Thursday, July 13, 2017

Advanced Micro Devices (Symbol $AMD) Is In A Nice Short Position -- Sell @ $14.50; +/- .25

Thursday, July 13, Morning Global Market Roundup: Shares, Bonds Rally As Markets Count On Patient Fed

By Wayne Cole
July 13, 2017

Asian shares scaled a two-year top on Thursday as investors wagered policy tightening in the United States would be glacial at best, lifting Wall Street to record peaks and lowering bond yields almost everywhere.

The star performer was the Canadian dollar, which rocketed to 11-month highs after the country's central bank hiked rates for the first time in seven years and left the door wide open to further moves.

Yet the overall mood was one of relief that Federal Reserve Chair Janet Yellen had not sounded more hawkish in her appearance before Congress, a green light for risk taking.

Sentiment got another boost when China reported upbeat data on exports and imports for June, helping the blue-chip CSI300 index up 0.4 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.2 percent to its highest since May 2015.

Australia's main index jumped 1 percent, while South Korea rose 1.1 percent to a record after its central bank kept policy easy to support consumer spending.

Japan's Nikkei was restrained by a firmer yen and managed only a 0.15 percent gain.

On Wall Street, the Dow rose 0.57 percent, while the S&P 500 gained 0.73 percent and the Nasdaq 1.10 percent. The rate-sensitive S&P 500 real estate index jumped 1.3 percent, its biggest gain in about four months.

Equities were underpinned by a drop in bond yields as Yellen sounded cautious on inflation and noted the Fed would not need to raise rates "all that much further" to reach current low estimates of the neutral funds rate.

"The market did perceive a greater degree of anxiety over inflation – at the margin," said Westpac's U.S. economist, Elliot Clarke. "To our mind, this is unlikely to get in the way of another hike this year."

"Two further hikes in 2018 will likely be justified by conditions. However, the case for additional hikes thereafter is nowhere near being made."

Indeed, markets doubt even that modest tightening will ensue and imply only a 50-50 chance of a rise by December.

Oh Canada

Treasuries rallied in reaction, with yields on two-year notes falling to three-week lows, as did bonds in Europe and Asia.

The odd man out was Canada, where yields hit their highest since late 2013 after the Bank of Canada raised rates a quarter point saying the economy no longer needed as much stimulus.

The Canadian dollar notched its biggest percentage gain since March 2016 and was last trading near one-year peaks at C$1.2740.

The main loser was the U.S. dollar which slipped to 112.97 on the yen, while the euro edged up to $1.1437. Against a basket of currencies, the dollar was pinned just above nine-month lows at 95.602.

The drop in U.S. yields benefited gold, which pays no interest, and nudged the precious metal up 0.3 percent to $1,223.67 and away from its recent trough of $1,204.45.

Oil prices flatlined as producer club OPEC said it expected demand for its crude to decline next year as rivals pump more, pointing to a market surplus in 2018 despite efforts to tighten supply.

Brent crude futures were up 1 cent at $47.75 a barrel, while U.S. crude was unchanged at $45.49.

Article Link To Reuters:

Oil Stable As Strong Chinese Demand Eases Concern Of Ongoing Glut

By Henning Gloystein
July 13, 2017

Oil prices were stable on Thursday as strong demand from China eased concerns of an ongoing fuel glut.

Brent crude futures were at $47.75 per barrel, up 1 cent from their last close.

West Texas Intermediate (WTI) crude futures were at $45.48 per barrel, down 1 cent from the previous session's close.

China imported 212 million tonnes of crude oil, or 8.55 million barrels per day (bpd), in the first six months of the year, up 13.8 percent on the same period in 2016, customs data showed on Thursday, making China the world's biggest crude importer ahead of the United States.

The strong demand from China eased concerns of an ongoing fuel supply overhang.

The Organization of the Petroleum Exporting Countries (OPEC) said late on Wednesday that the world would need 32.20 million bpd of crude from its members next year, down 60,000 bpd from this year, as consumers have increasing choices of supply from outside OPEC.

Meanwhile, OPEC said its output rose by 393,000 bpd in June to 32.611 million bpd. The gain was led by Nigeria and Libya.

This came despite a pledge by OPEC to curb output by about 1.2 million bpd between January this year and March 2018, while Russia and other non-OPEC producers say they will hold back half as much.

Despite the ongoing supply overhang, there are signs of a gradual reduction in the global glut.

In the United States, crude oil inventories last week dropped the most in 10 months.

Crude inventories fell 7.6 million barrels in the week to July 7, to 495.35 million barrels. The decline was the biggest since the week ended Sept. 4.

While U.S. crude inventories remain far above their five-year average, stocks have fallen 7 percent since record levels from late March.

"U.S. inventory numbers confirmed that a drawdown (of excess inventories) was in train," ANZ bank said.

Article Link To Reuters:

How Brexit Is Set To Hurt Europe’s Financial Systems

If Europe cuts off London’s deep financial markets when Britain leaves the EU, costs will likely rise for Europe’s banks and companies. Both Britain and Europe could suffer.

By Anjuli Davies, Huw Jones and Andrew MacAskill
July 13, 2017

Like many multinational companies, Italian engineering business Brembo relies on London to run its finances. The company, based close to the Alps, makes brakes for Formula One cars and motorbikes and sells them in 70 countries. Hundreds of millions of euros pass through its bank accounts each year – and London is the hub for those flows.

As Britain prepares to leave the European Union, the company says it may now have to shift the centre of its banking operations to Frankfurt. If Brexit happens with little provision for London’s financial services, banks, funds and insurers in London will lose their ability to sell many of their services to European companies.

Such upheavals will hurt not just London, say bankers and businessmen, but Europe as well. Financial firms say such shifts will mean the cost of banking for European companies will have to rise, though it is not clear yet who will pick up the bill – the banks or their clients.

“At the end of the day it will not be a problem for Brembo, but for our bank,” said Matteo Tiraboschi, executive vice president of Brembo, in an interview at the company’s headquarters in Bergamo. “We expect to have the same service for the same price.”

Brembo’s main bank, Citigroup, declined to comment.

Interviews with scores of senior executives from big British and international banks, lawyers, academics, rating agencies and lobbyists outline some of the dangers for companies and consumers from potentially losing access to London’s markets.

The EU needs London’s money, says Mark Carney, governor of the Bank of England. He calls Britain “Europe’s investment banker” and says half of all the debt and equity issued by the EU involves financial institutions in Britain.

Rewiring businesses will be expensive, though estimates vary widely. Investment banks that set up new European outposts to retain access to the EU’s single market may see their EU costs rise by between 8 and 22 percent, according to one study by Boston Consulting Group. A separate study by JP Morgan estimates that eight big U.S. and European banks face a combined bill of $7.5 billion over the next five years if they have to move capital markets operations out of London as a result of Brexit. Such costs would equate to an average 2 percent of the banks’ global annual expenses, JP Morgan said.

Banks say most of those extra costs will end up being paid by customers.

“If the cost of production goes up, ultimately a lot of our costs will get passed on to the client base,” said Richard Gnodde, chief executive of the European arm of Goldman Sachs. “As soon as you start to fragment pools of liquidity or fragment capital bases, it becomes less efficient, the costs can go up.”

UK-based financial firms are trying to shift some of their operations to Europe to ensure they can still work for EU clients, but warn such a rearrangement of the region’s financial architecture could threaten economic stability not only in Britain but also in Europe because so much European money flows through London. European countries, particularly France and Germany, don’t share these concerns, viewing Brexit as an opportunity to steal large swathes of business away from Britain and build up their own financial centres.

Britain alone accounts for 5.4 percent of global stock markets by value, according to Reuters data. Valdis Dombrovskis, the EU financial services chief, said the EU will still account for 15 percent of global stock markets by value without Britain, and that measures were being taken to strengthen its capital markets. But he added: “Fragmentation is preventing our financial services sector from realising its full potential.”

Industry figures have similar concerns. Jean-Louis Laurens, a former senior Rothschild banker and now ambassador for the French asset management lobby, told Reuters: “If London is broken into pieces then it is not going to be as efficient. Both Europe and Britain are going to lose from this.”

Money Machine

London is currently home to the world’s largest number of banks and hosts the largest commercial insurance market. About six trillion euros ($6.8 trillion), or 37 percent, of Europe’s financial assets are managed in the UK capital, almost twice the amount of its nearest rival, Paris. And London dominates Europe’s 5.2 trillion euro investment banking industry.

London’s markets insure French nuclear reactors and Greek ships. German carmakers borrow money for expansion. Dutch pensioners invest their savings.

