are simply not very good at picking stocks.
I asked Birinyi if he had any advice for all those investors who want to invest in more than just ETFs, but are nervous about their ability to pick stocks. Birinyi's surprising advice: "Try buying the stock with the largest market capitalization in all the S&P 500 sectors, except for Utilities and Telecom."
That would be nine stocks, and he claims a basket of those stocks are up 25 percent this year as a group.
What about the fourth quarter? Right now, he's still working on his target for December 31st, but he does say the market will be higher.
Finally, Birinyi laughed when I asked him about seasonal trading patterns, like sell in May and go away, or that August and September are historically poor months.
All of this has been wrong this year, but he ignores that kind of market trading routinely: "That doesn't tell you anything about tomorrow," he said. "People tell me all sorts of things that are just not actionable. They say September is a down month. This is just a lot of noise, and for me, the market is fine."
Investors are seeking to raise more than $1 billion from seven initial public offerings this week, the most active week for IPOs since at least June. Three Chinese companies are set to debut, led by Best Inc., an Alibaba-backed logistics company initially seeking to raise $869 million, the biggest IPO of the quarter.
Overnight, it was reported that Best Inc. cut the deal size to $472.5 million at the midpoint, down from $869 million.
Next week will be strong as well, with two tech companies coming: Roku, which is seeking to raise $204 million at a valuation of $1.5 billion, and used-car service CarGurus (from the founder of TripAdvisor), seeking to raise at least $100 million with a likely valuation of roughly $1 billion.
It's happening again: the IPO market is heating up. It's happened a couple times in the last year, only to peter out. But with markets at new highs and recent IPOs performing well, the market is again opening up. Whether it lasts is still uncertain.
There's certainly no shortage of prospects: at least 150 tech unicorns (those companies with valuations over $1 billion) are waiting to go public.
The biggest deal this week — and the biggest IPO of the quarter — is Alibaba-backed Chinese logistics firm Best Inc, which will seek to begin trading at the NYSE on Wednesday. The delivery business is big in China, but Best is fifth in a very competitive market. It's still unprofitable, according to Renaissance Capital, and its competitor, ZTO Express, is not exactly offering great comfort. It went public in October 2016 at $19.50, and is now at $14.89 at the NYSE.
Also from China this week: Secoo Holding. Luxury goods is a hot space in China. Secoo makes a market for pre-owned luxury goods, a space that Alibaba and JD.com have also been trying to enter (read: serious competition). They'll be seeking to raise $106 million and are scheduled to begin trading Friday at the Nasdaq.
Rounding out the China offerings is biotech firm Zia Lab, seeking to raise $100 million.
Also scheduled to trade Wednesday at the NYSE is Despegar, an online travel company based in Buenos Aires. They're backed by Expedia, Tiger Global and General Atlantic (Expedia provides the hotel inventory outside of Latin America). Online travel in Latin America is highly fragmented, but they are a leader, with 11 percent market share.
Finally, it's been a miserable year for energy IPOs, as the market fizzled when oil collapsed in March. That's when Hess Mainstream, a master limited partnership (MLP) that owns oil and gas pipelines, went public.
No one has wanted much to do with energy stocks — IPOs or listed — since then.
But with oil near $50, it's time to try again. On Thursday, Oasis Midstream, a spinoff of Oasis Petroleum, will be the latest to try, seeking to raise $150 million at the NYSE. The attraction, as with most MLP's, is the juicy 7.5 percent yield. They own oil and natural gas pipelines primarily in the Williston Basin in eastern Montana, western North Dakota, South Dakota, and southern Saskatchewan
Why the sudden interest in IPOs? Two factors: markets are again at new highs, and investors have been encouraged by the after-market trading in IPOs that have gone public in the last year.
I know, Blue Apron and Snap have been failures. But Kathleen Smith, of IPO research firm Renaissance Capital, points out that those have been the exception to the rule. Her Renaissance Capital IPO ETF (IPO), a basket of the largest 60 most recent IPOs, is up 27 percent this year.
Many of those stocks have had big out-performance this year:
Recent Top IPO performers (YTD)
Ferrari (RACE) +89%
Square (SQ) +109%
First Data (FDC) +27%
Atlassian (TEAM) +50%
MGM Growth Properties (MGP) +21%
The message: while public investors drive a hard bargain and want initial prices as low as possible, investors have been rewarded. For every Blue Apron and Snap, there are more winners.
That is not lost on those seeking to come to market.
The Street is buzzing with speculation over what company may be the target for Social Capital Hedosophia, which raised $600 million in an IPO today at the NYSE.
Social Capital is a special purpose acquisition company (SPAC), set up to invest in technology companies that are not yet public. SPACs are based on a simple premise: investors are initially going in with a seasoned manager in an investment space (energy, tech, etc.) who will then have up to two years to buy one or more assets. The investors have the option of remaining in the investment or getting out and receiving their money back.
In this case the management team is led by Chamath Palihapitiya, one of the original members of Facebook's management team.
The issue now: what will he buy?
Palihapitiya, in an interview earlier on CNBC, said he was looking for only one company to buy, so there is considerable speculation on what might be in his crosshairs.
He gave us a clue by identifying the rough size of a target: "[T]hink about this as a merger of an entity that should be valued anywhere between $3 and call it $20 billion where that management stays in control..."
