Category

United States

Brief USA: How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World? and more

By | Daily Briefs, United States

In this briefing:

  1. How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?
  2. Governments and Policies Adapting to Critical Known Unknown
  3. Fault Lines and Positive Surprises: Buy Car Makers
  4. Massive Fiscal Stimulus A Near-Term Game Changer but Long Term Trouble
  5. Tracking the Daily COVID-19 Cases for 10 Major Countries

1. How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?

Buffett 2

The main subject of this report is as follows: “How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?” Certainly, COVID-19 will change the way people behave. The longer that COVID-19 lasts and the longer that millions of people are under lockdown, their behaviors will change further, potentially making them into a habit and this would have a tremendous impact on the global economy. 

We are specifically interested in this topic because as millions of people around the world undergo “lockdown” for a period of one to three months, this could have an enormous behavior change once this lockdown period ends.

The change in behavior patterns (especially related to consumer spending) in the post COVID-19 world would also have a big impact on whether the global economy/stock market can turn around quickly (such as after the Great Financial Recession in 2008/2009) or whether the turnaround lasts longer (such as after the Internet tech/crash lasting for nearly 3 years from 2000 to 2002). 

2. Governments and Policies Adapting to Critical Known Unknown

Chart%203c

We argued in Lack of US market & macro volatility both reassuring and troubling that “the market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle”.

That unknown unknown, a “black swan” event, has turned out to be a global viral pandemic on a scale not seen since the Spanish influenza pandemic of 1918-1919.

The coronavirus outbreak is now three months old but governments, central banks, corporates and households still face a critical known unknown, in our view, namely the total number people who had the coronavirus, acquired immunity and are no longer contagious and who currently carry the coronavirus and are thus potentially infectious.

This includes people who have not been clinically tested – more than 99.9% of the world’s population. We estimate that only 3.3 million people (4 out of every 10,000) have been tested for coronavirus, although testing data are patchy and often released with a lag. The main reason so few people have been tested is the still limited capacity to rapidly and reliably test a very large number of people.

In econometric terms that is a very small sample from which to extrapolate country-wide trends. One implication is that the actual mortality rate may be far smaller than reported.

The high number of tests-per-capita conducted in countries such as South Korea has been posited as an explanation for their relatively low number of coronavirus-related deaths. However, other factors have likely been at play, including the timing of clinical tests, demographics, national health systems’ capacity to treat infected patients and the timing and efficacy of self-isolation and self-distancing policies, including country “lockdowns”.

For now what policy-makers know they don’t know will likely continue to influence country-specific containment plans, as well as domestic measures to support economic growth while ensuring the functioning of financial markets.

3. Fault Lines and Positive Surprises: Buy Car Makers

Image 74356928621585274600719

Where are the weakest points in the global economy that could send activity into a tailspin and threaten the banking system? Italy would seem to be the prime candidate for collapse. The economy was already flirting with recession but will definitely enter one when first quarter 2020 data are published. Weak economies are always the most vulnerable when an external shock hits. Italy’s banks are bound to require a bailout from either the government or the ECB – neither of which are well placed to provide the capital. 

4. Massive Fiscal Stimulus A Near-Term Game Changer but Long Term Trouble

Us publicdebttogdpratio

The extraordinary size of the US fiscal stimulus (US$2 trillion, or a bit over 10% of GDP) is eye-popping. It shovels money to families earning less than US$150,000 annually, for anybody unemployed, for specific businesses hurt directly by the Covid-19 crisis, as well as to other businesses hurt indirectly, hospitals, and SMEs. The sheer size of the package will ensure that the inevitable recession caused by the Coronavirus-related disruptions will be relatively short-lived. The package is therefore solidly market-positive in the near term. 

Over the longer term, it adds massively to the burden of US public debt (already 105.5% of GDP before this additional burden), severely distorts the labour market, and introduces some disincentives for work. The longer it lasts (and the longer the disruptions from Covid-19), the greater the long-term risks to democratic capitalism. This unprecedented package (occurring at a time when the economy and financial system is beset by a health rather than financial crisis) will be truly effective only if it (and the purported ticket size) are temporary, and can be withdrawn as soon as the economy has recovered. Given the nature of democratic politics, withdrawing all or part of the package is likely to prove very challenging.  

The sheer size and speed of the US relief package should restore risk-appetite in the US and, selectively, across the world. Equities and global emerging markets should return to favour in the near-term, and the yield curve steep, although there will be hiccups as the the US labour-market prints horrific numbers for the next couple of months. We estimate that real GDP will contract about 5% in 1H 2020, and grow 2-3% in 2H 2020 despite the large relief package, with faster growth occurring mainly in 2021. Nonetheless, risk assets will be buoyed by this mammoth package that should mitigate most of the negative economic impact by mid-2020, unless Covid-19 makes a big comeback in the northern winter of 2020-21.  

5. Tracking the Daily COVID-19 Cases for 10 Major Countries

Covid 19d

In this report, we provide an update of the new cases of COVID-19 among 10 major countries, including the top 10 countries with COVID-19 cases (excluding China). From our previous report, Tracking the Daily COVID-19 Cases for 7 Major Countries (More Hope!), we have added three more countries including Switzerland, U.K., and the Netherlands due to their rapid increase in new cases in the past week. 