Britain has the largest foreign exchange market and the second largest derivatives market in the world, accounting for just under 40 percent of the world’s dealings in those markets, while Paris, London’s nearest EU rival, handles under 5 percent, according to the Bank for International Settlements.

Each year, euro, yen and dollar trades worth about a combined $869 trillion happen in London - more than in all the euro zone countries combined - according to the City of London Corporation.

Barclays Chairman John McFarlane told Reuters that a bad trade deal between Britain and the EU risks harming the international economy, and that some banks may decide to abandon some lines of business altogether because they will be too expensive.

“Brexit will put a spotlight on the economic attractiveness of activities you are moving,” he said. “Everybody will say, ‘If you move, is it worth it financially?’”

Bankers say a number of areas are likely to be affected when Britain leaves the EU. The first is Europe’s ability to sell sovereign debt. At present, when a country, say Portugal or Greece, needs to sell debt to keep its hospitals or schools running, it will tap the bond markets, arranged by banks primarily in London. London-based firms are currently responsible for trading about 70 percent of sovereign debt in Europe, according to bankers.

But some banks are already withdrawing from arranging the bond sales because it is unprofitable. In the first quarter of the year five banks stopped being primary dealers in various European country bonds, Reuters reported in January.

The chief executive of one of Britain’s largest banks and one of the largest underwriters of European sovereign debt told Reuters the European Central Bank called him asking him not to abandon selling European debt because of Brexit. “They (EU countries) cannot be shut out from London's capital markets,” he said. “It’s suicide.”

The ECB declined to comment.

A second area that may suffer is the selling of derivatives for companies to buy protection against swings in the U.S. dollar or spikes in the price of oil. Bankers say rivals to London will offer a smaller array of products and at a higher cost because there will be fewer banks offering these services.

A third area likely to be affected is the clearing of derivatives denominated in euros, an activity that London dominates. EU policymakers want such clearing, which ensures the safe completion of a trade, to be shifted to the euro zone after Brexit. Financiers say that would bump up trading costs for continental customers that deal in a variety of currencies because they will have to route trades through multiple clearing houses, requiring them to post more collateral to back those trades.

The Futures Industry Association, a global derivatives industry body, says forcing a shift in euro clearing would increase the amount of cash needed to back trades by about $80 billion. German clearing house Eurex, which stands to gain from a shift, said the increase would be a far more modest $3 billion to $9 billion.

The global head of foreign exchange markets at one of the world’s largest banks said if the amount of cash required to back trades went up as much as $80 billion – nearly a doubling of the current amount - then “it’s going to stop the market.”

While bankers say it is hard to estimate how much extra it will cost a European company to borrow without direct access to London’s markets, the Association for Financial Markets in Europe said in a report early this month that European customers are being overly optimistic if they think lenders will pick up the bill.

The report said for companies similar in size to Brembo “any increase in the cost of debt funding and derivatives would therefore have a material impact on the business, making it less competitive.”

Brembo’s Tiraboschi disagreed. “As far as Brembo is concerned, we do not have indications for a growth in financing costs linked to Brexit,” he said.

Reality Check

Last autumn, the British government set about persuading Europe of the risks the EU faces if London’s position as a financial centre is damaged. A research paper by Ernst & Young surveying major corporates, including Volkswagen and Airbus, found that companies across Europe were worried about the cost of funding rising. The paper, which was commissioned by the City of London Corporation, a municipal body that runs the financial district, was sent to policymakers across the EU.

“They are not getting down on one knee begging their governments to be nice to Britain.”
 -- Jeremy Browne, the City of London Corporation’s special envoy for Europe, referring to European businesses facing the prospect of higher financing costs

The British government predicted that European companies would tell their respective governments they face higher costs and potential disruption, putting pressure on politicians to take this into account during Brexit negotiations.

In a speech in late June, British finance minister Philip Hammond said Europe will only hurt its own economy if it undermines London’s status as a global finance hub. “Fragmentation of financial services would result in poorer quality, higher priced products for everyone concerned,” he said.

But Jeremy Browne, the City of London Corporation’s special envoy for Europe, who has visited 26 EU countries over the past year, said many companies and politicians are willing to accept higher prices in return for sticking to EU principles and not giving London any special exemptions.

“They are not getting down on one knee begging their governments to be nice to Britain,” Browne said.

The UK Treasury declined to comment.

With formal divorce talks now triggered, the EU is wasting no time in regrouping to try to replicate Britain’s financial services on euro zone soil, egged on by the powerful European Central Bank (ECB). In 2015, the EU launched a “capital markets union” project to improve the way companies can raise funds from stocks, bonds and other securities. That project is now being given more priority, the European Commission said in early June.

The ECB says that a “new equilibrium” may be beneficial in the long term to euro zone banks looking to take advantage of business opportunities created by Brexit – while an increase in financing costs is likely to be only “modest” in the near term.

Christian Noyer, a former central bank governor of France, is now wooing financial firms to relocate to France. He told Reuters that if European banks had time to adapt “they will do exactly the same job” as London does now. “I don't believe for a minute it will be detrimental,” he said.

At least eight European cities are vying for financial firms to set up entities in Europe, hoping to attract their highly-paid employees. The French government has been the most aggressive, dangling the promise of tax breaks and flexible labour laws to complement the French capital’s cultural charms.

The chief financial officer at one of Europe’s biggest banks said he sat through a recent presentation by French officials highlighting the restaurants and nightlife in Paris. “It was all very Moulin Rouge,” he said.

A senior German lobbying official, who recently held meetings with the German government, said there is a feeling that Britain is failing to understand that the European project comes first. “British politicians think they are in a position whereby the EU 27 will say, ‘OK, there are lots of problems for the EU so we will agree on a trade deal as otherwise the EU will be faced with turmoil as well.’ They just don’t get it,” he said.


Bankers are sceptical about Europe’s efforts to replicate London. They say continental Europe is too leery of Anglo-Saxon free-market capitalism - which many politicians and economists blamed for the 2008 to 2009 global financial crisis.

London’s dominance as a financial centre has been built up over decades and would be very hard to replicate, especially with any speed, given the global talent pool, the widespread use of the UK legal system and the vast amount of money that is managed through London, say executives.

The head of European operations at a large U.S. investment bank said that if Europe ever managed to reform its labour laws, develop its capital markets and attract a global workforce, then it would mark the decline of London as a financial centre. But Europe may miss this opportunity, he said, because of infighting between EU countries and no clear plan for where jobs and assets will end up.

Discord between the euro zone’s three largest countries – Germany, France and Italy - initially stalled the ECB’s efforts to come up with a way to force euro clearing out of London and put it under its watch, three sources told Reuters in May.

Europe “will end up with a hodgepodge of financial centres,” the U.S. executive said. This is “a humongous risk,” he said. “If Europe becomes so unattractive, we just won’t be as big in Europe as we are today. Europe won’t win.”

Instead, some bankers predict the big gainer could be New York, 3,500 miles away. They say it is the only place that can replicate London’s depth of markets and expertise.

Article Link To Reuters:

ObamaCare Freedom And Failure Options

Ted Cruz’s idea is good policy, but is it a political hill to die on?

By The Editorial Board
The Wall Street Journal
July 13, 2017

Senate Republicans will roll out a revised health-care bill as soon as Thursday, and then begin a final drive to a vote this month. So this is a moment to take stock of some of the larger political dimensions of the ObamaCare debate.

Legislative progress has been slower and more difficult than it might have been for a party that ran for seven years on a repeal-and-replace agenda. The benefit is that Senate Republicans are better educated about health-care substance and prepared to make hard governing choices—if they can persuade the remaining Bartlebys.


One remaining debate is over Ted Cruz’s “freedom option.” The Texas Senator’s amendment says that any insurer that offers at least one ObamaCare-compliant plan could also sell other types of coverage off the exchanges. The expectation is that a more competitive and dynamic insurance market will emerge outside of ObamaCare. Released from federal mandates and price controls, insurers could offer many more innovative products designed for individuals, rather than standardized coverage planned in Washington.

Mr. Cruz acknowledges that insurance markets could “segment,” meaning that younger and healthier people would gravitate to the Cruz option, where premiums are likely to be much cheaper. Older people with more health expenses would remain on ObamaCare, which bars insurers from charging higher premiums based on health risks and bans exclusions for pre-existing conditions.

ObamaCare’s logic is that low-cost people must be charged more in order to charge high-cost people less. But these transfers aren’t a good value for low-cost people, which is why enrollment in ObamaCare has been so disappointing. This in turn has led to a cycle of higher premiums and less enrollment.

