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

    Amazon Cometh to Grocery What Does it Mean?

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

    2) Removing Consumers’ Online Grocery Pain Points…to Better Attack the$780bn US Grocery Market: The addition of WFM materially improves AMZN’s grocery user proposition and its ability to penetrate the ~$780bn US grocery market (See Exhibit 6). Grocery eCommerce penetration is still low (estimated 3% see Exhibit 7) in part because (per our AlphaWise survey data) consumers enjoy selecting their own food, value the in-store experience as well as the certainty that the food is correct (See Exhibit 5). The addition of WFM and its 465+ stores (across 3 countries and 42 US states) solves these points of friction. Bigger picture, this speaks to the importance of brick and mortar in certain e-commerce categories as AMZN (through WFM) and BABA (though Intime) continue to expand their attack on consumers’ wallets

    3) WFM + Prime Now = A 1-2 Hour Prime Personal Shopper: The combination of WFM’s store footprint and grocery inventory with Prime Now will enable AMZN to improve the Prime Now product…as Prime Now will be able to offer consumers grocery delivery in 1-2 hours. AMZN will also be able to leverage the store footprint to house other inventory, to expand its Prime Now selection. Prime Now just became a 1-2 hour personal shopper.

    4) Changing Consumer Behavior Again as 1-2 Hour Delivery Could Replace 2- Day Delivery Expectations: In our view, AMZN’s core business is behaviour modification, and a stronger 1-2 hour offering has the potential to further increase consumers’ expectations for e-commerce shipping times. Just as AMZN pushed expectations from a week delivery time (13 years ago) to 2 days (with Prime, introduced in 2005), a more robust Prime Now could further move the goal-posts to 2 hours. This will only further AMZN's competitive offering vs other retailers.

    5) A further driver of Prime Subscriber growth. Our Alphawise data show that ~62% of Whole Food Shoppers are Prime Members (See Exhibit 2). Amazon's ability to convert more Whole Foods shoppers into its Prime membership has the potential to lead to faster long term growth and wallet share growth. Bigger picture, 2 hour delivery could also drive faster Prime sub growth. In the words of Jeff Bezos on April 2016 "We want Prime to be such a good value, you’d be irresponsible not to be a member". 

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    China shares get MSCI nod in landmark moment for Beijing

    This article from Reuters may be of interest to subscribers. Here is a section: 

    Inclusion in the index marks a key victory for the Chinese government, which has been working steadily over the past few years to open up its capital markets, investors said.

    "Given the size and importance of China as an economic superpower, I think this is a historic moment," Kevin Anderson, senior managing director of State Street Global Advisors and head of investments in the Asia Pacific region told Reuters.

    "It's a long-awaited and much-debated decision in the past, and I think it's more than symbolic as it will create additional flow of capital and potentially a new segment of institutional investors in the China market."

    Traders said MSCI's widely expected "Yes" decision had been largely priced in, with the announcement triggering some profit-taking in blue chips, which are no longer cheap after strong rallies this year.

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    Why Britain Has to Be Really Nice to Norway and Russia

    This article by Anna Shiryaevskaya  and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

    Already buffeted by political chaos at home and abroad, the U.K. gas market must now operate without its biggest stabilizing force: the giant Rough gas storage facility under the North Sea.
    The planned permanent shutdown of the Centrica Plc site, able to meet 10 percent of peak demand in winter, means Britain is becoming even more reliant on imports of liquefied natural gas or pipeline fuel from Russia and Norway. That sets up the possibility that traders would have to outbid Japan, the world’s biggest LNG buyer, and others to keep millions of homes warm.

    Political uncertainty is making the supply game even riskier, with rules for international gas pipelines clouded in mystery as the U.K. negotiates an exit from the European Union.

    And the diplomatic crisis this month involving Qatar, the nation’s largest LNG supplier, caused gas prices in Britain to jump the most since January as two tankers were diverted.
    “It takes two weeks for a cargo of LNG to arrive from Qatar, which is not a politically stable place right now,” Graham Freedman, principal analyst for European gas and power at Wood Mackenzie Ltd. in London, said by phone.“That does raise the political implications quite a lot, along with Brexit. So it’s a perfect storm in terms of security of supply for the U.K.”
    Last winter as much as 94 percent of the country’s gas came from sources other than storage. More than half of that was imports, mainly through pipelines from Norway. Statoil ASA, Norway’s state-owned producer, has repeatedly said it doesn’t plan to significantly boost exports, but can divert more fuel to Britain if needed.