A combination of the U.S. Fed’s “QE Infinity,” U.S.’s $2 trillion stimulus bill, and growing optimism that the new cases of COVID-19 can be controlled in the U.S. and Europe have helped to stage turnaround of major equity markets around the world including S&P500 and KOSPI. We continue to believe that the peak daily cases of COVID-19 in the U.S. are likely to be in this 2 week period from March 23rd to April 5th. Numerous European countries included in the top 10 countries for COVID-19 cases are also likely to experience their peak daily cases during this period.

The number of COVID-19 cases has surged in the U.S. in the past week. According to the COVID Tracking Project, there were 418,810 people that were tested for this virus as of March 25th, up nearly 10x from on March 16th. As of March 25th, 15.2% of the people that were tested had positive results, up from 10.0% on March 16th. 

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief USA: Gaslog Ltd – Downgrade to Neutral on Multiple Headwinds Ahead and more

By | Daily Briefs, United States

In this briefing:

  1. Gaslog Ltd – Downgrade to Neutral on Multiple Headwinds Ahead
  2. Applied Materials Shines at SPIE Conference
  3. Beyond Meat (BYND US): 4Q2019- Whopper Rev Growth, Sober Margins & Super Marketing Spend
  4. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

1. Gaslog Ltd – Downgrade to Neutral on Multiple Headwinds Ahead

Gaslog%20partners%20share%20price

Downgrade to Neutral on multiple headwinds ahead

We have downgraded Gaslog to Neutral on account of weak industry prospects, a plunge in Gaslog Partners’ share prices and subdued valuations. We have also revised our spot rate forecasts as the tonne-mile demand is getting weaker with the coronavirus outbreak creating uncertainties on China’s LNG demand. Gaslog Partners’ share price has declined 60.5% following the company’s announcement to reduce the dividend by about 78% during its recent 4Q19 results. We have arrived at a fair value of USD 6.4 per share for Gaslog.

 

Industry prospects are getting weaker

We expect lower LNG charter rates during 2020-22, compared with 2018 and 2019, on account of the vast increase in liquefaction capacity in the market amid sluggish growth in demand in the major LNG-importing countries. We expect LNG shipping charter rates to be lower in 2020 than in 2019 owing to abundant LNG supply, low LNG prices and shrinking tonne-mile demand expected during this year.

 

Gaslog’s EBITDA margins to decline as spot exposure increases

We expect Gaslog’s EBITDA margins to decline to 63.6% in 2022 from 69.4% in 2019 as the number of vessels in the spot fleet is expected to increase from 6 vessels at the end of 2019 to 12 vessels by the end of 2020. Gaslog has six vessels coming off fixed charter in 2020. We believe the company will find it challenging to employ these vessels in the time charter market due to sluggish LNG shipping prospects. Consequently, we expect these vessels to trade in the spot market and earn lower earnings. As five of these vessels are less energy-efficient (steam turbine vessels with average age of more than 10 years), we expect their spot earnings to be about 35% lower than those of TFDE vessels, resulting in lower utilisation rates. Meanwhile, Gaslog recognised an impairment loss of USD 162.1mn on its six steam turbine vessels in 4Q19 due to negative market conditions.

 

Steep decline in Gaslog Partners’ share price restricts its ability to raise funds

We believe the recent steep decline in Gaslog Partners’ share price and the cut in its dividend, in addition to a weak market for LNG shipping, will restrict the company’s ability to raise fresh equity. Gaslog has traditionally used Gaslog Partners’ equity issue to finance its dropdown of vessels. Gaslog Partners did not do any equity issuance under its ‘At-the-market’ programme in 2019. As we value Gaslog Ltd’s stake in Gaslog Partners at market value, a sharp decline in the latter’s share price will adversely affect the former’s fair value.

 

Downgrade to Neutral with a fair value of USD 6.4 per share

We have downgraded Gaslog to Neutral in the wake of multiple headwinds ahead. Gaslog’s stock price has already declined 37.7% YTD (as of 19 February) and we see limited downside from this level. We have arrived at a fair value of USD 6.4 per share based on blended valuation. We have used a mix of DCF and NAV to arrive at the fair value. The key upside risks include an unexpected increase in crude oil prices, a better-than-expected win of fixed charter contracts and a sustained rise in spot freight rates. The main downside risks are a sustained drop in LNG shipping spot rate prices, a prolonged impact from coronavirus and the shutdown of many LNG liquefaction projects.

 

Weak industry prospects due to sluggish demand

We expect lower LNG charter rates during 2020-24, compared with 2018-19, on account of the vast increase in liquefaction capacity in the market amid sluggish growth in demand in major LNG-importing countries. Furthermore, over 200 vessels will be added to the fleet by 2024, while 26 vessels are estimated to have been removed from the effective fleet for conversions and scrapping. We believe 2020-22 will be the period when LNG trade rebalances with vast incoming vessel supply, liquefaction capacity from different regions and slower growth in demand in major LNG centers.

2. Applied Materials Shines at SPIE Conference

Layers%20from%20amat

At the SPIE Advanced Lithography conference this week Applied Materials proved that the company has a clear vision of the future and the way that the company will support its customers’ needs for advanced semiconductor processing equipment.

