David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Hurricane Irma Strengthens to a Category 5 Storm

    This article by Abigail Morris and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

     

    Beyond the threat to people and property in the Caribbean, the focus so far is on agriculture with the storm, "being a case of being long orange Juice futures rather than gasoline futures," Jakob said.

    Irma will probably cross the northern Leeward Islands Tuesday into Wednesday, according to the NHC, which said it’s still too early to determine what impact it might have on the U.S. Hurricane warnings have been issued for the U.S. and British Virgin Islands, Puerto Rico, Vieques, and Culebra. Tropical-storm-force winds could arrive in the British and U.S. Virgin Islands and Puerto Rico by early Wednesday.

    About two-thirds of Florida’s citrus crop is located in the lower two-thirds of the peninsula. Frozen concentrated orange juice futures in New York already rose last week on speculation the storm could strike, though prices are down almost 30 percent since January.

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    Revisiting Rare Earths: The Ongoing Efforts to Challenge China's Monopoly

    This article by Mayuko Yatsu for TheDiplomat.com may be of interest to subscribers. Here is a section:

    For instance, Australian companies have been working to open rare earth mines in Australia and Tanzania for producing elements such as neodymium and dysprosium. Likewise, Canada, through collaboration with the national government and industrial associations, seeks to gain up to 20 percent of global rare earth production by 2018.

    Japan has also explored non-Chinese suppliers of rare earth metals, reaching co-development agreements with countries like Australia, India, Kazakhstan, and Vietnam. A research group from the University of Tokyo in 2012 even found a significant amount of rare earth minerals around Minami-Torishima, the easternmost island of the country (located in the Western Pacific). In 2016, Japanese auto giant Honda invented an advanced motor which does not require rare earth elements. More recently, in June 2017, Japanese scientists discovered a massive amount of cobalt-rich crusts, which often contain cobalt, nickel, and some rare earth elements. Even if it is very challenging and costly to extract those minerals from the deep sea, Japan will seek to do so in order to boost its long-run natural resource self-sufficiency.

    For the United States, re-opening the Mountain Pass mine in California has been a strategic goal. After the shutdown of the mine in 2015 (following the bankruptcy of then-owner Molycorp), several companies expressed interest in purchasing the mine. There has been discussion of the economic and security considerations of the U.S. giving a Chinese-affiliated company some control over the mine, even before the court made its final decision. It is still unclear whether any higher U.S. authority such as Congress will step in to stop the deal, although several experts have address potential risks surrounding the court’s decision.

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    The Times, They Are A-Charging

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:  

    In the near-term, adoption is likely to be constrained by this slightly extended payback, concerns over driving range and thus, charging infrastructure. That said, investors may be surprised at the speed at which infrastructure can be built out (Tesla has constructed 830 SuperCharger locations in 31 countries to date, expected to double in 2017). However, the short driving range (~200 miles) is likely to constrain the market to specific use cases, until battery technology improves/costs decline. We forecast 10% adoption by 2027 within the NAFTA Class 8 market.

    The shorter, closed-loop nature of typical medium-duty truck routes should yield faster adoption of electric trucks vs. heavy-duty. Range is not a major concern for medium-duty trucks, given that they tend to drive much shorter routes (well below 200 miles/day), haul less tonnage, and often follow closed-loop networks, allowing for night-time charging. As such, we agree with consensus on this topic – medium-duty adoption of electric vehicles is likely to be much faster than with heavy-duty trucks. We project 15% adoption by 2027 within the NAFTA Class 5-7 market.

    OEMs that offer the best payback period/total cost of ownership are likely to win share. Tesla will be a new entrant in the market, which presents risk to existing OEMs in itself (Daimler, Volvo, Navistar, PACCAR) – we believe the company that provides the best combination of average selling price with battery range/cost will win, and Tesla will have many advantages in this regard. Nonetheless, today it seems that all OEMs are developing electric trucks with range in the ~200-mile zone, which shifts the focus to the ASP. At this point, Daimler, MAN/Scania and Tesla appear to be preparing to launch electric truck offerings, so they could potentially have a head start vs. Navistar and PACCAR.

    Legacy components suppliers could face significant headwinds. This centers around components that will be phased out in a fully electric world, such as the transmission (Allison Transmission) and engine (Cummins). Note that in conjunction with this report, we have downgraded Allison Transmission (covered by Nicole DeBlase) to Sell (price as of 8/31: $34.54), as we match longer-term electrification concerns with shorter-term earnings headwinds.