The logic of the Cruz proposal is that there is a rough consensus among Republicans that government should guarantee access to coverage for people with pre-existing conditions. In that case, government should pay for this guarantee, in the form of a de facto high-risk insurance pool, rather than hiding the cost in cross-subsidies imposed on private citizens.

The virtue of this approach is transparency and honesty. In a bifurcated market, premiums would be much higher for ObamaCare plans. But they’d be offset for consumers by much higher federal subsidies that rise with premiums, and the Senate bill also includes at least $50 billion for market stabilization and probably more once this exercise concludes. Federal spending might be higher as a result, but at least the taxes to pay it aren’t indirect and unfairly distributed.

One danger is that the Cruz amendment could precipitate a wave of market failures, where the ObamaCare side becomes so expensive that insurers quit even if they have to quit the deregulated side too. People whose incomes are too high to qualify for ObamaCare subsidies and then develop medical problems would also get a worse deal.

The political disadvantage is reopening the emotional pre-existing conditions brawl, which the GOP doesn’t want to fight. But under the Cruz plan, they could point out that ObamaCare protections would remain in place while adding more options for people who want them.

Mr. Cruz’s amendment has the makings of a sensible political compromise between conservatives and moderates—i.e., free-market prices in health care, with subsidies for those who can’t afford free-market prices. But if moderates make the Cruz plan a red line, conservatives will have to decide if they want to insist on it. Is the freedom option worth losing the other gains of the overbill bill, including the first major Medicaid reform since 1965, repealing the individual and employer mandates, reversing a chunk of ObamaCare’s tax hikes and other types of deregulation such as state waivers?


Meanwhile, some GOP centrists are still pretending that if the bill dies, both parties will come together and pass some glorious compromise. This ignores the vast philosophic differences between conservatives and liberals on health care and the role of government, and it assumes that Chuck Schumer and the Democrats who have pledged total resistance to Donald Trump will negotiate in good faith. There will be no such mercy.

GOP moderates have already moved the health bill toward the political center and earned zero Democratic interest in return—not even from Joe Manchin, though Mr. Trump carried West Virginia by 42 points, or Heidi Heitkamp, though Mr. Trump won North Dakota by 36. On Monday Mr. Schumer sent a letter laying out his price to start negotiations, citing four bills as the basis for his “bipartisan” terms—all sponsored by Democrats alone.

Politically, a grand bargain would throw a lifeline to the likes of Missouri Democrat Claire McCaskill, whose home state is facing an exodus of ObamaCare insurers. She’ll claim she voted to solve a problem Republicans caused, even if the practical effects are nil.

Republicans running for re-election in 2018 will see no similar upside, because no deal the GOP could cut with Democrats can repair the ObamaCare exchanges before the election while their pro-repeal voters will be demoralized. The trade Mr. Schumer is offering is political insulation for Democrats while inviting Republicans to accept the blame for surging premiums and diminishing coverage.


Once Senators have time to inspect the new bill, better to vote for the motion to proceed and bring the legislation to the floor. That will start a robust debate and the amendment process. Every idea will get a vote and the public can see which command a majority.

Republicans are fast approaching a binary choice. They can either repeal and replace ObamaCare with a center-right reform, or they can collapse in failure and throw power to Mr. Schumer. Republicans who issue ultimatums over this or that detail are supporting the failure option.

Article Link To The WSJ:

Trump Wanted To Collude, But Did Putin?

The most interesting part of this story is about how the Kremlin responded to Trump's open invitation.

By Leonid Bershidsky
The Bloomberg View
July 13, 2017

Political memories are short, but they shouldn't be this short. Amid all the outrage about Donald Trump Jr.'s willingness a year ago to find out what dirt the Russian government may have had on Hillary Clinton, it's worth remembering his father's press conference on July 27, 2016.

"I will tell you this, Russia: If you’re listening, I hope you’re able to find the 30,000 emails that are missing,” Trump told reporters in Florida. He was talking about Clinton's emails from her time as secretary of state that she had reportedly failed to turn over to the government. "Let's see if that happens. That'll be next." Trump also made it clear that he considered any foreign meddling in the election a sign of disrespect for the Obama administration -- something that should play in his favor with voters.

Trump's opponents were as indignant then as they are today. "This has to be the first time that a major presidential candidate has actively encouraged a foreign power to conduct espionage against his political opponent," said Jake Sullivan, policy adviser to Hillary for America. Former Central Intelligence Agency Director Leon Panetta said Trump's comments were "beyond the pale" because he was "asking the Russians to engage in American politics."

The U.S. public has known for a year that Trump would have no scruples about using the spoils of Russian spying against Clinton. (He tweeted later that he'd encourage the Russians to turn over any Clinton emails to the Federal Bureau of Investigation -- but that was just an attempt to divert the criticism).

So the public hasn't found out much that is new from the decision of Donald Trump Jr. to take a meeting with a Russian lawyer who had been described to him in an email as a Russian government representative bearing anti-Clinton gifts for his father. In the summer of 2016, with Trump far behind in the polls, the family would have accepted that kind of help from the devil himself, not just Russian President Vladimir Putin. The candidate wasn't making much of a secret about it. Moreover, unlike his son, he expressed willingness to accept Russian intelligence as a campaign tool after the Democratic National Committee hack was reported. President Obama and Clinton made clear they would treat this as a national security breach rather than another part of winning the race for the White House. Trump made no such distinctions.

Almost all Trump supporters I talked to at rallies across the U.S. last year explained their preference by praising Trump's perceived frankness. "He tells it like it is," I heard again and again. In this case, too, he unashamedly spoke his mind, doing just what his voters admired. Many of them liked Putin more than Clinton, too, so accepting his help against her didn't look all that un-American to them.

Thanks to those people, Trump is now U.S. president. It's only natural that his sole comment on his son's decision to publish what many saw as incriminating emails -- and still more saw as a gigantic lapse in judgment -- was to praise his openness and transparency. It was another way to protect his brand’s strongest selling point to his base.

I find a different aspect of the Russian lawyer episode more intriguing than Donald Trump Jr.'s willingness to accept Russian help.

It's probably safe to say that lawyer Natalia Veselnitskaya delivered no such help -- not because both Trump Jr. and Veselnitskaya say so, but because the Trump campaign never revealed any kompromat, to use a Russian word, on Clinton's ties with Russia. Music promoter Rob Goldstone, who arranged the meeting, emailed the candidate's son that this is what Veselnitskaya would bring, but he was clearly wrong, intentionally or not.

It probably wouldn't have been hard for the Kremlin to use Trump's Russian business partners -- such as the Agalarov family, involved in arranging the Veselnitskaya meeting -- to pass on information. It missed the opportunity, however. Months into the investigation of Russian election meddling, no information has come to light suggesting that Russia actually provided any ammunition to the Trump campaign, even though we know the Trumps would have welcomed it and a Republican operative, Peter W. Smith, also tried to solicit it, perhaps acting on the campaign's behalf.

It takes two to collude. The Trumps and other people on their side were ready to dance. But the partner, apparently, was a no-show. At most -- and that is still not proven -- the Russian government provided the spoils of several hacks to WikiLeaks, not to the Trump campaign.

If it's true that the Kremlin did not want to collude with the Trump camp -- and it certainly looks that way – its possible reasons are the most interesting part of the story. An obvious explanation that comes to mind is that Putin didn't believe in his ultimate victory and so didn't want be caught helping him because of possible retaliation from President Clinton. The only thing for Putin to like about Trump is the chaos he can cause with his overconfident novice's ways, but it can also be a threat. The Kremlin ultimately likes predictability and is itself predictable.

Another possible explanation is that Putin's U.S. experts thought helping Trump directly could have harmed his campaign. Where Trump was openly careless, the Russians are crafty enough to anticipate the political fallout. WikiLeaks damaged Clinton without directly involving Trump in the dirty business of hacking and colluding.

This, of course, is only guesswork. Yet I wouldn't completely give up hope that we'll know one day. Putin waited a year before he revealed the details of his planning for the 2014 Crimea annexation. Perhaps a moment will come when he feels free to talk about the 2016 U.S. presidential campaign in a similar way, and we'll be able to piece together the story of the Kremlin's hopes and fears for that race.

Article Link To The Bloomberg View:

Democrats Introduce New Bill On Russia And Iran Sanctions

By Patricia Zengerle
July 13, 2017

Democrats in the U.S. House of Representatives introduced a new version of a Russia and Iran sanctions bill on Wednesday, hoping to send a message to President Donald Trump to maintain a strong line against Moscow.

Seeking to force Republican House leaders to allow a vote, Democrats on the House Foreign Affairs Committee introduced legislation unchanged from what passed the Senate by 98-2 on June 15 but has been stalled ever since.