3. Beyond Meat (BYND US): 4Q2019- Whopper Rev Growth, Sober Margins & Super Marketing Spend

Bynd%202016 19

Beyond Meat Inc (BYND US) reported strong revenue growth in 4Q2019, thus ending the full year 2019 by tripling sales vs 2018; however, the operating gains from the rather robust gross margins at 34% (tad lower than 3Q19) was wiped away by a steep increase in marketing spend in 4Q2019. Management has guided that investment in marketing and R&D will continue at increased pace in 2020 as well. The focus for now seem to be to drive revenue growth by expanding presence across distribution channels and geographies as well launch more product lines. 

Beyond Meat’s reported 4Q19 operating losses may come as a disappointment to the street given it had reported 12% operating margins in 3Q19. But management has maintained its strong revenue growth outlook for 2020 and guided to further growth in capacity for 2021. It is gaining traction in the food service segment as they collaborate with leading QSRs in the US and has expanded to Europe. It plans to hit Asia by late 2020.  For details on 4Q 2019 results, Management call updates and our stock view, please read the segment below.

4. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

Image 41514005621582821543929

Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief USA: Does COVID-19 Imply A Bonanza for Micron? and more

By | Daily Briefs, United States

In this briefing:

  1. Does COVID-19 Imply A Bonanza for Micron?

1. Does COVID-19 Imply A Bonanza for Micron?

2020 02 26%20micron%20stock%20price%20history

The COVID-19 virus has undertaken a significant upturn in Korea.  Since Samsung and SK hynix dominate two of the markets that Micron is in, one would naturally anticipate that the outbreak could benefit Micron, a US-based firm.  In this SmartKarma Insight we will examine that line of thought and see why it misses key facts that must be considered.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief USA: Micron: Great Quarter, but Outlook Is Confusing and more

By | Daily Briefs, United States

In this briefing:

  1. Micron: Great Quarter, but Outlook Is Confusing
  2. Breaking: Softbank Bonds Gets Severe Downgrade; WeWork Bonds Suffer
  3. Active Vs. Passive Investing Post COVID-19 Coronavirus World
  4. Fiscal Response to COVID-19: Bazooka or Spud Gun?
  5. Update on European Covid 19 Numbers – Cautiously Positive

1. Micron: Great Quarter, but Outlook Is Confusing

2020 03 25%20micron%20revs

In Micron’s earnings call today the company revealed that its second fiscal quarter hit the top of the company’s guidance, and would have exceed that guidance had COVID-19 not occurred.  The company then gave a very cautious outlook for the current quarter.

Overall, though, Micron appears to be doing a laudable job of preparing for any challenges that the market may experience.

2. Breaking: Softbank Bonds Gets Severe Downgrade; WeWork Bonds Suffer

Moodys%202

Moody’s Corp (MCO US) topped Standard & Poor’s with an even more severe downgrade of bonds in Softbank Group (9984 JP).

This is is even worse news for The We Company (WeWork) (WE US) sputtering bonds, which are down another 15 points since my report on Monday to37.8 (34.7% ytw; 3421 bps) and down 51 points since my report on March 18th.

3. Active Vs. Passive Investing Post COVID-19 Coronavirus World

Funds c

  • The world was never the same after 9-11 and it will never be the same after the COVID-19 coronavirus. 
  • In this insight, we discuss what impact COVID-19 will have on the active versus passive/index/ETF funds, especially as it relates to the Korean markets.
  • One could make an argument that one of the outcomes of the COVID-19 coronavirus is an environment that could have a GREATER MARKET VOLATILITY and potentially higher inflation/interest rates (but we do not presume to know the exact timing or extent). In such an environment, it is possible that there could a renewed prominence of ACTIVE INVESTING.
  • Passive/index/ETF investing will continue to represent a major portion of the total global investment world. Nonetheless, if investors’ perception of the “normal global volatility” changes materially post COVID-19, then one could make a renewed call on greater capital allocation for hedge funds and mutual funds that ACTIVELY pick stocks. 

4. Fiscal Response to COVID-19: Bazooka or Spud Gun?

Image 47911326721585114409469

Last week in our Insight, COVID-19: A Perspective on Policy, we wrote about the unfolding government and central bank responses to the virus crisis. In the past few days there have been many more including interest rate cuts in Indonesia, the Philippines, Taiwan and Thailand. The US is readying a supposed US$2trn fiscal package and the UK has increased its support for workers while offering (stupidly) a huge loan facility to businesses. Government action to support demand, not supply, is the, predictable, default.  

5. Update on European Covid 19 Numbers – Cautiously Positive

Image 38914253081585079990609

We update our charts for the latest European Covid-19 data.  A positive trend in case numbers is emerging despite our concerns about the impact of shifts in the way testing is carried out.  Adjusted fatalities also appear to be showing an improved trend.

Overall we are cautiously positive.  Though we remain very negative about the economic effects of policies being followed.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief USA: Governments and Policies Adapting to Critical Known Unknown and more

By | Daily Briefs, United States

In this briefing:

  1. Governments and Policies Adapting to Critical Known Unknown
  2. Fault Lines and Positive Surprises: Buy Car Makers
  3. Massive Fiscal Stimulus A Near-Term Game Changer but Long Term Trouble
  4. Tracking the Daily COVID-19 Cases for 10 Major Countries
  5. Monetary Policy: Nothing to Offer (And That’s Where They’re Going)

1. Governments and Policies Adapting to Critical Known Unknown

Chart%203c

We argued in Lack of US market & macro volatility both reassuring and troubling that “the market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle”.

