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

    Investment Gurus Counsel Catching Reform Tailwinds in Latin America

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

    “The broad outperformance in Latin America -- particularly Argentina, Mexico, and Brazil -- speaks to the broad reform programs we have seen in each of these countries and the stable backdrop these reforms have provided,” said Kofi Bentsi, a money manager focused on emerging-market corporate bonds at Pimco, the second-largest U.S. fixed-income management firm. He says Argentina and Brazil are likely to continue to outperform. 

    Jim Barrineau, the co-head of emerging-markets debt at Schroders in New York, said the region has benefited from a combination of the highest yields among emerging markets and improving economies, especially in Argentina and Brazil, which overcame deep recessions. This backdrop, he says, tends to favor corporate bonds over government securities.

    “They are more responsive to changes in economic growth,” said Barrineau, who helps oversee Schroders’ $520 billion in assets. His emerging-market bond fund has outperformed 81 percent of peers this year.

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    Apple's Rain of Cash Washes Away Debt Doubts

    This article by Lisa Abramowicz Shira Ovide for Bloomberg may be of interest to subscribers. Here is a section:

    Stock investors love it, of course. Why wouldn't they? Apple is the third-biggest dividend payer in the U.S. behind Fannie Mae and Exxon Mobil Corp., which is music to any investor's ears when bonds are paying historically little. And debt investors seem to be just fine with forking their money over to the company; they've eagerly bought up multiple debt offerings from Apple so far this year, with the seventh 2017 bond sale on track to get the company's usual warm reception. 

    This raises longer-term risks and threats to the company that aren't highlighted often, if ever.

    As long as Apple keeps churning out loads and loads of cash, all this is fine. Apple generates more cash than any other public U.S. company, and it's spending its money both to invest in its business and to return money to stockholders. Apple's spending on research and development has also increased sharply in recent years, as have its capital expenditures on things like manufacturing equipment, computer centers and its retail stores. In short, Apple produces enough cash to do everything a business is supposed to do: reward its owners, support its existing products and plan for the future.

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    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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