While the new bill is identical to what the Senate passed, it will be labeled as House legislation to avoid a procedural issue that prompted House Republican leaders to send the measure back to the Senate.

However, there was no sign of support from Trump's fellow Republicans, who control majorities in both the House and the Senate and control what legislation comes up for a vote.

AshLee Strong, a spokeswoman for Republican House Speaker Paul Ryan, dismissed the Democrats' action as "grandstanding."

The measure was introduced by House Democratic Leader Nancy Pelosi and Representatives Steny Hoyer, the No. 2 House Democrat, and Eliot Engel, the ranking Democrat on the House Foreign Affairs Committee.

Democrats have accused House Republicans of stalling the sanctions package because of Trump administration concern about provisions setting up a process for Congress to approve any effort by the president to ease sanctions on Russia.

Trump's attempts to mend relations with Russia have been hindered by allegations that Moscow interfered in the 2016 U.S. election and colluded with Trump's campaign. Russia denies meddling and Trump says there was no collusion.

The issue has become even more heated since emails released Tuesday showed that Donald Trump Jr, the president's eldest son, eagerly agreed last year to meet a woman he was told was a Russian government lawyer who might have damaging information about Hillary Clinton, the Democratic rival in the 2016 presidential election.

Lawmakers and aides said news of that meeting, and the failure to disclose it, added new urgency to the push to pass the Russia package.


House Republican leaders said they had not taken up the original Senate bill because it violated a constitutional requirement that all legislation affecting government revenues originate in the House, known as a "blue slip" issue. Democrats and some Republicans who backed the bill scoffed, saying the problem could have been quickly remedied.

"Dilly-dallying around about the blue slip issue was just a ridiculous waste of time. We could have fixed it in five minutes," Senator Bob Corker, the Republican chairman of the Senate Foreign Relations Committee, told reporters.

The Senate changed the bill to address that issue, but also tweaked it in a way that Democrats said weakened a provision requiring Congress to approve any effort by the president to ease sanctions on Russia.

The new bill introduced on Wednesday would eliminate that change to allow House Democrats, as well as Republicans, to force a vote on a resolution of disapproval of any effort to ease Russia sanctions.

"I don't believe that having the president's party in a position to protect him from any oversight is good policy for our country," Hoyer told reporters.

Ryan told a news conference he wants to move a strong bill regarding sanctions on Russia as quickly as possible but that the legislation still faced procedural and policy hurdles.

The U.S. energy industry has been lobbying against the bill and some Republican House members, particularly from oil-producing states, have said they might want changes.

The Russia sanctions legislation was written as an amendment to a bill imposing new sanctions on Iran over issues including its ballistic missile program. Besides establishing the review process, it puts into law sanctions previously imposed on Moscow via presidential executive order and introduces new sanctions.

Article Link To Reuters:

Oil Bosses See More Pain As Price Recovery Slips Back To 2020

It could be at least 2020 before slump ends, Pouyanne says; ‘Lower for longer’ is new normal: Baker Hughes CEO Simonelli.

By Rakteem Katakey
July 13, 2017

Three years into the biggest oil downturn in a generation, industry bosses see the recovery slipping further from view.

It could easily take until the end of the decade for better times to return to an industry that’s already endured a longer slump than most people expected, according to Total SA Chief Executive Officer Patrick Pouyanne and Weatherford International Plc head Mark McCollum. Executives gathering at the World Petroleum Congress in Istanbul said they’re still focused on repairing battered finances and resetting their operations to withstand low prices.

“In terms of the magnitude of damage this is by far the worst” industry downturn, McCollum said. It may take until 2020 for demand growth to accelerate enough, or for a supply gap to emerge that U.S. producers can’t fill. “That’s when pricing will begin to rise. Until then it feels very tenuous.”

That’s an enormous turnaround from the last World Petroleum Congress in Moscow in 2014, when people were speculating oil could rise as high as $125after the precursor to Islamic State seized parts of northern Iraq. Three years on, Iraq has driven the Islamist extremists out of the city of Mosul, but the U.S. shale industry that triggered the slump to below $30 has survived and thrived. Even as OPEC curbs production, banks including Goldman Sachs Group Inc and BNP Paribas SA are cutting their price forecasts for the years ahead.

New Normal

“Lower for longer is the new normal,” Lorenzo Simonelli, CEO of Baker Hughes Inc., said in Istanbul. Exploration has slowed and producers outside the shale areas in the U.S. aren’t increasing spending, he said.

Exxon Mobil Corp. is debating which projects will be the most resilient as the price-slump continues, Stephen Greenlee, president of the company’s exploration unit, said at the conference. BP Plc CEO Bob Dudley said his company had its “plate full” with the current roster of projects amid an abundance of supply.

Crude is still languishing below $50, half the level of three years ago. Dinesh Kumar Sarraf, chairman of India’s state-run Oil & Natural Gas Corp., said companies must learn to live with this and even be prepared for a “lower forever oil price.”

“As companies we have to remain very disciplined about spending and not assume that the price will go up,” BP’s Dudley said. “The years of $100 oil will turn out to be an aberration. We used to make money at $40 oil, we used to make money at $25 oil.”

Worrying Outlook

Dudley, who was among the first Big Oil bosses to predict the downturn would endure longer than expected, does see glimmers at the end of the tunnel. Prices will eventually rise as demand surpasses supply and erodes overloaded inventories.

“It’s lower for longer, but not lower forever,” he said at an industry dinner in Istanbul.

The price collapse killed off about $1 trillion of potential energy investments and fewer new deposits are being discovered, said Saudi Arabian Oil Co. Chief Executive Officer Amin Nasser. The outlook for supplies is “increasingly worrying” and the company will invest more than $300 billion over the next decade to maintain its spare oil-production capacity so it can help fill the impending shortfall, he said.

Sooner or later the market will catch up with the decline in spending, said Mark Richard, senior vice president of global business development and marketing at oil-services giant Halliburton Co.

“You can’t have sustainable business without investment,” Richard said. “You’ll see some kind of spike in the price of oil, maybe somewhere around 2020, 2021."

That wouldn’t be a welcome development to consumers, for whom the talk at Istanbul wasn’t of hardship and survival, but of the benefits of abundant supply.

India, the world’s second-largest nation in terms of population, imports more than 80 percent of its crude oil and spent $134 billion in the two years to March 2017, 47 percent less than the preceding two years, according to data from its Oil Ministry.

“The new normal has emerged,” Petroleum Minister Dharmendra Pradhan said in an interview at the Congress. “This price will stay. This is a reasonable price for everyone.”

Article Link To Bloomberg:

Big Oil Stays Wary On Iran

BP CEO says firm is looking elsewhere for deals.

By Benoit Faucon
The Wall Street Journal
July 13, 2017

Iran’s ambitious agenda for its oil-and-gas industry is running up against the caution of big energy companies.

At a major energy conference here, Iranian officials said French oil giant Total SA’s TOT 0.08% commitment of $1 billion toward a gas project this month marked a new chapter in the country’s energy business since the end of Western sanctions. Iranian officials promised 10 contracts like it in the next year and said they were seeking $92 billion in foreign investment to raise oil production by a third and gas exports by 15-fold by 2021.

“Our hands are full,” Iran’s Deputy Oil Minister Amir Hossein Zamaninia told reporters here at the World Petroleum Congress, saying 25 contracts were being negotiated with foreign companies. “We think that the situation is normal enough now for major international oil business to get engaged in Iran.”

But other big oil companies have been more shy than Total about wading into Iran, even with its enormous oil and gas reserves.

Western companies are wary of running afoul of remaining U.S. sanctions on Iran for weapons, human rights and terrorism allegations. Overall, the industry is still smarting from an oil-price downturn that isn’t letting up in its third year, making companies wary of new spending.

Speaking at the same conference here, BP BP 1.48% PLC Chief Executive Bob Dudley said he was looking beyond Iran for now, as the company had already committed to $15 billion in spending elsewhere this year.

“We have a full plate,” Mr. Dudley said at a news briefing. “We have to stay on a capital diet.”

U.S. companies like Exxon Mobil Corp. and Chevron Corp. are barred from doing business in Iran, but European companies like London-based BP can still try to make a deal work. One factor slowing things down: U.S. President Donald Trump has criticized the deal over Iran’s nuclear program and threatened to pull out or tighten sanctions.

“BP’s decision to be cautious on Iran [was] a ripple effect” of U.S. pressure against doing business in Iran, Mr. Zamaninia said.

A BP spokesman declined to comment.

Total’s commitment in Iran is evidence that oil companies have concluded “the return of sanctions is very unlikely, if not impossible,” Mr. Zamaninia said. Total said it was in compliance with all sanctions.