That unknown unknown, a “black swan” event, has turned out to be a global viral pandemic on a scale not seen since the Spanish influenza pandemic of 1918-1919.

The coronavirus outbreak is now three months old but governments, central banks, corporates and households still face a critical known unknown, in our view, namely the total number people who had the coronavirus, acquired immunity and are no longer contagious and who currently carry the coronavirus and are thus potentially infectious.

This includes people who have not been clinically tested – more than 99.9% of the world’s population. We estimate that only 3.3 million people (4 out of every 10,000) have been tested for coronavirus, although testing data are patchy and often released with a lag. The main reason so few people have been tested is the still limited capacity to rapidly and reliably test a very large number of people.

In econometric terms that is a very small sample from which to extrapolate country-wide trends. One implication is that the actual mortality rate may be far smaller than reported.

The high number of tests-per-capita conducted in countries such as South Korea has been posited as an explanation for their relatively low number of coronavirus-related deaths. However, other factors have likely been at play, including the timing of clinical tests, demographics, national health systems’ capacity to treat infected patients and the timing and efficacy of self-isolation and self-distancing policies, including country “lockdowns”.

For now what policy-makers know they don’t know will likely continue to influence country-specific containment plans, as well as domestic measures to support economic growth while ensuring the functioning of financial markets.

2. Fault Lines and Positive Surprises: Buy Car Makers

Image 74356928621585274600719

Where are the weakest points in the global economy that could send activity into a tailspin and threaten the banking system? Italy would seem to be the prime candidate for collapse. The economy was already flirting with recession but will definitely enter one when first quarter 2020 data are published. Weak economies are always the most vulnerable when an external shock hits. Italy’s banks are bound to require a bailout from either the government or the ECB – neither of which are well placed to provide the capital. 

3. Massive Fiscal Stimulus A Near-Term Game Changer but Long Term Trouble

Uscovidcases 25mar2020

The extraordinary size of the US fiscal stimulus (US$2 trillion, or a bit over 10% of GDP) is eye-popping. It shovels money to families earning less than US$150,000 annually, for anybody unemployed, for specific businesses hurt directly by the Covid-19 crisis, as well as to other businesses hurt indirectly, hospitals, and SMEs. The sheer size of the package will ensure that the inevitable recession caused by the Coronavirus-related disruptions will be relatively short-lived. The package is therefore solidly market-positive in the near term. 

Over the longer term, it adds massively to the burden of US public debt (already 105.5% of GDP before this additional burden), severely distorts the labour market, and introduces some disincentives for work. The longer it lasts (and the longer the disruptions from Covid-19), the greater the long-term risks to democratic capitalism. This unprecedented package (occurring at a time when the economy and financial system is beset by a health rather than financial crisis) will be truly effective only if it (and the purported ticket size) are temporary, and can be withdrawn as soon as the economy has recovered. Given the nature of democratic politics, withdrawing all or part of the package is likely to prove very challenging.  

The sheer size and speed of the US relief package should restore risk-appetite in the US and, selectively, across the world. Equities and global emerging markets should return to favour in the near-term, and the yield curve steep, although there will be hiccups as the the US labour-market prints horrific numbers for the next couple of months. We estimate that real GDP will contract about 5% in 1H 2020, and grow 2-3% in 2H 2020 despite the large relief package, with faster growth occurring mainly in 2021. Nonetheless, risk assets will be buoyed by this mammoth package that should mitigate most of the negative economic impact by mid-2020, unless Covid-19 makes a big comeback in the northern winter of 2020-21.  

4. Tracking the Daily COVID-19 Cases for 10 Major Countries

Covid 19d

In this report, we provide an update of the new cases of COVID-19 among 10 major countries, including the top 10 countries with COVID-19 cases (excluding China). From our previous report, Tracking the Daily COVID-19 Cases for 7 Major Countries (More Hope!), we have added three more countries including Switzerland, U.K., and the Netherlands due to their rapid increase in new cases in the past week. 

A combination of the U.S. Fed’s “QE Infinity,” U.S.’s $2 trillion stimulus bill, and growing optimism that the new cases of COVID-19 can be controlled in the U.S. and Europe have helped to stage turnaround of major equity markets around the world including S&P500 and KOSPI. We continue to believe that the peak daily cases of COVID-19 in the U.S. are likely to be in this 2 week period from March 23rd to April 5th. Numerous European countries included in the top 10 countries for COVID-19 cases are also likely to experience their peak daily cases during this period.

The number of COVID-19 cases has surged in the U.S. in the past week. According to the COVID Tracking Project, there were 418,810 people that were tested for this virus as of March 25th, up nearly 10x from on March 16th. As of March 25th, 15.2% of the people that were tested had positive results, up from 10.0% on March 16th. 

5. Monetary Policy: Nothing to Offer (And That’s Where They’re Going)

Image 63476846251585115144649

When the Bank of England cut rates on 11 March it joined a growing list of central banks that have eased since the beginning of February: the Fed, the Reserve Bank of Australia, Bank Negara Malaysia, Bangko Sentral ng Pilipinas, Bank of Korea, Bank of Thailand and Bank Indonesia. Since then, the Fed, Bank of Korea, the Central Bank of China, Bank Indonesia, Bangko Sentral and Bank of Thailand have all cut again, thus compounding the folly. All of these moves have failed to arrest the rout in equity markets. 