That is a wide range, but there are several tech "unicorns" that fall in the $3 billion to $20 billion range. Just in the $10 billion and below range there are several well-known names:
It's a rather slow year for IPOs, but Thursday we'll see an IPO floated at the NYSE that is getting more than the usual amount of attention.
The company is Social Capital Hedosophia, and they are planning a fairly healthy IPO of $600 million: 60 million shares at $10. (That's up from 50 million shares first indicated.). The company's shares rose 2.8 percent mid morning Thursday after it opened for trading.
Normally, of course, IPOs announce price ranges, say, from $9 to $11, not just one price of $10. Why is this just $10 with no range?
Because the company has no assets, at least not yet. It is a special purpose acquisition company (SPAC), a company that is being set up to invest in technology companies that are not yet public.
These SPACs are enjoying a banner year: more than 20 have gone public so far in 2017, the highest number since 2007, according to Renaissance Capital, a research firm that tracks IPOs and runs the Renaissance Capital IPO ETF (IPO), a basket of the most recent IPOs.
SPACs are based on a simple premise: a seasoned manager in an investment space (energy, tech, etc.) buys assets and assembles them in a portfolio for investors. They are sometimes referred to as "blank check" companies.
I got a call Thursday morning from Kathleen Smith, who runs Renaissance Capital, an investment firm that specializes in investing in IPOs and also runs the Renaissance Capital IPO ETF (ticker: IPO), a basket of the largest 60 or so most recent offerings.
She had just finished reading the S-1 filing of a proposed IPO called Social Capital Hedosophia Holdings, a holding company that is aiming to raise $500 million in an IPO that will then go out and buy other tech companies who have been reluctant to go public.
The S-1 notes that tech startups have plenty of access to private venture money but don't want to go public for a number of reasons: "We believe management distraction, a sub-optimal price discovery mechanism and the resultant longer-term aftermarket impact have discouraged private technology companies from pursuing IPOs." (You can read more here).
Here's excerpts from our conversation:
What's bothering you?
Smith: The prospectus implies the IPO market is broken. It's not. It may be broken for overvalued private companies, but it's not broken for investors, because they are not jumping up and down to invest in overvalued unicorns.
The prospectus also says that the number of IPOs has been dropping. That's certainly true, no?
Smith: Yes, but it's because the companies staying private are overvalued and they don't want to float them at lower prices. Those that have gone public, for the most part, have done well. We count 28 tech IPOs in the last 12 months. The average return from the IPO prices is 31 percent. That includes Snap and Blue Apron. It tells us that the IPO market is functional and working as it should, enabling investors to earn a return. And our IPO ETF is up 25 percent for the year.
What about Blue Apron and Snap?
Smith: They are failed IPOs. Investors made a mistake buying Snap and Blue Apron, and they have corrected.
The prospectus says that the IPO process "lacks an effective price discovery mechanism and encourages participation from many investors that are focused on short-term performance." True?
Smith: No. There is plenty of smart money in the IPO market, so the price discovery is there. The problem is the companies are not providing enough information.
What about the statement that investors are too focused on short-term performance?
Smith: It's the job of management to get them to focus long-term. They need to do a better job at working with shareholders to manage expectations. There are plenty of companies that are doing that, and they have high multiples. Just ask Jeff Bezos, ask Mark Zuckerberg.
What about the way this Social Capital Hedosophia IPO is structured?
Smith: It is a SPAC [Special Purpose Acquisition Company]. The people behind this are well-known and have very good reputations, but with a SPAC you're putting all your trust in a manager. You have to trust that that investor is going to invest at the right price, and we already know that the venture community is caught up in irrational exuberance because there is so many dollars competing for the same companies. Valuations are high and the IPO market are not accepting them.
You note that the people behind this have invested in many tech startups in the past. Is there a potential for conflicts of interest?
Smith: The prospectus says they will obtain an opinion from an independent investment banking firm about the fairness of investing in any business that's affiliated with the sponsor or directors, but then go on to say "potential conflicts of interest still may exist and, as a result, the terms of the business combination may not be as advantageous to our public shareholders as they would be absent any conflicts of interest."
But don't these people have a point about the IPO process? Spotify is talking about a direct listing that would go around the whole process of filing an IPO and list directly on an exchange. Now we have this proposal to set up a SPAC to buy up companies that, for whatever reason, can't or won't go public.
Smith: These are examples of the increasing desperation of the venture capital investors to get out of their overvalued investments in any way they can. The public market has been resisting paying high prices, and this is a workaround. What a lot of hubris.
What should be done to improve the IPO process?
Smith: We need more time to evaluate these companies. THE JOBS Act rushes the process and takes too much information off the table. You used to be required to provide three years of financial history, now it's only two. With this confidential filing, people don't get to see the prospectus until about two weeks before they launch the deal. That is not enough time to study the deal. And I'd like more information on who holds the IPO. When a company goes public, we don't know who the big holders are. It could take several months to find out. We'd like to know a lot sooner, particularly if insiders purchased on the IPO. We should know that immediately. We are in a market economy, and when the investors don't know something, it makes it more expensive for companies to raise capital because there's more risk.
It may be a turkey-shortened week ahead but there are a few key things Wall Street will be watching and trading, including tax reform and Black Friday.
Canadian Philip Baker, sentenced to 20 years in U.S. federal prison, gets a transfer home and eventually gets out of prison.
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