Mr. Zamaninia has tried to use the World Petroleum Congress conference here as a sort of coming out party for Iranian energy investments after the Total deal. He cracked jokes while sharing a panel with Mr. Dudley and Barry Worthington, the executive director of the U.S. Energy Association, an industry body that advocates for American oil companies.

But the panel also underscored Iran’s challenges. While Messrs. Dudley and Zamaninia talked before the panel, Mr. Dudley said they only discussed its topics—not any potential business. Mr. Dudley, a U.S. citizen, didn’t elaborate but Washington’s sanctions bar Americans from discussing oil deals with Iran.

Mr. Dudley called Total’s deal a “very good sign for the industry” but he hadn’t seen its terms. Total and Iranian officials have said the 20-year contract was longer-term than deals Iran allowed in the past and allowed the company more flexibility to recoup costs.

Total Chief Executive Patrick Pouyanne said the company and its partners were already preparing tenders to contractors in the project. Total’s partners include China National Petroleum Corp. and an Iranian company.

Royal Dutch Shell PLC signed a preliminary agreement to explore opportunities in Iranian oil fields late last year. The Anglo-Dutch company held meetings in Tehran and Dubai in the two past months with the National Iranian Oil Co. and Chinese state-run China Petroleum & Chemical Corp. to work together on an oil field called Yadavaran, according to a person familiar with the discussions. But people who work with the company said it is concerned about its exposure to the U.S. and is more selective in the choice of its banks than Total.

A Shell spokeswoman said: “Shell is interested in exploring the role it can play in developing Iran’s energy potential. We have been engaging with Iranian officials but it is still too early to discuss potential Shell investment in any project.”

Oil companies are closely watching a political debate playing out in Iran since the Total deal. On Wednesday, Iranian Oil Minister Bijan Zanganeh was grilled in the country’s parliament over what some hard-liners said was a sweet deal for Total. Some lawmakers threatened to block it, though they relented.

Iran is also working against a persistent chill in oil investments globally. While global oil and gas investments are set to increase by 3% this year, most of it is flowing to the U.S. shale oil, according to the International Energy Agency, an adviser to governments on energy issues.

Iran’s old oil fields are a challenge, requiring “patience and high technology,” Laszlo Varro, the IEA’s chief economist, said.

Further, Iran’s geopolitical risks, complex contracts and risk of sanctions could deter investors who can go to other growing oil regions like Brazil instead, Mr. Varro said. “Iran will remain under its geological potential for quite some time,” he said.

Article Link To The WSJ:

Rooftop Solar Is No Match For Crony Capitalism

Utilities want onerous fees on power generated from the sun. Environmentalists and economists should be dismayed.

By Noah Smith
The Bloomberg View
July 13, 2017

The New York Times ran an article over the weekend about efforts by utility companies to fight the spread of rooftop-solar power:

"[Rooftop solar panel] growth has come to a shuddering stop this year, with a projected decline in new installations of 2 percent, according to projections from Bloomberg New Energy Finance…Since 2013, Hawaii, Nevada, Arizona, Maine and Indiana have decided to phase out…programs that spurred explosive growth in the rooftop solar market. (Nevada recently reversed its decision.) Many more states are considering new or higher fees on solar customers."

The article chronicles how utility companies have engaged in an extensive lobbying campaign against rooftop solar at the federal and state level. These companies are big campaign donors with deep political influence. They have also been receiving assistance from the American Legislative Exchange Council and the Institute for Energy Research, two think tanks funded by the Koch family, whose sprawling company Koch Industries makes much of its money from fossil-fuel energy. With that kind of political clout, the fledgling rooftop-solar industry looks overmatched.

The clobbering of rooftop solar should cause dismay not just among environmentalists worried about global warming, but also among economists, policy makers and anyone who cares about economic efficiency. This is a case of an incumbent industry using the power of government to suppress a revolutionary new technology. That’s not good for anyone except the incumbent.

There is actually an economic case to be made against the main policy the utilities want to get rid of, which is called net metering. Net metering forces utility companies to buy surplus electricity from rooftop solar owners at the retail price. So if I have a house with solar panels that generate electricity only during the day, net metering means I can sell the electricity to the power company while the sun is shining and buy gas- or coal-generated electricity back for the same price at night. Basically, this solves the intermittency problem for solar customers -- it effectively forces utility companies to act as free energy storage for rooftop solar customers.

Here’s where a problem crops up. Suppose that I’m a rooftop solar owner, and I want to use 15 kilowatt-hours of electricity during the day and another 15 kWh at night. My house generates 30 kWh a day. I use half of that, and thanks to net metering, I sell the other half to the power company at the retail price -- say, 12 cents per kWh. At night, I buy that 15 kWh back from the power company at that same price. I end up paying nothing at all, on net, for the day’s electricity. But the utility company had to pay to build and maintain the grid that I’m using to smooth out my power consumption. So net metering is allowing me to get more out of the system than I pay for it.

It therefore makes economic sense to charge rooftop solar owners extra to maintain the electrical grid -- without the grid, after all, a person using only rooftop solar wouldn’t have any electricity at night. It also makes sense to charge solar homes an extra fee to cover the costs utilities pay to increase and decrease the amount of power their plants generate over the course of the day.

What’s less clear, though, is whether states should force rooftop-solar owners to pay for the creation and maintenance of gas- and coal-fired power plants. It’s hard to know how much of the fees that utilities are imposing on rooftop-solar users around the country go toward power plant maintenance and construction, but it seems likely that many of the fees are for more than just grid maintenance. Utility companies, of course, would love to make rooftop solar users pay for fossil-fuel plants, because it would ensure that the big investments they made in the past would be guaranteed to pay off in the future. Guaranteed profit margins with zero risk are a corporate executive’s dream.

But government shouldn’t be in the business of providing risk-free profits for private businesses, and it shouldn’t bail out companies when technology disrupts their business model. Should our government have banned cars in order to save horse breeders from going out of business? I think we all agree the answer is no.

Utility companies are an interesting case, because they’re a highly regulated natural monopoly. Since it doesn’t make economic sense for multiple competing utilities to build redundant power grids in the same area, one power company will tend to become a local monopoly. To prevent customers from being gouged, governments typically limit the amount of profit utilities are allowed to make. To compensate the companies for this loss of upside, governments limit their risk, by always allowing utilities enough profit to recoup their fixed costs. This regulated monopoly model attempts to give consumers approximately the same price and service they would get in a free, competitive market.

But when technology changes rapidly, this model can hold back progress. Solar is such a case. Costs are plunging. In a free market, that kind of technological change will naturally damage the business models of companies that made big investments in older tech. If government acts to make utilities invulnerable to that disruption, then the market for electricity will be very inefficient in the long run.

It’s possible that rooftop solar is the future. Instead of generating power, the utilities of the future might simply build and maintain power grids and store excess energy in giant batteries or water reservoirs. Or rooftop solar might turn out to simply be much less efficient than utility-scale solar, in which case the utility business model might survive basically unaffected.

But whatever happens, governments shouldn’t kill rooftop solar simply to keep utilities afloat in their present, fossil-fuel-powered form. Fees for grid maintenance and variable power generation are fine, but fees shouldn’t be used to ensure that utilities never take a loss on their fossil-fuel investments. And measures to ban third-party ownership of rooftop solar are crony capitalism, plain and simple.

In the long run, the heavy hand of government almost certainly won’t kill the solar industry. Eventually, solar power will be so cheap that it makes sense to install rooftop panels even without net metering, and utilities will start switching from power plants to solar farms. But if utility lobbyists manage to delay the inevitable, the day when the economy benefits from cheap solar power will be pushed further into the future.

Article Link To The Bloomberg View:

Tech Firms Protest Proposed Changes To U.S. Net Neutrality Rules

By Angela Moon and David Shepardson
July 13, 2017

Facebook Inc (FB.O), Twitter Inc (TWTR.N), Alphabet Inc (GOOGL.O) and dozens of other major technology companies protested online on Wednesday against proposed changes to U.S. net neutrality rules that prohibit broadband providers from giving or selling access to certain internet services over others.

In support of the "Internet-Wide Day of Action to Save Net Neutrality," more than 80,000 websites - from big social media platforms like Facebook to streaming services like Netflix and matchmaking website OkCupid - are displaying banners, alerts, ads and short videos to urge the public to oppose the overturn of the landmark 2015 net neutrality rules.

Net neutrality is a broad principle that prohibits broadband providers from giving or selling access to speedy internet, essentially a "fast lane," to certain internet services over others. The rule was implemented by the Obama administration in 2015.