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief USA: Uranium: 30% Decline in Demand Over Next 30 Years and more

By | Daily Briefs, United States

In this briefing:

  1. Uranium: 30% Decline in Demand Over Next 30 Years

1. Uranium: 30% Decline in Demand Over Next 30 Years

Figure%2014

  • Nuclear plant closures will outnumber newly constructed within 18-24 months
  • Plant closures the West to on outstrip new construction facilities in the East
  • Modelled global nuclear power generation demand to 2050
  • Global nuclear generation to fall from 2675.4 to 1897.4TWh over next 30-years
  • China has only commenced a single power plant in past four years
  • Forecasts for US, UK, France, China, Japan, Korea, Germany, Russia, Taiwan, Canada and India
  • NAC Kazatomprom JSC (KAP LI) will increasingly dominate global primary production

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief USA: Uranium: 30% Decline in Demand Over Next 30 Years and more

By | Daily Briefs, United States

In this briefing:

  1. Uranium: 30% Decline in Demand Over Next 30 Years
  2. Sanders in Pole Position for the Democrats Adds Risk to Markets Spooked by Covid-19

1. Uranium: 30% Decline in Demand Over Next 30 Years

Figure%2014

  • Nuclear plant closures will outnumber newly constructed within 18-24 months
  • Plant closures the West to on outstrip new construction facilities in the East
  • Modelled global nuclear power generation demand to 2050
  • Global nuclear generation to fall from 2675.4 to 1897.4TWh over next 30-years
  • China has only commenced a single power plant in past four years
  • Forecasts for US, UK, France, China, Japan, Korea, Germany, Russia, Taiwan, Canada and India
  • NAC Kazatomprom JSC (KAP LI) will increasingly dominate global primary production

2. Sanders in Pole Position for the Democrats Adds Risk to Markets Spooked by Covid-19

Having won an emphatic victory in the Nevada caucuses, narrowly won the New Hampshire primary and narrowly lost the Iowa caucuses, Sen. Bernie Sanders now has a healthy lead in nation-wide polls. In the 10th Democratic presidential debate (Tuesday evening in South Carolina, 26th February morning in Asia), he escaped relatively unscathed and won the debate according to at least two instant polls, thus putting himself in pole position to win at least half the 14 states holding primaries a week hence — on Super Tuesday (3 March 2020). Ex-VP Joe Biden did just enough at this debate to win the South Carolina primary, which would keep him viable for Super Tuesday, where he needs to win at least 3 additional states if his campaign is to go on. 

Mike Bloomberg’s surging momentum (based on his blanket advertising spree) stalled after his weak performance in the last debate 6 days earlier. He did slightly better in the latest debate, but not enough to spur a significant revival in his upward momentum. The polls suggest he may still win 2-4 states on Super Tuesday: he narrowly leads in Arkansas, is a close second in Oklahoma (where he previously led) , and one poll shows him tied with Sanders and Biden at 20% in North Carolina. He also leads in Florida (where the primary is on 17th March). The counting chaos in Iowa denied Pete Buttigieg the normal fillip from an Iowa win; he will fade unless he can finish among the top-2 in at least 3 states on Super Tuesday. In the latest debate, Warren continued to attack Bloomberg rather than her main rival for the “socialist” vote, so she is likely to be irrelevant after Super Tuesday. Klobuchar and Steyer will be under pressure to withdraw thereafter too. 

The Socialist who has sat as an Independent (rather than a Democrat) in the Senate will likely appear the presumptive Democratic nominee after Super Tuesday a week hence. Once Warren withdraws, he will have the left field of the Democratic party to himself, while the moderate centre will have at least two competitors (Biden and Bloomberg), and possibly a third (Buttigieg), ensuring that Sanders’ delegate lead mounts throughout the busy month of March. Markets are right to be concerned about the growing risk of severe economic disruption from Covid-19, which has paralyzed China’s trade in goods and services for a month now — with widening effects on Japan, Korea and South-east Asia, with contagion spreading to Iran and Italy. As East Asia suffers a sharp economic slowdown, over-capacity issues in China will be exacerbated — creating the possibility of an accelerated financial crisis there, and a feedback loop on the global economy. The rising probability of a Sanders-Trump presidential race (and the risk of a Socialist president) are likely to spook markets. We would recommend switching to bonds from equities.    

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief USA: Uranium: 30% Decline in Demand Over Next 30 Years and more

By | Daily Briefs, United States

In this briefing:

  1. Uranium: 30% Decline in Demand Over Next 30 Years
  2. Sanders in Pole Position for the Democrats Adds Risk to Markets Spooked by Covid-19
  3. Return of Risk Aversion Raises the Ante on Fed Policy Outlook as Repo Market Stress Concerns Linger

1. Uranium: 30% Decline in Demand Over Next 30 Years

Figure%2014

  • Nuclear plant closures will outnumber newly constructed within 18-24 months
  • Plant closures the West to on outstrip new construction facilities in the East
  • Modelled global nuclear power generation demand to 2050
  • Global nuclear generation to fall from 2675.4 to 1897.4TWh over next 30-years
  • China has only commenced a single power plant in past four years
  • Forecasts for US, UK, France, China, Japan, Korea, Germany, Russia, Taiwan, Canada and India
  • NAC Kazatomprom JSC (KAP LI) will increasingly dominate global primary production