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    Aussie Banks Seen Set to Dodge Debt Cost Pain After Moody's

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

    Surging home prices in cities like Sydney along with rising household debt and sluggish wage growth pose a threat to lenders, according to Moody’s. But the four banks likely won’t have to pay more to issue debt for now, as they remain in the “rare company” of lenders around the world that hold AA level ratings, said Vivek Prabhu, Sydney-based head of fixed income at Perpetual Ltd.

    “Any further downgrade would take them into the A rating band and could lead to a more meaningful increase in the cost of wholesale debt funding if this were to occur,” he said.

    Australian banks are lenders to some of the most indebted people on the planet. The combination of eye-watering house prices and anemic wage growth has pushed the ratio of household debt to disposable income to 189 percent -- one of the highest levels globally. Every basis point paid to borrow counts for the lenders, who source about two-thirds of their funding from deposits and the rest from debt markets from Australia to the U.S.

    Australians piling on mortgage debt has been a key concern of Moody’s, Frank Mirenzi, a senior analyst, told Bloomberg TV Tuesday. “We just don’t know how these mortgages will perform during a real downturn,” he said.


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    Fed plan to reverse QE is fraught with danger

    This article by Ambrose Evans-Pritchard for The Telegraph must have touched a nerve among investors because I received multiple emails asking about it. Here is a section: 

    It typically takes about 500 basis points of Fed cuts to fight bad recessions. It was even worse after the Lehman crash in 2008. The Fed ran out of ammunition after 475 points and had to flood the system with liquidity through QE. The total was, in synthetic terms, 850 points of loosening.

    As matters now stand, the Fed has just 100 basis points of cuts to play with in a crisis. Prof Blanchflower said: “We should be getting as far away as possible from the zero-lower-bound [zero rates] before selling off any assets, otherwise we are going to have a disaster.”

    What makes this so sensitive is that the window for QE in the future is closing. The two new Fed members floated by the Trump administration, Randal Quarles and Marvin Goodfriend, are both staunch conservatives hostile to QE. The bar will be higher. This means the Fed may have to fight the next downturn with little in the arsenal.

    It is going to be pretty unpleasant if we hit a crisis with only four rate cuts to play with and no QE.

    One ex-Fed official said: “It is going to be pretty unpleasant if we hit a crisis with only four rate cuts to play with and no QE. The whole universe of asset prices is built on the assumption there will always be a ‘Fed put’ and bond yields will never be allowed to rise.”
    Professor Tim Congdon, founder of the Institute of International Monetary Research, said quantitative tightening would compound the monetary squeeze just as big banks were already having to boost their loss-absorbing capital to 16pc of risk-weighted assets under the Basel rules.


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    Email of the day on companies benefitting from cryptocurrency mining:

    Musings From the Oil Patch June 20th 2017

    Thanks to a subscriber for this report by Allen Brooks’ for PPHB. Here is a section on the rig count:

    At the same time, U.S. oil output continues growing in response to the increase in the number of working drilling rigs. As a result, the International Energy Agency (IEA) is projecting that U.S. oil output will grow by almost 5% on average this year, and by nearly 8% in 2018, overwhelming projected demand growth and re-establishing the glut environment. This forecast is creating concern about the success of OPEC’s strategy of cutting its output. The pessimistic view of crude oil prices rests on the belief that the slow pace in reducing oil inventories will create an environment where cheating on production cuts occurs, making it impossible for demand growth alone to drive oil prices higher. The optimists, including OPEC, believe that its strategy is working, it will merely need more time – hence the nine-month extension rather than a six-month one.

    What we know is that the lift in oil prices sparked a drilling rig recovery in 2016, which has continued into 2017, and has become the fastest industry recovery in history. Although the recovery has been the fastest, it has yet to reach the levels of the recoveries of 1979 and 2009. The current weakening of crude oil prices is likely to cut short this rig recovery below the levels reached in those earlier recoveries, unless something else is at work in the oil patch.


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