Changes to the rule are being proposed by the head of the U.S. Federal Communications Commision (FCC), Ajit Pai, appointed by President Donald Trump in January.

Pai wants the commission to repeal the rules that reclassified internet service providers as if they were utilities, saying the open internet rules adopted under former President Barack Obama harm jobs and investment. The FCC voted 2-1 in May to advance a Republican plan to reverse the "net neutrality" order.

During a speech in April, Pai asked: "Do we want the government to control the internet? Or do we want to embrace the light-touch approach" in place since 1996 until it was revised in 2015.

At a Capitol Hill press conference, Democrats and internet companies vowed to fight the changes and suggested internet companies could slow internet speeds. Senator Edward Markey said the internet "is under attack."

"We will not let this takeover happen," Markey said. "A free and open internet is our right and we will fight to defend it."

Major broadband providers, including AT&T Inc (T.N) and Verizon Communications Inc (VZ.N), acknowledged the public support for net neutrality. They emphasized they are in favor of an “open internet” but made clear they oppose the 2015 net neutrality reclassification order that they say could lead to government rate regulation.

FCC spokesman Brian Hart declined to comment.

FCC Commissioner Mignon Clyburn, the sole Democrat on a commission with two current vacancies, said in a statement on Wednesday she supports "those who believe that a free and open internet is a foundational principle of our democracy."

The public will have until mid-August to send comments to the FCC before the final vote.

More than 550,000 comments have been filed in the last day with the FCC and more than 6.3 million filed to date and thousands of people called Capitol Hill offices to express concerns.

Online Protest

Facebook CEO Mark Zuckerberg wrote on the social media platform, "Right now, the FCC has rules in place to make sure the internet continues to be an open platform for everyone. At Facebook, we strongly support those rules."

Twitter expressed support for the existing rules, encouraging users to protest while promoting the hashtag #NetNeutrality.

"Net Neutrality is foundational to competitive, free enterprise, entrepreneurial market entry – and reaching global customers. You don’t have to be a big shot to compete. Anyone with a great idea, a unique perspective to share, and a compelling vision can get in the game," Twitter said in a blog.

Online forum Reddit displayed a pop-up message that slowly loads the text, "The internet's less fun when your favorite sites load slowly, isn't it?"

Netflix Inc (NFLX.O) displayed banners on top of the home page while Inc (AMZN.O) posted a short video explaining net neutrality, urging consumers to send comments to the FCC.

A pop-up banner on The American Civil Liberties Union's website read: "Trump’s FCC wants to kill net neutrality. This would let the cable and phone companies slow down any site they don’t like or that won’t pay extra."

Article Link To Reuters:

To Win In Emerging Markets, Avoid The Passive Investing Rush

Stock pickers beat passive funds 60% of time over five years; Jack Bogle says it’s mathematically impossible to beat ETFs.

By Selcuk Gokoluk
July 13, 2017

When Robert Marshall-Lee started running an emerging-market equity fund six years ago, he decided the only way to withstand the surge in passive investing strategies was to stop paying attention to them.

Breaking ranks with peers whose goal was to beat the benchmark, the Bank of New York Mellon Corp. money manager instead identified about 50 companies he thought were well run and worth holding long term -- and it paid off. He delivered 12 percent annual returns in the past five years, eclipsing all competitors, human and robot, tracked by research provider Morningstar Inc.

“Competition from exchange-traded funds doesn’t even feature for me, I am very unconcerned,” said Marshall-Lee, a 22-year investment veteran whose top-performing Newton Global Emerging Fund is among the 2.6 billion-pound ($3.3 billion) portfolio he lead manages from London. “If you track the index you end up holding a lot of undesirable companies.”

In contrast to the trend in advanced countries, Marshall-Lee represents the rule rather than the exception in developing nations. Since 2012, active investors like him with funds domiciled in Europe have done better than exchange-traded funds 60 percent of the time in these markets, compared with just 20 percent in the U.S., according to Morningstar.

That defies the view held by an increasing number of market savants and participants, such as Warren Buffett, that index trackers will always win over time for the simple fact that they cost less. But then, picking stocks on the Standard & Poor’s 500 is an entirely different animal from navigating more than two dozen emerging equity markets in countries where data can be scarce and political upheaval often takes investors unaware. Some emerging-market stocks don’t even trade every day.

Dominant Stocks

There’s also the glaring detail that index funds in emerging markets almost always end up being a proxy for what’s happening in Asia -- a skew that may become more pronounced when Chinese domestic A shares are added to the benchmark MSCI Emerging Markets Index next year.

Marshall-Lee, whose fund has registered inflows in the past five years as some competitors bled assets, is free to be more nimble. He takes big bets on a few companies, with his biggest holdings including African media giant Naspers Ltd., Hong Kong insurer AIA Group Ltd., Taiwan Semiconductor Manufacturing and Indiabulls Housing Finance. He also stays away from the behemoth state-owned companies.

Tracking indexes, by contrast, often leaves investors vulnerable to the performance of the handful of dominant stocks: Samsung Electronics Co. makes up 22 percent of the Korean market, Brazil’s two biggest banks account for a fifth of the Ibovespa and just three companies represent 41 percent of Poland’s benchmark.

Good Managers

Cash is flooding into the few dozen ETFs that track indexes in developing countries nonetheless, including the Vanguard Emerging Markets Stock Fund and the iShares MSCI Emerging Markets ETF. Since January, they drew in a net $20 billion, five times more than active managers and more than double the inflow last year, Morningstar figures show.

On returns, though, ETFs fell short, producing an average of 3.6 percent return annually in the past five years in those markets versus a 4.1 percent gain from active managers, after stripping out management fees.

“If you find a good manager, the chances are there you can actually beat the benchmark,” said Daryl Liew, who helps private-banking clients manage their wealth as the head of portfolio management at Reyl & Cie SA’s Singapore unit. He advises customers to use index funds in advanced countries, but stick with active managers in emerging nations. “The challenge is finding a good manager,” he said.

And it can be a challenge. While Marshall-Lee is outperforming, more than a third of the 358 others tracked by Morningstar trailed ETFs. In the 10 years through 2016, four out of every 10 emerging-market equity funds flopped, according to S&P Global Ratings’ SPIVA Scorecord report for 2016 comparing active and passive investments.

ETF Rush

Advocates of passive investing maintain that developing countries are no exception to the rule that, over the long run, relying on a manager’s intuition won’t beat the benchmark.

Out of every $3 invested in mutual funds focused on emerging markets, $1 is now held in ETFs as passive strategies gain ground. The shift makes sense given that for all the good active managers out there, there are plenty of “dumb” managers who will lose clients money, according to Jack Bogle, the founder of Vanguard Group and creator of the first index fund in 1976.

“That is simply the math,” said Bogle in an interview. “If I sell my bad stock to another emerging-markets manager, there is just no way around the basic principle,” he said.

There are, nonetheless, reasons unique to the developing world to be wary of following the pack into ETFs. For one, they aren’t all that cheap. The average expense ratio for an emerging-market ETF is 50 basis points, or $500 for every $100,000 invested per year, double the price of passive funds geared to U.S. and European markets, according to Morningstar.

And managers have also cut fees to an average of 1.44 percentage points in 2016 from 1.8 percentage points in 2009, the data show. Marshall-Lee’s fund charges 0.95 percent.

China Slant

But cost isn’t the only consideration. Some investors worry about the Asian bias since the MSCI Emerging Markets Index allocates more than half to China, South Korea and Taiwan.

“A lot of the Chinese listed companies are controlled by the government and state interest can take precedence over profitability,” said Mathieu Caquineau, a Paris-based senior research analyst at Morningstar. “There is a risk here by going passive that should not be overlooked.”

In the first five months of 2017, as emerging markets rebounded, active managers continued to beat their passive counterparts, albeit by a smaller margin: 17.2 percent versus 16.1 percent. Marshall-Lee’s fund added 27 percent.

“Ultimately it is about getting the stock-picking right and being thick-skinned enough to use the time when the market is worried about short-term issues to buy the right companies,” he said.

Article Link To Bloomberg:

Electric Cars Are the Future? Not So Fast

Though they’re no longer ugly, impossibly expensive and impractical, electric vehicles need to out-innovate fossil fuels if they are ever to displace the internal combustion engine.

By Greg Ip
The Wall Street Journal
July 13, 2017

Skepticism of electric cars melts a bit more with each new announcement from the likes of Tesla, which last week launched production of a mass-market vehicle, and Volvo, which days later promised to phase out gasoline-only engines by 2019.