2. Sanders in Pole Position for the Democrats Adds Risk to Markets Spooked by Covid-19

Having won an emphatic victory in the Nevada caucuses, narrowly won the New Hampshire primary and narrowly lost the Iowa caucuses, Sen. Bernie Sanders now has a healthy lead in nation-wide polls. In the 10th Democratic presidential debate (Tuesday evening in South Carolina, 26th February morning in Asia), he escaped relatively unscathed and won the debate according to at least two instant polls, thus putting himself in pole position to win at least half the 14 states holding primaries a week hence — on Super Tuesday (3 March 2020). Ex-VP Joe Biden did just enough at this debate to win the South Carolina primary, which would keep him viable for Super Tuesday, where he needs to win at least 3 additional states if his campaign is to go on. 

Mike Bloomberg’s surging momentum (based on his blanket advertising spree) stalled after his weak performance in the last debate 6 days earlier. He did slightly better in the latest debate, but not enough to spur a significant revival in his upward momentum. The polls suggest he may still win 2-4 states on Super Tuesday: he narrowly leads in Arkansas, is a close second in Oklahoma (where he previously led) , and one poll shows him tied with Sanders and Biden at 20% in North Carolina. He also leads in Florida (where the primary is on 17th March). The counting chaos in Iowa denied Pete Buttigieg the normal fillip from an Iowa win; he will fade unless he can finish among the top-2 in at least 3 states on Super Tuesday. In the latest debate, Warren continued to attack Bloomberg rather than her main rival for the “socialist” vote, so she is likely to be irrelevant after Super Tuesday. Klobuchar and Steyer will be under pressure to withdraw thereafter too. 

The Socialist who has sat as an Independent (rather than a Democrat) in the Senate will likely appear the presumptive Democratic nominee after Super Tuesday a week hence. Once Warren withdraws, he will have the left field of the Democratic party to himself, while the moderate centre will have at least two competitors (Biden and Bloomberg), and possibly a third (Buttigieg), ensuring that Sanders’ delegate lead mounts throughout the busy month of March. Markets are right to be concerned about the growing risk of severe economic disruption from Covid-19, which has paralyzed China’s trade in goods and services for a month now — with widening effects on Japan, Korea and South-east Asia, with contagion spreading to Iran and Italy. As East Asia suffers a sharp economic slowdown, over-capacity issues in China will be exacerbated — creating the possibility of an accelerated financial crisis there, and a feedback loop on the global economy. The rising probability of a Sanders-Trump presidential race (and the risk of a Socialist president) are likely to spook markets. We would recommend switching to bonds from equities.    

3. Return of Risk Aversion Raises the Ante on Fed Policy Outlook as Repo Market Stress Concerns Linger

Treasury%20debt

US Treasury investors have recently raised the ante on the Federal Open Market Committee (FOMC) about the economic and monetary policy outlook by discounting further reductions in the federal funds rate in 2020. The pessimistic economic outlook embraced by bond investors is in stark contrast to the baseline forecast of FOMC members, thereby laying the foundations of another game of chicken between the two parties. 

The FOMC can cite numerous factors that support their baseline scenario of continued growth, but supply chain dislocations in China on US activity have yet to unfold.  The FOMC will be monitoring events in China and potential transmission to the US via a number of mechanisms. 

While aggregate US export exposure to China is small, the FOMC will look at the impact of events on Asia’s capacity to produce and export to the US, thereby triggering a supply-side shock. Meanwhile, rising risk aversion will tighten US financial conditions, an outcome the FOMC sought to avoid last year. 

US equities will remain skittish as China’s economic data weakens, particularly given the front-end loaded gains witnessed in early-2020 based on sanguine corporate profit expectations. The worst outcome for US would be the lack of taming in the spread of the coronavirus until the summer due to the ever-rising risks of global recession in the absence of further policy easing by the Fed.

The FOMC will also need to consider the risks of a return of stress in overnight repo markets in Q2 if its monthly purchases of T-bills are scaled back in April as originally intended. The Treasury’s General Account at the Fed is both large and volatile, thereby raising the possibility of sustained funding stress in overnight repo markets as bank reserves are squeezed due to large federal government budget deficits.  

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief USA: Fault Lines and Positive Surprises: Buy Car Makers and more

By | Daily Briefs, United States

In this briefing:

  1. Fault Lines and Positive Surprises: Buy Car Makers
  2. Massive Fiscal Stimulus A Near-Term Game Changer but Long Term Trouble
  3. Tracking the Daily COVID-19 Cases for 10 Major Countries
  4. Monetary Policy: Nothing to Offer (And That’s Where They’re Going)
  5. Micron: Great Quarter, but Outlook Is Confusing

1. Fault Lines and Positive Surprises: Buy Car Makers

Image 16957330731585274683132

Where are the weakest points in the global economy that could send activity into a tailspin and threaten the banking system? Italy would seem to be the prime candidate for collapse. The economy was already flirting with recession but will definitely enter one when first quarter 2020 data are published. Weak economies are always the most vulnerable when an external shock hits. Italy’s banks are bound to require a bailout from either the government or the ECB – neither of which are well placed to provide the capital. 