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    Reminiscences

    Thanks to a subscriber for this note from Birinyi Associates which may be of interest. Here is a section:

    In truth, the positive arguments are not especially helpful either.  One major investment banking firm wrote: “the bull market is still healthy but the risks for a crash are increasing.”  And “the bull market has ten more years to run” which is not an argument we would like to defend.

    In summary, sentiment is negative and even the bullish arguments are muted.  While several firms have slightly upgraded their year-end targets, perhaps the bulls with a capital B might be ourselves, David Tepper (‘nowhere near an overheated market’) and Morgan Stanley (‘Bull market check list remains intact’).

    To us the abundance of bears and the lack of strong, positive arguments for a rally is a positive.  We agree that the rally is lengthy and perhaps even boring of late, but it is still a bull market.  For those who argue that it exceeds the average of the last ten rallies we might again mention that last year when we spoke at the Columbia B School we asked one of the professors: if averaging three numbers does not make sense, then how many data points does one need to make a meaningful average?

    He said the conventional response is 30. Thus, it is not statistically sound to average ten rallies or declines despite one’s understandable inclination to do so.

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    Bitcoin Tumbles as PBOC Declares Initial Coin Offerings Illegal

    This article by Lulu Yilun Chen and Justina Lee for Bloomberg may be of interest to subscribers. Here is a section:

    China’s central bank said initial coin offerings are illegal and asked all related fundraising activity to be halted immediately, issuing the strongest regulatory challenge so far to the burgeoning market for digital token sales.

    The People’s Bank of China said on its website Monday that it had completed investigations into ICOs, and will strictly punish offerings in the future while penalizing legal violations in ones already completed. The regulator said that those who have already raised money must provide refunds, though it didn’t specify how the money would be paid back to investors.

    It also said digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies. Digital tokens can’t be used as currency on the market and banks are forbidden from offering services to initial coin offerings.

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    Comparing Risk and Opportunity

    Thanks to a subscriber for this summary by Byron Wein for Blackstone, from his series of discussions with investors. Here is a section:

    There was general agreement that both inflation and productivity were understated. Housing is a big part of the inflation calculation and, for most of the country, housing costs have been rising modestly. The prices of services like healthcare and lifestyle-supporting needs used by everyone, such as haircare and cleaning services, have risen sharply but don’t show up in the numbers. As for productivity, the measurement techniques were developed in the 1950s when the U.S. was more of a manufacturing economy. Now with services and knowledge-based industries so important, the historical measurement approaches, which underestimate the impact of computer software developments, understate productivity improvements. Time spent posting and reading posts on Facebook during working hours, however, detracts from productivity. One technology person pointed out, though, that the video games of today are intensely interactive and represent a learning experience for the kids playing them. This is in sharp contrast to the passive watching of television by previous generations.

    We talked a bit about inequality and agreed the problem was likely to become worse because of globalization and technology. One investor was optimistic, however, because of the positive impact machine learning was making in improving the outlook of disadvantaged Americans and educational opportunities in the emerging markets. Another pointed out that 60% of the jobs held in 1980 don’t exist today and still unemployment is down to 4.3%. On-demand services, such as Uber, are creating jobs, but technology displacing workers is a problem throughout the world.

    Even though there was an apprehensive mood at the lunches few were buying gold as a safeguard. In spite of the strong performance of the Japanese economy this year and the rise in its stock market, the group remained wary of Japan. There was no clear consensus on why the dollar was weak, but a lack of confidence in the new administration in Washington was clearly a factor in spite of strong U.S. growth and a rising stock market. One of the lunches was decidedly bearish. Overall, a vote on market performance between now and year-end showed that 60% believed it would be higher in spite of the caution expressed in the discussion.

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    Campbell Drops After Bleak Outlook Follows Blow From Buffet

    This article by Craig Giammona for Bloomberg may be of interest to subscribers. Here is a section: 

    Over the past three years, the 10 largest packaged-food companies have seen about $16 billion in revenue evaporate as consumers change how they eat and shop. Shoppers are seeking out more natural and organic food, shifting away from the staples that have dominated supermarket shelves for decades.

    Whole Foods Deal
    Amazon.com Inc.’s deal to buy Whole Foods also has fueled pessimism about packaged-food giants, with analysts predicting that the e-commerce titan will favor private-label products and squeeze the profit margins of its suppliers. In June, when that deal was announced, the 10 largest U.S. food companies lost almost $8 billion in market value combined.

    In a bid to add more natural products, Campbell agreed to buy Pacific Foods of Oregon, a maker of organic soup and broth, for $700 million in June. Campbell also acquired Bolthouse -- a producer of carrots, juices and salad dressings -- for $1.55 billion in 2012. That business, now part of the Campbell Fresh unit, has struggled with poor harvests and a drink recall.

     

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