But that progress comes with two big caveats: First, it has relied on extensive public subsidies and, second, it has done little to reduce planet-warming emissions of carbon dioxide. If electric cars are ever to displace gasoline engines without government putting its thumb on the scale, they must not only keep innovating but outrun fossil fuels where productivity also keeps advancing.

Electric cars have come a long way. They are no longer ugly, impossibly expensive and impractical, thanks to technological advances that have slashed battery storage from $1,000 per kilowatt-hour in 2010 to $273 per kwh last year, according to Bloomberg New Energy Finance.

Nonetheless, that means a 75 kwh battery (about what you need for 250 miles of range) still adds about $20,000 to a car’s cost. So how do the cars sell? Public largess helps a lot.

The federal government offers a tax credit of up to $7,500 each for the first 200,000 electric or plug-in hybrid cars a manufacturer sells. Throw in state tax credits, subsidies for recharging infrastructure, relief from gasoline taxes, preferential lanes and parking spots and government fleet purchases, and taxpayers help pay for every electric car on the road.

What happens when the credits go away? When Hong Kong slashed a tax break worth roughly $55,000 for a Tesla in April, its sales ground to a halt. In Georgia, electric vehicle sales plummeted 80% the month after a $5,000 tax credit was repealed.

Tesla will find plenty of wealthy niche buyers for its high-priced cars once it exhausts its credits. But for electric vehicles as a whole, hybrids have a sobering lesson. From 2005 to 2010, some hybrid buyers enjoyed a $3,500 tax credit. Sales kept rising after the credit expired, peaking at 487,000, or 3.1% of total vehicles, in 2013, according to, when gasoline averaged $3.51 a gallon. A surge in oil supply, thanks to fracking, caused gasoline prices to plummet to $2.36 a gallon this year, and hybrids’ market share has dropped to just 2.1%.

Many optimists think falling battery costs mean electric vehicles (EVs) will inevitably displace the internal combustion engine (ICE). Last week, Bloomberg predicted electric cars would become “price competitive” with ICE cars in eight years without subsidies.

But such scenarios hinge not just on the cost of batteries but on the price of oil and the efficiency of competing vehicles. Economists Thomas Covert, Michael Greenstone and Christopher Knittel, in an article for the Journal of Economic Perspectives, estimate that at the current battery cost of $270 per kwh, oil would have to cost more than $300 a barrel​ (in 2020 dollars) to make electric and gasoline equally attractive. If battery costs fall to $100, as Tesla Founder Elon Musk has targeted, oil would have to average $90.

That could happen. But optimists “overlook the compensating effect of incumbent technology,” says Kevin Book, of ClearView Energy Partners, an advisory firm. He notes, for example, the spectacular decline in natural gas prices that hydraulic fracking has made possible. Global oil reserves have repeatedly defied predictions of shrinkage as industry innovation expands what can be recovered. And internal combustion engine efficiency typically rises 2% a year.

ClearView says that in an optimistic scenario, where battery costs fall 10% a year starting now and gasoline begins at $5 a gallon, electric vehicles will be competitive in five years. If battery costs fall just 5% a year and gasoline starts at $2.25, it will take more than 20.

This would still be a step forward for the climate, but by how much depends on other factors. Electric vehicles are meant to be recharged at night. Economists Joshua Graff Zivin, Matthew Kotchen and Erin Mansur note in a 2014 article in the Journal of Economic Behavior and Organization that night is when electricity is most likely to come from burning coal. They estimate electric vehicles account for more carbon dioxide per mile than existing cars in the upper Midwest, where coal-fired plants are more prevalent, and more than comparable hybrids in most of the country.

Federal regulators further dilute the carbon-reduction impact by giving manufacturers added credit for each electric vehicle, when complying with average fuel efficiency standards. Thus, every electric vehicle sold allows a manufacturer to sell a few more gas guzzlers and still comply.

These subsidies have clearly accomplished one goal: They’ve accelerated electric vehicle technology innovation when the private market had little incentive to invest. Yet they may not be the most efficient way to combat carbon emissions. A carbon tax, for example, would incentivize conservation and alternative fuels regardless of oil prices.

Since that’s unlikely for now, Mr. Greenstone and Sam Ori, both of the University of Chicago’s Energy Policy Institute, and Cass Sunstein, of Harvard University, suggest scrapping the current array of fuel efficiency standards and assigning manufacturers a tradable emissions cap for each vehicle. This would put alternatives to electric cars, such as more efficient gasoline or diesel engines, on a level playing field. Just in case electric vehicles don’t meet their heady expectations, the world should spread its bets.

Article Link To The WSJ:

Computers Are Getting More Expensive, And Here’s Why

Prices expected to stay higher as long as memory is scarce, threatening back-to-school and holiday shopping seasons.

By Therese Poletti
July 13, 2017

The world-wide personal computer industry saw another quarterly decline in sales during the second quarter, as price hikes caused by memory chip scarcity scared some consumers away.

According to data for the second quarter from Gartner Inc. and International Data Corp., PC shipments fell 4.3% and 3.3%, respectively, in the second quarter world-wide. That’s a quicker decline for the PC industry than the previous quarter, when Gartner saw a decline of 2.4% and IDC saw them tick up very slightly at 0.6%, in signs of some stabilization in the market.

One reason both analyses mentioned is higher computer prices for consumers, which they noted was due to higher prices for certain components, namely memory chips. While companies could not raise prices too quickly on computers sold to businesses, especially at large enterprises where contracts lock in prices, consumers are reportedly seeing higher price tags.

“In the consumer market, the price hike has a greater impact as buying habits are more sensitive to price increases,” Gartner analyst Mikako Kitagawa said Tuesday. “Many consumers are willing to postpone their purchases until the price pressure eases.”

Memory chip prices, both DRAM (dynamic random access memory) and flash memory components, started to jump last year, with higher demand driving a big up cycle, especially for cloud computing hardware. Other factors include NAND flash memory becoming a popular replacement for solid disk drives, and build-up for fall product launches like the expected new iPhone taking up supply, as Micron Technology Inc. MU, +0.26% told investors earlier this month.

At a meeting in February, an executive at chip giant Intel Corp. INTC, +0.97% showed a slide indicating that average selling prices for PCs have climbed steadily since 2014. The recent move appears more significant, though: Kitagawa said that it is still early in her research, but she estimates price hikes have ranged from about 2-3% to as much as 10% versus a year ago.

“Vendors raise the price for both new and existing models,” she said. “For instance, a model A used to be $500, but the same model A with same configuration is now $550.”

She said some companies are also adding less memory, stripping down the specifications of the system and instead installing smaller amounts of DRAM at prices that would have covered larger memory modules in the past.

Advance, contract purchasing of large amounts of memory chips helped some PC makers, who either avoided raising prices too much, or just absorbed the price hikes.

“The approach to higher component costs varied by vendor,” Kitagawa said in a statement.

HP Inc. HPQ, +0.56% has fared well so far among the major PC manufacturers, managing to take back the top spot for shipments after losing it in 2013. Company executives told investors in late May that it raised prices around the world on its products during its fiscal second quarter, “in response to the increased cost of components and unfavorable currency impact.”

Lenovo Group Ltd. 0992, +1.04% lost share, dropping to No. 2 world-wide, followed by Dell Inc. and Apple Inc. AAPL, +0.14% , according to both analysis firms.

RBC Capital Markets analyst Amit Daryanani said in a note to clients that the drop in unit shipments in the quarter was pretty much in line with Intel’s forecast for the PC industry and suggests a “small moderation” in year-over-year trends.

“We think the overall year-over-year trajectory is improved versus prior year levels, and we think year-over-year performance should continue to improve in calendar 2017,” he said, noting that some companies’ data was tracking ahead of Gartner’s, which does not include Chromebooks in its tally. Last year, IDC reported that overall PC shipments fell 5.7%

Now, the big question is whether the higher prices will continue into the second half of the year, which is typically the busiest season for PCs because of the back-to-school and holiday shopping seasons. Higher prices will surely deter some consumers, but price cuts to woo them would also hurt the already thin profits at PC makers.

As the memory chip constraints and higher prices filter down to consumers, we are likely to see fewer new computers on campus and under Christmas trees later this year, or rough profits for PC makers. Either way, there will be some lumps of coal in stockings by the end of the year.

Article Link To MarketWatch:

The Stock Market May Not Be Able To Defy Gravity For Much Longer

Strategist: We’ll likely see a 5% correction before the year is over

By Sue Chang
July 13, 2017

History is not on the market’s side.

U.S. stocks have gone over a year without a major drawdown, prompting some strategists to predict a swoon that could shave as much as 5% off of the S&P 500.