2. Massive Fiscal Stimulus A Near-Term Game Changer but Long Term Trouble

Us publicdebttogdpratio

The extraordinary size of the US fiscal stimulus (US$2 trillion, or a bit over 10% of GDP) is eye-popping. It shovels money to families earning less than US$150,000 annually, for anybody unemployed, for specific businesses hurt directly by the Covid-19 crisis, as well as to other businesses hurt indirectly, hospitals, and SMEs. The sheer size of the package will ensure that the inevitable recession caused by the Coronavirus-related disruptions will be relatively short-lived. The package is therefore solidly market-positive in the near term. 

Over the longer term, it adds massively to the burden of US public debt (already 105.5% of GDP before this additional burden), severely distorts the labour market, and introduces some disincentives for work. The longer it lasts (and the longer the disruptions from Covid-19), the greater the long-term risks to democratic capitalism. This unprecedented package (occurring at a time when the economy and financial system is beset by a health rather than financial crisis) will be truly effective only if it (and the purported ticket size) are temporary, and can be withdrawn as soon as the economy has recovered. Given the nature of democratic politics, withdrawing all or part of the package is likely to prove very challenging.  

The sheer size and speed of the US relief package should restore risk-appetite in the US and, selectively, across the world. Equities and global emerging markets should return to favour in the near-term, and the yield curve steep, although there will be hiccups as the the US labour-market prints horrific numbers for the next couple of months. We estimate that real GDP will contract about 5% in 1H 2020, and grow 2-3% in 2H 2020 despite the large relief package, with faster growth occurring mainly in 2021. Nonetheless, risk assets will be buoyed by this mammoth package that should mitigate most of the negative economic impact by mid-2020, unless Covid-19 makes a big comeback in the northern winter of 2020-21.  

3. Tracking the Daily COVID-19 Cases for 10 Major Countries

Covid 19c

In this report, we provide an update of the new cases of COVID-19 among 10 major countries, including the top 10 countries with COVID-19 cases (excluding China). From our previous report, Tracking the Daily COVID-19 Cases for 7 Major Countries (More Hope!), we have added three more countries including Switzerland, U.K., and the Netherlands due to their rapid increase in new cases in the past week. 

A combination of the U.S. Fed’s “QE Infinity,” U.S.’s $2 trillion stimulus bill, and growing optimism that the new cases of COVID-19 can be controlled in the U.S. and Europe have helped to stage turnaround of major equity markets around the world including S&P500 and KOSPI. We continue to believe that the peak daily cases of COVID-19 in the U.S. are likely to be in this 2 week period from March 23rd to April 5th. Numerous European countries included in the top 10 countries for COVID-19 cases are also likely to experience their peak daily cases during this period.

The number of COVID-19 cases has surged in the U.S. in the past week. According to the COVID Tracking Project, there were 418,810 people that were tested for this virus as of March 25th, up nearly 10x from on March 16th. As of March 25th, 15.2% of the people that were tested had positive results, up from 10.0% on March 16th. 

4. Monetary Policy: Nothing to Offer (And That’s Where They’re Going)

Image 63476846251585115144649

When the Bank of England cut rates on 11 March it joined a growing list of central banks that have eased since the beginning of February: the Fed, the Reserve Bank of Australia, Bank Negara Malaysia, Bangko Sentral ng Pilipinas, Bank of Korea, Bank of Thailand and Bank Indonesia. Since then, the Fed, Bank of Korea, the Central Bank of China, Bank Indonesia, Bangko Sentral and Bank of Thailand have all cut again, thus compounding the folly. All of these moves have failed to arrest the rout in equity markets. 

5. Micron: Great Quarter, but Outlook Is Confusing

2020 03 25%20micron%20revs

In Micron’s earnings call today the company revealed that its second fiscal quarter hit the top of the company’s guidance, and would have exceed that guidance had COVID-19 not occurred.  The company then gave a very cautious outlook for the current quarter.

Overall, though, Micron appears to be doing a laudable job of preparing for any challenges that the market may experience.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief USA: Sanders in Pole Position for the Democrats Adds Risk to Markets Spooked by Covid-19 and more

By | Daily Briefs, United States

In this briefing:

  1. Sanders in Pole Position for the Democrats Adds Risk to Markets Spooked by Covid-19
  2. Return of Risk Aversion Raises the Ante on Fed Policy Outlook as Repo Market Stress Concerns Linger
  3. Cole Haan IPO – A Failing Attempt to Disrupt the Footwear Market

1. Sanders in Pole Position for the Democrats Adds Risk to Markets Spooked by Covid-19

Having won an emphatic victory in the Nevada caucuses, narrowly won the New Hampshire primary and narrowly lost the Iowa caucuses, Sen. Bernie Sanders now has a healthy lead in nation-wide polls. In the 10th Democratic presidential debate (Tuesday evening in South Carolina, 26th February morning in Asia), he escaped relatively unscathed and won the debate according to at least two instant polls, thus putting himself in pole position to win at least half the 14 states holding primaries a week hence — on Super Tuesday (3 March 2020). Ex-VP Joe Biden did just enough at this debate to win the South Carolina primary, which would keep him viable for Super Tuesday, where he needs to win at least 3 additional states if his campaign is to go on. 

Mike Bloomberg’s surging momentum (based on his blanket advertising spree) stalled after his weak performance in the last debate 6 days earlier. He did slightly better in the latest debate, but not enough to spur a significant revival in his upward momentum. The polls suggest he may still win 2-4 states on Super Tuesday: he narrowly leads in Arkansas, is a close second in Oklahoma (where he previously led) , and one poll shows him tied with Sanders and Biden at 20% in North Carolina. He also leads in Florida (where the primary is on 17th March). The counting chaos in Iowa denied Pete Buttigieg the normal fillip from an Iowa win; he will fade unless he can finish among the top-2 in at least 3 states on Super Tuesday. In the latest debate, Warren continued to attack Bloomberg rather than her main rival for the “socialist” vote, so she is likely to be irrelevant after Super Tuesday. Klobuchar and Steyer will be under pressure to withdraw thereafter too. 

The Socialist who has sat as an Independent (rather than a Democrat) in the Senate will likely appear the presumptive Democratic nominee after Super Tuesday a week hence. Once Warren withdraws, he will have the left field of the Democratic party to himself, while the moderate centre will have at least two competitors (Biden and Bloomberg), and possibly a third (Buttigieg), ensuring that Sanders’ delegate lead mounts throughout the busy month of March. Markets are right to be concerned about the growing risk of severe economic disruption from Covid-19, which has paralyzed China’s trade in goods and services for a month now — with widening effects on Japan, Korea and South-east Asia, with contagion spreading to Iran and Italy. As East Asia suffers a sharp economic slowdown, over-capacity issues in China will be exacerbated — creating the possibility of an accelerated financial crisis there, and a feedback loop on the global economy. The rising probability of a Sanders-Trump presidential race (and the risk of a Socialist president) are likely to spook markets. We would recommend switching to bonds from equities.    

2. Return of Risk Aversion Raises the Ante on Fed Policy Outlook as Repo Market Stress Concerns Linger

Treasury%20debt

US Treasury investors have recently raised the ante on the Federal Open Market Committee (FOMC) about the economic and monetary policy outlook by discounting further reductions in the federal funds rate in 2020. The pessimistic economic outlook embraced by bond investors is in stark contrast to the baseline forecast of FOMC members, thereby laying the foundations of another game of chicken between the two parties. 

The FOMC can cite numerous factors that support their baseline scenario of continued growth, but supply chain dislocations in China on US activity have yet to unfold.  The FOMC will be monitoring events in China and potential transmission to the US via a number of mechanisms. 

While aggregate US export exposure to China is small, the FOMC will look at the impact of events on Asia’s capacity to produce and export to the US, thereby triggering a supply-side shock. Meanwhile, rising risk aversion will tighten US financial conditions, an outcome the FOMC sought to avoid last year. 

US equities will remain skittish as China’s economic data weakens, particularly given the front-end loaded gains witnessed in early-2020 based on sanguine corporate profit expectations. The worst outcome for US would be the lack of taming in the spread of the coronavirus until the summer due to the ever-rising risks of global recession in the absence of further policy easing by the Fed.

The FOMC will also need to consider the risks of a return of stress in overnight repo markets in Q2 if its monthly purchases of T-bills are scaled back in April as originally intended. The Treasury’s General Account at the Fed is both large and volatile, thereby raising the possibility of sustained funding stress in overnight repo markets as bank reserves are squeezed due to large federal government budget deficits.  

3. Cole Haan IPO – A Failing Attempt to Disrupt the Footwear Market

Image 81728678531582631665169

Cole Haan Inc (CLHN US) was formerly a part of Nike Inc Cl B (NKE US) and was then acquired by a private equity firm- Apax Partners in 2013 with the aim of disrupting the conventional dress footwear industry. Cole Haan is the first footwear company to go public after Crocs Inc. and Heelys Inc. in 2006. Cole Haan has not yet released its IPO pricing details, but according to the company, funds are expected to be given to the owners. In this note, we have analysed Cole Haan’s background and its business model. Based on our initial analysis, the fundamentals of the company are quite mixed, and we are quite sceptical on the reasons for the IPO. Our main points are:

  • Cole Haan is operating in a highly competitive market holding only an insignificant market share in the US footwear industry (NA footwear revenue is only c.0.7% of the total US footwear revenue). Although the brand was acquired to disrupt the traditional footwear market, the company does not seem to have really demonstrated a competitive edge in doing so. Cole Haan does not seem to have exceptional brand power when compared to leading brands like Nike, Adidas, Clarks, Crocs, and Timberland in the footwear market.
  • In an attempt to improve sales growth and presence globally, the company is starting to rely on distributors instead of its direct-to-consumer channels (DTCs). It seems that, although Cole Haan intended to bring its innovative product to consumers directly, the process has not been very effective. DTCs contribute to a larger share of revenue (60% of total revenue) but its share of total revenue has been declining over the past two years. This has also affected the company’s GPM to an extent and could possibly affect future growth of its products if its partners do not give the brand the necessary promotional attention.
  • The outlook for the footwear segment looks reasonable with the on-going trend of online sales. However, revenue growth is in the single digits. Cole Haan expects growth in e-commerce to aid sales via its online platform (website and mobile). However, online sales platforms seem to work better for apparel products than footwear. Thus, even though e-commerce growth prospects are evident, we do not think they are quite as attractive for footwear players like Cole Haan.
  • Moreover, the increasing gearing level coupled with IPO proceeds being used to pay off existing shareholders, raises concerns about whether the IPO is being used to raise corporate value or provide existing investors with an exit from a business that is reaching its ceiling.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.