Ryan Detrick, senior market strategist at LPL Financial, is among those who are cautioning investors to tread carefully given the absence of a correction in the wake of the market’s dazzling performance since last summer.

“This is only the sixth time since 1950 that the S&P 500 has made it at least a year without so much as a 5% correction, and marks the longest streak since 1995,” said Detrick in a report Wednesday.

An equities-positive environment of robust earnings, low inflation, an accommodative Federal Reserve and reasonable valuations suggests the eight-year-old bull market still has more mileage left in the tank.

Even so, the law of gravity is expected to kick in at some point, given the extended period of relative calm since the last big selloff, he said.

The longest streak for the market without the dreaded 5% correction was between December 1994 and July 1996, when the large-cap index rose more than 40%, according to Detrick.

Since June 27, 2016, when the S&P 500 SPX, +0.73% closed 6.1% off its then all-time high, stocks have rallied 19%, while the worst correction so far this year has been 2.8%. In just the past year, the index has set 42 new highs and surged 14%.

It’s not just the S&P 500 that has been operating on adrenaline this year. The Dow Jones Industrial Average DJIA, +0.57% has also set multiple records, notching its 21st 100-point rally of 2017 on Wednesday to close at an all-time high of 21,532.14, according to the Dow Jones Data Group.

But the market’s breathtaking gains could be setting up investors for a harsh fall.

“To put things in perspective, going back to 1950, the average intra-year correction for the S&P 500 has been 13.6%, and 91% of all years have had at least a 5% correction, while nearly 54% of all years pulled back at least 10%,” said Detrick. “In other words, history suggests we’ll likely see that 5% correction before the year is over.”

But history aside, stocks may be able to put off the inevitable for a little while longer, or even dodge the worst if corporate earnings, due to kick off this week, surprise on the upside.

S&P 500 companies are expected to report earnings rose 6.4% in the second quarter, according to John Butters, senior earnings analyst at FactSet Research. However, actual bottom-line growth could top 9% as results have generally exceeded estimates by an average of 4.2% over the past five years, he added.

There is also the potential for a boost from President Donald Trump’s administration if Trump is able to unravel the legislative gridlock over the health-care bill, which many see as a prelude to rolling out other critical policies, including more corporate-friendly tax codes.

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An Astonishing Number Of Americans Have ‘Side Hustles’

By John Crudele
The New York Post
July 13, 2017

Ever wonder how people are affording to live these days with the cost of everything so high? Well, says 44 million Americans have what it calls “side hustles.”

That’s what we used to call a “second job.” And, while Bankrate didn’t get into this, I wonder how many of those second jobs are what we still call “off the books.”

Bankrate says that 86 percent of the side hustlers do it at least monthly and 36 percent of those earn more than an additional $500 a month.

Millennials — those 18 to 36 years old — who have a side hustle typically earn less from their second job than older generations.

Baby boomers ages 53 to 62 are the most likely group to earn at least an extra $1,000 a month.

(Yeah, because they don’t have enough for retirement and are getting desperate.)

Article Link To The NY Post:

Want A Higher Interest Rate On Your Bank Account? Tough Luck

The Fed has been raising short-term rates, yet many banks are still paying peanuts to depositors; ‘We haven’t seen this movie before’

By Christina Rexrode
The Wall Street Journal
July 13, 2017

Interest rates are rising. So why aren’t bank customers demanding higher interest on their deposits? This is the dilemma confronting banks.

For now, most bankers are happy to keep deposit yields low, standing pat even as the Federal Reserve hikes short-term rates. No one is sure, though, how long customers will tolerate that.

“Many bank management teams believe we could be one to two hikes away from an increase in retail” deposit rates, John McDonald, a bank analyst at Bernstein, wrote in a recent note. “At the same time however, we’ve never quite seen a cycle like this play out before, so it’s tough to know for sure.”

How banks prepare for any moves by depositors is important for their profits, especially given disappointing loan growth this year.

Deposit rates will be top of mind for many investors when banks begin reporting earnings this Friday, because increases could maintain pressure on already-low net-interest margins.

The Fed had previously signaled that it expected to raise rates one more time this year, from the current range of between 1% and 1.25%. But Fed Chairwoman Janet Yellen, testifying before Congress on Wednesday, gave no indication about the timing of the next rate increase. She also said the Fed could alter its rate-raising plans if the slowdown in global inflation persists.

The Bank of Canada on Wednesday raised its policy rates for the first time in seven years, sending the Canadian dollar up more than 1% to its highest level in a year against the U.S. currency.

Banks have been dealing with interest-rate cycles and depositors for decades, but a number of factors, both psychological and technological, make this time of rising rates different. A decade of near-zero rates, more competition from online firms, less loyalty from customers and new capital rules, among other factors, are making preparations more difficult.

“We’ve never really seen this movie before,” Marianne Lake, chief financial officer of J.P. Morgan Chase & Co., told investors recently.

Of course, banks don’t want to raise deposit rates until they have to. Though they tend to raise certain loan rates as soon as the Fed makes a move, they prefer to let deposit rates lag, bolstering profits.

And when they do raise rates, it is often because competition has forced them. “Nobody wants to be first,” said Greg Carmichael, chief executive of Fifth Third Bancorp. “But nobody wants to lose deposits.”

So far, the Fed has raised rates four times since December 2015, but banks haven’t been under much pressure to raise deposit rates concurrently.

Bank of America is a case in point. Its cost for U.S. interest-bearing deposits in the first quarter was just 0.09%—unchanged from the prior quarter and the lowest among its peers.

Talking with analysts recently, finance chief Paul Donofrio said it seemed unlikely that customers would leave the bank to chase rates because many had their primary checking accounts there.

Officers at some banks believe it will take another one or two Fed rate increases before they have to start raising deposit rates. Others believe customers will start to demand higher deposit rates now that the Fed rate has crossed the visually important 1% threshold.

“The first Fed increase, people are like, ‘Oh, it’s still so small, who cares?’ ” said William H.W. Crawford IV, chief executive of United Financial Bancorp Inc., a community bank based in Glastonbury, Conn. “By the fourth or fifth increase, people care.”

Or at least they used to care. A complicating factor is that depositors haven’t thought of bank accounts as income-producing instruments in nearly a decade, thanks to the Fed’s near-zero interest-rate policies.

Given that, many customers have come to view banks in terms of the services they offer, such as mobile banking, rather than the rates they pay.

Another difference: Banks are awash in deposits. At the end of June, total deposits at U.S. commercial banks equaled $11.72 trillion, only slightly below an all-time high reached in May, according to Fed data.

What’s more, loan growth has slowed this year, so the 4.7% average rate of deposit growth during the first half of 2017 was ahead of the 4.5% average rate of loan growth, Fed data show. Loans at U.S. commercial banks are equal to just 79% of total deposits, meaning even if banks saw some deposit outflows, many would have plenty of room to keep lending.

Fitch Ratings analysts said in a recent report that they expect banks will be able to keep deposit rates low throughout 2017, even if the Fed raises rates again, and won’t meaningfully increase their rates until loan demand picks up.

Yet banks can’t ignore depositors if they start to make moves. There are regulatory concerns, for example.

In certain tests related to the amount of liquid assets a bank has on hand, consumer deposits are more valuable than commercial deposits. That could prompt some banks to act quickly if depositors get itchy.

Meanwhile, technology has made it much easier for depositors to quickly shift funds and to use multiple banks.

Andrew Bain doesn’t think much of the rates at J.P. Morgan Chase & Co., which generally pays customers with savings accounts from 0.01% to 0.08%. But he likes the bank’s QuickPay system, which lets him pay for his children’s day care easily and without a fee.

So Mr. Bain, who works in corporate finance in Portland, Ore., found a workaround. He keeps enough money at J.P. Morgan to pay some bills and spreads the rest between a credit union and an online bank, both of which pay him more than 1%.

A number of online-focused banks, like Ally Financial Inc. and Synchrony Financial , are able to pay higher rates because they are less encumbered by brick-and-mortar expenses. An even newer competitor, Goldman Sachs Group Inc., has been driving rates higher to draw deposits to its new consumer bank. It currently offers 1.2% interest on online savings accounts.

All those factors combined raise the prospect that when consumers do decide to move, banks may be forced to raise rates at a faster pace than investors might be expecting.

Nelson Bonilla is part of that threat. His savings account at Synchrony pays about 1.15% interest. But Mr. Bonilla, a software developer in San Francisco, is on the lookout for institutions that might pay more.

Though he has already moved his savings account twice in recent years, he’s open to being wooed away a third time. “I wouldn’t hesitate,” Mr. Bonilla says, “to switch again.”

Article Link To The WSJ: