Wednesday, August 2, 2017

Wednesday, August 2, Morning Global Market Roundup: Asia Tech Stocks Bathe In Apple Glow, Dollar Overshadowed

By Wayne Cole
August 2, 2017

Asian technology stocks hit 17-year peaks on Wednesday as blockbuster earnings from Apple (AAPL.O) rippled out to component makers globally, helping offset a pullback in the energy sector.

Shares in the world's most valuable company surged 6 percent after hours to a record of more than $159, taking its market capitalization above $830 billion.

That should help carry the Dow through the 22,000 mark when trading resumes in New York. E-Mini futures for the Dow YMc1 were up 0.2 percent in Asia trade.

The tech giant reported better-than-expected iPhone sales, revenue and earnings per share and signaled its upcoming 10th-anniversary phone is on schedule.

Among Apple suppliers, LG Innnotek (011070.KS) jumped 9 percent and SK Hynix (000660.KS), the world's second-biggest memory chip maker, rose almost 3 percent. Murata Manufacturing (6981.T) firmed 4 percent and Taiyo Yuden (6976.T) 3.8 percent.

The MSCI tech index for Asia .MIAS0IT00PUS climbed 0.8 percent to ground not trod since early 2000, bringing its gains for the year to a heady 40 percent.

Those gains balanced losses in basic materials and energy to leave MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS steady near its highest since late 2007. Japan's Nikkei .N225 rose 0.4 percent.

There was a note of caution over reports U.S. President Donald Trump was close to a decision on how to respond to what he considers China's unfair trade practices.

Tepid U.S. inflation along with political turmoil in Washington has lessened the risk of another Federal Reserve rate hike this year, lowering bond yields across the globe.

Improving data in other major economies has also served to push the greenback down nearly 11 percent from January peaks, benefiting commodities and emerging markets.

A swathe of manufacturing surveys (PMIs) out on Tuesday underlined how the improvement in activity had broadened out from the United States to Asia and Europe.

Ebullient Mood

Alan Ruskin, head of G10 forex at Deutsche, noted the top five PMIs were all Northern European economies and every index in Europe was in expansionary territory above 50.

"That will do nothing to hurt ebullient global risk appetite," said Ruskin. "This phase of the risk rally is based on growth data, but even more on subdued inflation measures."

"The latter plays to a gradual Central Bank exit from extreme policy accommodation that should prolong the global growth cycle."

MSCI's gauge of stocks across the globe .MIWD00000PUS has scored its longest monthly winning streak in over a decade.

On Wall Street, the Dow .DJI ended Tuesday with gains of 0.33 percent, while the S&P 500 .SPX added 0.24 percent and the Nasdaq .IXIC rose 0.23 percent.

In currency markets, the dollar edged away from deep lows though thanks mainly to positioning - bears are already so short of the currency that they are wary of selling even more.

The dollar index .DXY steadied at 93.085 after touching 92.777, the lowest since early May 2016. The euro stood at $1.1812 EUR=, not far from a 2-1/2-year high of $1.1845 struck on Monday.

The dollar was flat on the yen at 110.60 JPY=, having briefly fallen below 110 on Tuesday for the first time in more than six weeks.

Oil prices were under pressure again amid rising U.S. fuel inventories and as major world producers kept pumping, causing investors to worry that several weeks of steady gains had pushed the rally too far.

Brent crude LCOc1 eased 42 cents to $51.36 a barrel, while U.S. crude CLc1 lost 42 cents to $48.74.

Article Link To Reuters:

Oil Down 1% On Surprise Rise In U.S. Inventories, High OPEC Output

By Henning Gloystein
August 2, 2017

Oil prices fell 1 percent on Wednesday, with rising U.S. fuel inventories pulling U.S. crude back below $50 per barrel, while ongoing high OPEC supplies weighed on international prices.

U.S. West Texas Intermediate (WTI) crude was at $48.69 per barrel, down 47 cents, or 1 percent, from its last settlement. That came after the contract opened above $50 for the first time since May 25 on Tuesday.

Brent crude, the international oil benchmark, was down 47 cents - almost 1 percent - at $51.31 per barrel.

The American Petroleum Institute's (API) said that U.S. crude stocks rose by 1.8 million barrels in the week ending July 28 to 488.8 million, denting hopes that recent inventory draws were a sign of a tightening U.S. market.

Jeffrey Halley of futures brokerage OANDA said following the API's report "traders stampeded for the door to lock in profits from the last eight days' bull-run."

Official storage figures are due to be published by the U.S. Energy Information Administration later on Wednesday.

Outside the United States, Brent was pulled down by reports this week showing production from the Organization of the Petroleum Exporting Countries (OPEC) at a 2017 high of 33 million barrels per day (bpd). That is despite OPEC's pledge to restrict output along with other non-OPEC producers, including Russia, by 1.8 million bpd between January this year and March 2018.

The Economist Intelligence Unit said that despite the cuts "the global market remains oversupplied," and it warned that "there is no guarantee that further cuts will be sufficient to rebalance the oversupplied global oil market."

Energy consultancy Douglas Westwood reckons that this year's oil market will be slightly undersupplied but that the glut will return in 2018, and last to 2021.

"Oversupply will actually return in 2018. This is due to the start-up of fields sanctioned prior to the downturn," said Steve Robertson, head of research for the firm's Global Oilfield Services. "This is in addition to the production gains through increased investment and activity in the U.S. unconventional (shale) space."

While Robertson said unforeseen major supply disruptions could lift the market, he warned that expectations based on thinking the price "always bounces back should be tempered by a reality check," adding that there was "the very real possibility that the current recovery could take much longer to materialize".

Likely acting as a further lid on prices is that, according to U.S. bank Goldman Sachs, second quarter company results had shown that oil majors "are adapting to $50 per barrel oil prices and can afford to pay dividends in cash" at that level.

Article Link To Reuters:

'Sheikhs Versus Shale' To Keep Oil Prices Capped At $50 In Q3

By Sri Jegarajah and Dan Murphy
August 2, 2017

Growth in U.S. oil production is slowing, but will continue to blunt OPEC's efforts to cut supply and normalize global inventories, keeping benchmark prices capped at around $50 a barrel this quarter, according to a CNBC poll of energy strategists, traders and economists.

De facto OPEC leader Saudi Arabia is leading calls to deepen production cuts as it battles perceptions of falling compliance. Doubts over OPEC's commitment to supply curbs tipped benchmark oil futures into a bear market in June.

Elsewhere, OPEC is also squaring off against familiar rivals.

Attempts to prop up the price of oil by the producer group have encouraged U.S. suppliers to put more oil onto an already over-supplied market. But bulls say that's changing as American production shows signs of leveling out and recent declines in U.S. inventories point to market re-balancing.

"It's still sheikhs versus shale," said John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years. "I would put an average price for [the third quarter] at just under $50. In the past year it's like Brent was following the U.S. speed limit: 55 max."

The "wild card" for oil markets, Driscoll said, remains output from tight oil formations such as the Permian Basin in the U.S. southwest.

Brent crude will average $50 a barrel in the July to September period, according to the median response in CNBC's survey of 21 strategists, traders and economists. The lowest call was for $40 oil, while the highest was $56.

Brent — the benchmark for two-thirds of the world's oil — averaged $50.79 in the second quarter.

UBS Bullish Oil

Warren Gilman, CEO of CEF Holdings offered the lowest forecast at $40 a barrel for the third quarter. "Growing supply will require further cuts from OPEC if they want a higher price," Gilman said.

Oil bulls UBS expected prices to hit $60 a barrel in the second-half while BMI Research said prices will likely average $55.20 from the July to December period.

Seasonal factors may prove supportive in the current quarter: Gulf producers could hold back oil from the export market to feed higher demand from domestic power generators during the summer, coinciding with strong U.S. gasoline demand.

"U.S. demand seems pretty steady despite low oil prices and the lowest summer gas prices in years," said Rachel Ziemba, managing director of emerging markets research at 4CAST-RGE. "I'm a tad more constructive on India and China."

OPEC is not ruling out extending supply cuts. Together with stabilizing U.S. inventories, Brent crude futures rose to a two-month high of $52.68 on July 28, rounding off its strongest week so far this year.

Crude inventories chalked up their fourth weekly decline, falling 7.2 million barrels in the week ending July 21, as improved product margins encouraged U.S. refiners to process more crude. That put total crude stockpiles below 2016's level for the first time this year. Still, U.S. crude inventories remain stubbornly above the five-year average.

"Since oil inventories are the barometer by which the oil market judges OPEC's success in rebalancing the market, a decline in stocks will be positive for market sentiment and the oil price, which on a WTI basis, stands a good chance to once again trade above $50," said BNP Paribas head of commodity strategy Harry Tchilinguirian.


Saudi and Russian energy ministers in St. Petersburg in July discussed extending their deal to cut output by 1.8 million barrels a day beyond March 2018 if necessary.

The level of actual OPEC compliance rates divided survey respondents.

"We see Brent prices sustained at or slightly above $50 per barrel over the next few months," said Johannes Benigni, chairman and founder of JBC Energy. "However, this hinges on compliance not only in terms of reported production figures but also in terms of actual arrivals at consumer hubs ... otherwise the credibility of the deal and outright oil prices will suffer."

JTD Energy's Driscoll said he expected "greater threats" to OPEC and non-OPEC supply cuts. "Any perception that there will be 'leakage' will take air out of the balloon."

UBS, meanwhile, projected that OPEC will remain "steadfast" in its commitment to restrain oil output, but assigned a 20 to 30 percent probability of a breakdown in the OPEC deal, which could translate to a short-term price drop to between $30 and $35.

Notably, few survey respondents were willing to venture levels over $50 in the current quarter.

"The price range seems to be shifted downwards because of greater efficiencies, new supply and demand not being strong enough to pick up all that extra supply," said Daniel Yergin, a Pulitzer Prize-winning energy historian and vice chairman of IHS Markit.

Shale Slows

Although productivity and efficiency gains driven by innovation helped U.S. producers ride out the oil price collapse, evidence is emerging of renewed financial stress. Depressed prices are forcing some operators to cut capital spending. That's slowing U.S. production growth, offering some support to the oil market.

"Oilfield services bottlenecks and low prices over [the second quarter of the year] will constrain drilling and completion activity in U.S. shale plays over [the second half of 2017], paring back on growth," said Peter Lee, oil and gas analyst at BMI Research in Singapore.

Baker Hughes' closely watched weekly U.S. rig count numbers in late June declined for the first time since January, while more recent numbers showed only modest increases.

"While a single data point is not a trend, it may confirm that the low prices seen in recent weeks are not sustainable for U.S. shale producers," said UBS commodity analyst Giovanni Staunovo.

Anadarko Petroleum reported a larger-than-expected quarterly loss last month and said it would cut its 2017 capital budget by $300 million because of depressed oil prices, according to Reuters. The Texas-based firm was reportedly the first major U.S. oil producer to do so.

Meanwhile, Halliburton's executive chairman said growth in North America's rig count was "showing signs of plateauing."

"U.S. producers are not prepared or able to keep up production at any price," said Ole Hansen, head of commodity strategy with Saxo Bank in Copenhagen.

The slowdown in U.S. production, reduced capital spending and declining U.S. stockpiles could give OPEC the cover it needs to justify deeper production cuts to its membership, accelerating the re-balancing process.

"These developments have left OPEC with a window of opportunity," Hansen said. "If successful, the price of Brent crude oil is likely to rally back towards $55 during the coming months before renewed weakness sets in as the focus turns to 2018 and the potential risk of additional barrels hitting the market if OPEC and Russia fail to extend the production cut deal beyond Q1 2018."

Saudi Energy Minister Khalid al-Falih has said the Kingdom would limit crude exports to 6.6 million barrels per day in August. That's almost 1 million barrels below year-ago levels.

Article Link To CNBC:

Let HBO Make 'Confederate' Before You Judge It

A good alternate history forces us to re-examine our own era. Here's how the showrunners could succeed.

By Stephen L. Carter
The Bloomberg View
August 2, 2017

I won’t be joining the #NoConfederate protest, although I entirely understand what the Twittersphere is worried about. Social media exploded Sunday night with the hashtag, which was a trending topic both domestically and internationally. The social media campaign is a protest against “Confederate” -- the working title of HBO’s planned alternate-reality show in which the Civil War came out the other way, and slavery remains legal in the Confederate States of America.

The protest was timed to peak during HBO’s broadcast of “Game of Thrones,” because “Confederate” is the brainchild of David Benioff and D.B. Weiss, who created “Thrones” for television. The social media campaign is the brainchild of April Reign (creator also of the #OscarsSoWhite hashtag), who has made her intentions unambiguous: “Our objective is for HBO to cancel this idea and spend no more money on it.” Those who have joined the protest contend that the show may be traumatizing, and that the very concept cuts too close to reality.

As a writer, I could never endorse an effort to kill a project before it is begun. But in our racially fraught times, it’s not hard to see where the fears come from. Like most African Americans, I am a descendant of the South’s captive labor force. My great-great grandfather escaped three times from enslavement in Fauquier County, Virginia, and three times was nabbed by the slave catchers. On his third try he made it as far as Erie, Pennsylvania, a terminus of the Underground Railroad, before being dragged back to captivity. Years later, having bought his way to Canada, he was involved in the planning of John Brown’s violent raid on Harper’s Ferry, and nearly went along -- which would have led to his being hanged alongside Brown, as one of his friends was. I would hardly want to relive the family history every week.

But given the remarkable imaginative world Benioff and Weiss built for “Game of Thrones,” I am more than willing to give the show a chance. The alternative history genre exists precisely to upset our expectations, to force us to re-evaluate our own era by appreciating how many twists and turns were necessary to get us here. In Amazon’s “The Man in the High Castle” and Hulu’s “The Handmaid’s Tale,” we have seen how powerfully frightening dystopias can move us when the narrative drama and the richness of characters are crafted with care -- both of which are signal accomplishments of “Game of Thrones.”

The Civil War has long exercised an understandable attraction for the authors of speculative fiction. 2 No episode in the nation’s history did more to shape the nation’s present. And the challenges to the way things worked out are genuine. Suppose Robert E. Lee had made better decisions at Gettysburg, won the battle and cut off Washington from the rest of the North? Suppose the rebel garrisons in Vicksburg and Atlanta had held out a few months longer than they did, and the peaceably minded George McClellan had defeated Abraham Lincoln in the 1864 presidential election? These are not merely details that tantalize those of us who continue to be fascinated by the era. They are challenges to our hindsight bias, our unspoken assumption that because the Union won the war its victory was inevitable.

All of which is to say that although I sympathize with those who are upset, I would rather give Benioff and Weiss a chance to show what they can do. As a Civil War buff who recently taught a course on the law of slavery, and as an avid consumer of alternative history (and an occasional creator of it), I would, however, like to offer some concrete advice. Here are five suggestions:

(1) The economy of the Confederacy must be plausible.
Many professional economists doubt that slavery was a sustainable institution. Rather than simply offering a 21st-century version of the practices with which we are familiar, the show will have to portray an evolved version that comports with changing labor markets and modern technology. So, for example, we should see Southern blacks who are enslaved and yet also work in IT, in finance, and so forth. One way the slaveocracy created incentives for its captives to work hard was by allowing them to earn money on the side. It’s hard to see how the system could have survived for another 150 years without this device.

(2) The history must be plausible too.
Would there have been a Northern civil rights movement? How would this have resounded in the Confederacy? Similarly, the show will have to account for World War II, which the U.S. could not possibly have fought without the South. Different alternate histories have handled the question in different ways. A Hitler victory would slop over into “Man in the High Castle” territory. A Hitler defeat would be unpersuasive. This will be a tough nut to crack.

(3) The social structure must also be plausible.
Don’t settle for yet another dystopian tale full of jackbooted thugs. No pure police state has survived so long. The Confederacy must have a believable ideology that could survive into the internet age without causing a massive rebellion among the young. (Will the South have an LBGTQ movement?) There will have to be a free black community, and if slaves are wealth, then some of them must be slave owners.

(4) Resist the temptation to leap for the cheap comparisons to present-day politics.
In “Thrones” such allusions have been so subtle as to be contestable. Keep that model. And bear in mind that during the era of Jim Crow, many Southern racists were also big progressives. (Franklin Roosevelt’s landslides were mostly white landslides.) Try to draw a model of Confederate politics that includes pro-slavery liberals.

(5) Cut the rape and torture.
The big blemish on an otherwise masterful run of “Game of Thrones” has been the amount of screen time spent on needlessly long and explicit scenes of women being abused and prisoners being bloodied in various sadistic ways. A little of this goes a long way. And in the particular case of a show that purports to tell us what a slave society would be like today, explicit and bloody detail will certainly set off fresh rounds of protest. Surprises are fine; killing off beloved characters is fine (it’s what prestige television nowadays does); but, please, fellas, cut down on the rape.

Yes, the slave system presumed the sexual availability of black women to their masters. But it is hard to believe that the women’s movement would somehow have skipped the Confederacy, or that simple public relations would not demand a different arrangement. This will be another tough needle for the showrunners to thread. But they’re going to have to find a way.

If “Confederate” can avoid these and other pitfalls, the show might wind up being a powerful addition to this Peak TV era. HBO has expressed its faith that the writers “will approach the subject with care and sensitivity,” and its hope that critics “will reserve judgment until there is something to see.” That’s certainly my plan. I do understand the protests, but I will confess that I’m rather looking forward to what Benioff and Weiss come up with. I’ll judge it when I see it.

Article Link To The Bloomberg View:

Insurers Seek Hike In ACA Premiums

Companies say they are struggling to make decisions as Congress and White House wrangle over health care.

By Anna Wilde Mathews and Louise Radnofsky
The Wall Street Journal
August 2, 2017

Major health insurers in some states are seeking increases as high as 30% or more for premiums on 2018 Affordable Care Act plans, according to new federal data that provide the broadest view so far of the turmoil across exchanges as companies try to anticipate Trump administration policies.

Big insurers in Idaho, West Virginia, South Carolina, Iowa and Wyoming are seeking to raise premiums by averages close to 30% or more, according to preliminary rate requests published Tuesday by the U.S. Department of Health and Human Services. Major marketplace players in New Mexico, Tennessee, North Dakota and Hawaii indicated they were looking for average increases of 20% or more.

In other cases, insurers are looking for more limited premium increases for the suites of products they offer in individual states, reflecting the variety of situations in different markets. Health Care Service Corp., a huge exchange player in five states, filed for average increases including 8.3% in Oklahoma, 23.6% in Texas, and 16% in Illinois.

Together the filings show the uncertainty in the health-insurance marketplaces as insurers around the U.S. try to make decisions about rates and participation for next year amid open questions about changes that could come from the Trump administration and Congress.

Insurers face a mid-August deadline for completing their rates. The companies have until late September to sign federal agreements to offer plans in 2018. In some cases, insurers warn, the figures revealed by federal regulators may not reflect their up-to-date thinking.

The insurers’ decisions will be closely dependent on moves by the Trump administration and Congress. Most important is whether the federal government continues making payments that reduce health-care costs for low-income exchange enrollees, which insurers say are vital and President Donald Trump has threatened to halt.

Insurers are also concerned about whether the Trump administration will enforce the requirement for most people to have insurance coverage, which industry officials say helps hold down rates by prodding young, healthy people to sign up for plans.

In Montana, Health Care Service linked 17 percentage points of its 23% rate increase request to concerns about the cost-sharing payments and enforcement of the mandate that requires everyone to purchase insurance. Kurt Kossen, a senior vice president at Health Care Service, said the company’s rate requests are driven by causes including growing health costs and “uncertainty and the associated risks that exist within this marketplace, including uncertainty around issues like the continued funding of [cost-sharing payments] and mechanisms that encourage broad and continuous coverage.”

Sen. Lamar Alexander (R., Tenn.), who chairs the Senate committee that oversees health policy, said Tuesday that he had told Mr. Trump directly that the government should continue making the payments to insurance companies

The effect of the rate increases will be blunted for many exchange enrollees, because lower-income people receive federal subsidies that cover much of their premiums.

But increases could be tough to stomach for those who aren’t eligible for the help, like Harland Stanley, 53, of Louisville, Ky. Mr. Stanley, who owns his own research business, pays about $400 a month for a plan from Anthem Inc., which is seeking an average increase of 34% in the state, though Mr. Stanley’s own premiums might rise by less or more than that.

“It’s going to hurt,” said Mr. Stanley, who said his monthly premium this year is about $120 more than he paid in 2016. “I worry about, what if it keeps going? When is this going to stop?”

Anthem, which is seeking rate average increases of 30% or more in states including Colorado, Kentucky, Nevada and Virginia, has said it would refile for bigger hikes and may pull back its exchange offerings more if uncertainty continues around issues including the cost-sharing payments.

Centene Corp.’s requests ranged from less than 1% in New Hampshire to 21% in Texas and 12.49% in Georgia. Those rate proposals generally assume the current rules surrounding ACA plans continue, the company said.

Within the marketplaces, “there is relative stability,” said Chief Executive Michael F. Neidorff. “The uncertainty is driven by these policies on the ACA.”

CareSource, a nonprofit insurer that offers exchange plans in four states, has prepared alternate rate filings for different scenarios, and one of its state regulators Monday asked it to refile with proposed rates that assume no cost-sharing payments.

“It’s challenging; you learn to be very fluid,” said Steve Ringel, president of the Ohio market for CareSource. According to actuarial firm Milliman Inc., at least seven states have made similar requests in the past week, while others had earlier asked for two versions of rate filings.

“Resolution of the [cost-sharing payments] is an urgent issue,” said Bill Wehrle, a vice president at Kaiser Permanente, which offers exchange plans in a number of states. “We’re coming up at a point that’s fairly soon, where the pricing decisions we make are set for all of next year.”

The impact of potentially losing the cost-sharing payments was also clear in the rates requested by Blue Cross of Idaho, which average 28%. That would probably be in the lower teens if the payments were guaranteed, said Dave Jeppesen, a senior vice president. “It’s a big swing,” he said. “There’s a lot of risk associated with the uncertainty in Congress right now, and we are pricing appropriately for that risk.”

A recent Kaiser Family Foundation analysis found insurers’ financial results on exchange plans improved in the first quarter of this year, a sign of potentially emerging stability in the business. That is reflected in a number of states where rate-increase requests are limited. The exchange in California said Tuesday that insurers there were seeking an overall average increase of 12.5%—but there would be an additional 12.4% boost layered onto middle-tier “silver” plans if the cost-sharing subsidies aren’t paid.

However, in a number of cases, insurers’ rate requests are well above 20% because of market factors not directly tied to the federal uncertainty. Anthem has warned that it may need to add 18% to 20% to its existing rate requests if the cost-sharing payments aren’t locked in, and it may pull back in more states beyond the five exchanges where it has disclosed plans to leave or sharply reduce its footprint. An Anthem spokeswoman declined to comment on the company’s rate filings.

In Iowa, Medica said its rate increase request was 43.5%, driven by the dynamics of the local market, including the departure of other insurers and the fact that Medica itself has been losing money because enrollees’ health costs ran higher than expected. “You have some element of catching up to what the claims experience is,” says Geoff Bartsh, a Medica vice president.

Medica’s requests in other states have been far lower, he said, a sign of increased steadiness in those markets. But, he said, if the cost-sharing payments go away, Medica estimates it will need to add around 13% to 19% to its rate requests.

Article Link To The WSJ:

Flying In Coach Could Be Harmful To Your Health

Saving money by flying economy could cost you in the long run.

By Reed Alexander
August 2, 2017

Every cloud has a silver lining — including the one that could lead to more comfortable seats in coach.

Passenger advocacy group Flyers Rights recently won a victory over the Federal Aviation Administration in court, with three D.C. Circuit judges ordering the FAA to look into excessively small seats on commercial flights. Flyers Rights says that flying economy could jeopardize your health and safety in the event of an emergency and potentially cause passengers to develop blood clots—a side effect of aviation informally known as “economy class syndrome.”

D.C. Circuit judge Patricia Millett described her court’s ruling as “the Case of the Incredible Shrinking Airline Seat.”

“As many have no doubt noticed, aircraft seats and the spacing between them have been getting smaller and smaller, while American passengers have been growing in size,” Millett wrote in the court’s opinion.

She’s right: Plane seats are shrinking. “The petition [from Flyers Rights] noted that economy class ‘seat pitch’—the distance between a point on one seat and the same point on the seat directly in front of it—has decreased from an average of 35 inches to 31 inches, and in some airplanes has fallen as low as 28 inches. Evidence in the petition further indicated that the average seat width has narrowed from approximately 18.5 inches in the early-2000s to 17 inches in the early- to mid-2010s.”

Flyers Rights may be onto something — in addition to causing discomfort, small seats really can impact your health and safety negatively.

The first issue they present is deep-vein thrombosis — the formation of blood clots. “We see patients who come home from long trips sitting still for prolonged periods of time, and not having the opportunity to move around, ending up with blood clots in their legs,” says Dr. Jonathan Schor, Program Director of the Vascular Surgery Fellowship at Staten Island University Hospital in New York. “Unless a patient is treated reasonably promptly with blood thinners afterwards, they can have bad problems with leg swelling, or pieces of the blood clot breaking off and going up to the lung,” Schor adds, estimating that his hospital treats about 50 patients a year for flight-related clots. If left unattended, they can, in rare cases, be fatal.

“The size of the seat certainly affects the ability of someone to stretch out their legs and be able to prevent a blood clot,” Schor also tells Moneyish. “We recommend to usually walk hourly — to get up and go for at least a little walk to the bathroom — to decrease the risk of blood clots.” If you can’t do that, try to stretch your calf muscles in your seat. Passengers flying for six hours or more should be particularly aware of doing these exercises, he advises.

Uncomfortable in-flight accommodations can exacerbate pain for passengers with other complications, like arthritis and orthopedic injuries, too, sending them to the doctor or hospital for treatment.

Equally as concerning, cramming people like sardines into a plane can pose risks during an emergency. “The FAA has not conducted, or alternatively has not released, any tests, whether computer simulations or rehearsed evacuations, that demonstrate that planes with modern seat sizes and modern passenger sizes would pass emergency evacuation criteria,” Flyers Rights published on its website.

The FAA has told Moneyish that Flyers Rights’ statement is incorrect, saying this: “The FAA does consider seat pitch in testing and assessing the safe evacuation of commercial, passenger aircraft. We are studying the ruling carefully and any potential actions we may take to address the Court’s findings.”

This is not the first time critics have expressed concerns about moving around in cramped rows in coach. Last year, Congressman Steve Cohen (D-TN) spoke out, saying: “We have been squeezed long enough… There will be a crash, and there will be people who will not be able to get out of an airplane,” according to the Washington Post.

But we may not see the end of cramped planes anytime soon, as stuffing passengers onto a plane is in airlines’ best interests. In 2015, Marketwatch wrote: “[The] more people you can get on a plane, the more money you can make.” What’s more, reducing the number of seats on a plane, while comfier, could lead to price hikes for passengers.

Article Link To Moneyish:

Britain’s Brexit Blunders

London disarms on taxes while hurting itself on immigration.

By The Editorial Board
The Wall Street Journal
August 2, 2017

Theresa May’s government is deeply divided over Brexit, but one trend is emerging: Her ministers seem determined to get their negotiating priorities backward. Witness a growing resistance to compromise with the European Union when compromise would be best for Britain, coupled with unilateral policy disarmament on issues where Britain should carve out a new path.

An example of the latter comes via Chancellor Philip Hammond’s promise that Britain won’t cut taxes and regulations to compete with the EU. He told Le Monde this week that Britain will “remain a country with a social, economic and cultural model that is recognizably European,” including a tax take as a percentage of GDP around the European average.

This is self-destructive. Brexit is supposed to allow Britain to shed onerous taxes and cumbersome regulations. The U.K. will have to do both to attract investment despite the costs of probable new trade barriers with the EU and the weaker pound. Mr. Hammond’s unilateral economic disarmament is a mistake for the ages.

Meanwhile, members of the cabinet are holding firm on their determination to block immigration from the EU. A spokesman for Mrs. May on Monday promised free movement of people would not “continue as it is now” after Brexit. Yet the economy can’t grow without immigrant labor, given the skills shortages in the tight pre-Brexit labor market. Intransigence on immigration will also make it harder for London to negotiate a more open trade deal with the EU.

June’s election fiasco has dimmed Mrs. May’s enthusiasm for standing up to destructive factions within her own party, especially on migration. If she doesn’t start leading in a different direction, the future looks bleaker for her and Britain after Brexit.

Article Link To The WSJ:

U.S. Ethanol Makers Steer Away From Fuel, Reach For Booze

By Karl Plume and Michael Hirtzer
August 2, 2017

A U.S. glut of fuel-grade ethanol has major producers, including Green Plains Inc (GPRE.O) and industry pioneer Archer Daniels Midland Co (ADM.N), pursuing other markets and idling excess capacity in an effort to rebuild sagging margins.

ADM and Green Plains both said on Tuesday they are converting fuel-ethanol capacity into beverage and industrial alcohol production, as well as idling some mills. The announcements follow Pacific Ethanol's (PEIX.O) decision in June to buy a beverage-grade facility in Illinois, a diversification away from fuel ethanol.

The shifts are the latest moves by the once-booming corn-ethanol sector that has struggled with thin margins for the past two years amid industry overcapacity.

U.S. ethanol inventories hit a record 23.705 million barrels in April, according to U.S. Energy Information Administration data, as demand failed to keep up with growth in supplies.

"The ethanol crush margin has been on a constant downward trend. The industry is figuring out how to deal with it," said Tanner Ehmke, senior economist with CoBank, a lead lender to ethanol makers. ADM said it was reconfiguring its Peoria, Illinois, corn dry mill to produce more beverage and industrial alcohol. It will steer the plant's fuel to export markets, taking 100 million gallons of annual production out of the domestic market. "That reconfiguration allows us to focus on the profitable products that we wanted to maintain," ADM Chief Executive Officer Juan Luciano told analysts on a conference call on Tuesday.

ADM has capacity to produce about 1.8 billion gallons of ethanol at its wet and dry corn mills, more than 10 percent of the 16 billion-gallon annual industry output. The company put its dry mills on the selling block last year but has yet to find a buyer.

Green Plains said it idled about 50 million gallons of capacity at nine plants during its second quarter. The company said it was transitioning its plant in York, Nebraska, to industrial-grade ethanol that can be used in paint and cosmetic products and will eventually upgrade that facility to produce beverage ethanol. Green Plains' profit margins in fuel ethanol in the second quarter averaged 7 cents per gallon, down from 15 cents per gallon in the same quarter last year. That ate in to returns, despite the company selling larger volumes of fuel in domestic and export markets. "The ultimate weakness in the ethanol margin during the quarter was a result of too much ethanol being produced by the industry," GPRE Chief Executive Officer Todd Becker told analysts.

Article Link To Reuters:

Why Killing The Iran Deal Could Start The Next War In The Middle East

The JCPOA is not to blame for Iran’s success in the regional power game, and reversing it will not deprive Iran of its gains.

The National Interest
August 2, 2017

There are troubling signs that the Trump administration is itching for a fight with Iran. While the White House recently certified that Tehran was complying with the nuclear deal, fresh sanctions and thinly veiled references to regime change should raise serious concern that the administration will be searching for any excuse to avoid recertifying Iran’s compliance come the next review in October. In fact, President Donald Trump tasked a team in the White House with coming up with reasons to withhold certification at the next opportunity. And in a July 25 interview with the Wall Street Journal Trump prejudged the October outcome, saying he fully expected Iran to be declared noncompliant.

Breaking the nuclear deal, presumably to keep a campaign promise, could put Washington on a slippery slope towards a military confrontation with Iran. Sabotage of the accord that Iran negotiated, not only with the United States, but also with Russia, China, the United Kingdom, France and Germany, would be received in Tehran as a message that Washington is preparing for military action, and that it must therefore prepare for the worst. This path towards confrontation would wreak havoc on an already unstable Middle East, undermine U.S. national security interests, and potentially put American lives at risk.

There are legitimate reasons for Washington to be alarmed about Iran’s behavior. Tehran has projected its influence deep into the Arab heartland using its al-Quds expeditionary force and through its patronage of militias like Hezbollah, the Iraqi popular mobilization units, the Houthis in Yemen and over 100,000 militiamen in Syria. Its game of tug-of-war with the United States in Iraq is intended to pull Baghdad more fully into Tehran’s political orbit and away from Washington. And provocatively it flexes it's muscle by conducting missile tests and arresting U.S. visitors to Iran.

But distinguishing fact from fiction on Iran is necessary, particularly amidst the bluster from the White House and Congress. It is true that Tehran’s influence in the region has been growing steadily, particularly since Russia entered Syria in 2015 to buttress President Bashar al-Assad, a goal shared by Iran. But it is false that the nuclear deal is somehow to blame for Iran’s success in the regional power game, and that reversing it will deprive Iran of that capability. What has given Iran the capacity to meddle isn’t the nuclear deal, but rather the large political vacuum that now exists smack in the center of the Arab world. The wars in Syria and Iraq in particular, as well as the conflict in Yemen, have hollowed out the center of the Arab world, creating a gaping security hole that has lured in Iran, but also Saudi Arabia and Turkey, into a kind of conflict trap from which it is easier to enter than exit.

Iran has inflamed these conflicts and efforts by Washington to counterbalance Tehran’s regional power make sense. But it is important to understand that the real threat to American national security interests isn’t Iran per se, but rather the vacuum created by the civil wars that allows Tehran and other regional powers to step in. It is the collapse of the regional order, with all the security risks this entails, that is the real threat to U.S. interests. The Syrian civil war, for example, spawned a new Al Qaeda affiliate, Hay’at Tahrir al-Sham, which could eventually take root elsewhere in the region. The conflicts in Syria, Iraq, Yemen and Libya make Trump’s campaign promise of permanently eradicating ISIS unrealizable. The longer the wars continue, the greater is the risk that already weakened countries like Jordan and Lebanon will succumb to civil war, and the greater the threat of instability becomes for Saudi Arabia. Plus, ongoing wars give Russia the opportunity to cement its position as the indispensable actor in the Middle East, a sub-optimal scenario for both the region and the United States.

It is these corrosive effects of the civil wars that represent the real threat to U.S. interests. It should be this overarching challenge, and not a singular focus on Iran, that energizes Washington’s role in the region.

Backing out of the nuclear deal risks further inflaming these civil wars that represent the real threat to U.S. interests in the Middle East. Here are how events could unfold and the regional situation deteriorate should Washington breach the nuclear deal. Tehran will interpret any moves to undermine the nuclear accord as a shot across the bow on the road towards regime change, and it will use all means at its disposal, including its assets in Syria, Iraq, Lebanon and Yemen, to beef up its deterrence and retaliatory capabilities. Under threat, Iran could stir up Shia restiveness in Bahrain and Saudi Arabia, increase support for the Houthis in Yemen, put Hezbollah on alert on Lebanon’s border with Israel, and sow more mischief in Syria and Iraq. Since these actions would take place not in Iran, but in the most volatile areas of the Middle East, they would likely lead to further escalation of the civil wars and greater instability in the region. They could also be sufficiently provocative to push the Trump administration towards military action and into the conflict trap.

Advocates of breaking the nuclear deal could argue that the United States has the capacity to contend with any negative contingencies that might arise using its superior military power. Yes, the United States could mitigate some of the effects of Iran’s actions by inflicting considerable damage on the country’s military infrastructure. But neutralizing the retaliatory and deterrent capabilities Tehran has at its disposal in the civil war zones of Syria, Iraq and Yemen—and Lebanon—won’t be as easy. What Iran lacks in conventional military might, it makes up for with its asymmetric capabilities. Tehran has militias planted right in the heart of the most vulnerable parts of the Arab world, partially as a hedge against U.S. and Israeli threats. Neutralizing these capabilities would require the United States or Israel to engage Iran directly on the ground in Syria, a perilous venture given that Russia operates in the same space and backs Iran. It would also likely require some fighting in neighboring Lebanon, which could throw this country into civil war.

Worse yet for the United States under a scenario where the nuclear deal is breached, the international community would likely give Iran a pass and assign blame to Washington. This would particularly be the case if Iran continues hewing to the terms of the nuclear deal despite a U.S. withdrawal, rendering Washington the pariah. In fact, backing away from the nuclear deal could further cement the relationship between Iran and Russia, turning ties that are today based on a tactical convergence of interests in Syria into something longer term and more strategic. And it is likely to strengthen Russia’s global standing, giving it greater capacity to challenge U.S. leadership of the international order.

But the biggest long-term risk to the security of the United States and the countries of the Middle East of trashing the nuclear accord would be lost opportunities. Iran, along with Saudi Arabia and Turkey, must be part of any solution to end the civil wars that threaten the security, counterterrorism, and energy interests of the United States. Cooperation among the three major regional powers will be necessary to wind down the wars and prevent ISIS from morphing into a new type of threat after the campaigns to liberate Mosul and Raqqa are over. Undermining the nuclear deal would give Iran incentives to move even further away from cooperation than it is today, and would strengthen hardliners in the Iranian government who are predisposed to seeing any cooperation with the United States as a desecration of the principles of the Iranian revolution.

What then should the United States do? Using the threat of force to deter Iran from creating regional mischief might make some sense if it were part of a more comprehensive strategy that also included diplomacy. But breaking the nuclear agreement would kill the opportunity to try diplomatic means, it would give Iran further incentives to play the role of spoiler in a region already in turmoil, it would eliminate the possibility for cooperation in the war against ISIS, and it would likely be construed by Iran as an act of war. Only by a combination of pressure and diplomacy, that includes maintaining the nuclear agreement, can Washington claim a successful Iran policy and avert a crisis in a region so central to U.S. and global security.

Article Link To The National Interest:

Nukes Won’t Save North Korea

The U.S. and South Korea’s war games are their best sanction.

By Holman W. Jenkins, Jr.
The Wall Street Journal
August 2, 2017

In 2012, the commander of U.S. allied forces in South Korea explained the nature of the thousands of North Korean artillery and conventional rocket systems aimed at Seoul, a city of 24 million.

“These systems are capable of ranging Seoul without moving, and can deliver both high-explosive and chemical munitions with little or no warning.”

This would seem a pretty good deterrent given the improbable scenario, as North Korea surely understands, of a U.S. and South Korean attack on the North. Then why nukes? Penetrating North Korean rationalizations is never a sure thing, but a likely answer is to be found in the recent joint Chinese-Russian proposal of a freeze in North Korea’s missile and bomb testing in exchange for an end to U.S.-South Korean annual military exercises.

When North Korea is already spending 22% of gross domestic product to maintain its military, the cost of mobilizing in response to near-constant U.S. and South Korean maneuvers is a killing burden. Washington’s and Seoul’s war games are their most effective sanction and always have been.

North Korea upped the tempo of its training flights sixfold, to 700 a day, on the first day of the 2013 U.S. and South Korean “Key Resolve” annual maneuvers. That naturally sent Seoul’s analysts to their calculators, concluding triumphantly that the North was either draining its war reserve or starving its civilian economy of fuel.

The North especially goes ape over carrier deployments. When President Obama dispatched the USS George Washington, the North denounced “imperialist aggression” and promised “unpredictable disasters.” When President Trump sent the USS Carl Vinson, the North raged about “maniacal military provocations.”

When the U.S. and Japanese navies are operating in nearby waters, the North must keep its jets in the air and defenses mobilized. When U.S. and South Korean and (recently) Chinese troops are on the move near its border, it must activate troops in response.

Blood-curdling threats are the norm, possibly because they are cheaper than jet fuel. The North’s deputy United Nations ambassador warned earlier this year amid various Trump deployments that “thermonuclear war may break out at any moment.”

Or not. Both sides have been playing this game for a long time. Miscalculation is always possible, but much less so than in 1950.

Adm. Harry Harris, chief of the U.S. Pacific Command, said before Congress in April that the goal is to “bring Kim Jong Un to his senses, not his knees.” Tellingly, the admiral noted North Korean “shortfalls in training and equipment.”

In 2013, when Gen. Mike Flynn headed the Defense Intelligence Agency, he testified that “the North’s military suffers from logistics shortages, largely outdated equipment, and inadequate training.”

The U.S. and its allies can maintain their mobilization virtually indefinitely. North Korea can’t. Motor fuel is a sore point, but so are food, equipment, and sanitation and health care for troops in the field.

Ultimately, the Kim family regime remains in power by distributing resources to its loyalists, which actually shows every sign of being the growing priority today. In April, foreign reporters were invited to witness a ribbon cutting on a sumptuous new apartment block in Pyongyang for Kim favorites. The Chosun Ilbo, a South Korean paper, recounted the scene:

“Premier Pak Pong-ju then delivered a speech in which he claimed the opening of the street is more powerful than ‘hundreds of nuclear bombs.’ A Los Angeles Times correspondent tweeted that the street is ‘impressive’ and the skyscrapers lining it as ‘very modern’ but pointed out that the thousands of soldiers massing in the capital ‘looked severely stunted. A reminder of widespread malnutrition outside of Pyongyang.’ ”

In theory, what North Korea wants is a peace treaty ending the Korean War of 1950-53 and removal of U.S. forces from the region. Unfortunately, the North can’t afford the treaty it claims to want, because it can’t do without a U.S. threat to justify its sociopathic dictatorship.

In the end, the irresolvable dilemma is North Korea’s, not the West’s. The Kim regime doesn’t have a realistic solution for itself except to make sure the standoff goes on forever. The answer to North Korea’s nukes is a deep breath and to invest in missile defense, which the world needs anyway. The upside is likely to be a marked deterioration in its conventional forces.

In the meantime, the U.S. and South Korea maintain their long-term watching brief on the Northern regime’s effort to hold itself together. Keep up the pressure through the annual war games variously known over the years as “Team Spirit,” “Key Resolve,” “Foal Eagle” and “Ulchi-Freedom Guardian.” No regime is forever. And North Korea’s is more mercenary than most—suggesting an endgame in which the Kim family essentially sells out one day.

Article Link To The WSJ:

Trump Is Right About China And North Korea

By David Ignatius
The Washington Post
August 2, 2017

Here’s a contrarian thought: President Trump had the right instinct to insist that China help resolve the nightmare problem of North Korea. A peaceful solution is impossible without help from the other great power in East Asia.

As Trump nears the threshold of a military crisis with North Korea, he needs to sustain this early intuition — and not be driven into actions that may look tough but would leave every player worse off. The template hasn’t really changed from the Korean War in 1950: North Korea’s aggressive actions bring an American response and then a general war that devastates the Korean Peninsula. The conflict ends in stalemate and at huge cost.

Trump in his first months saw the need for a negotiated halt in North Korea’s program. But he has been pushed toward military options by Kim Jong Un’s reckless continuation of his missile testing — despite China’s efforts to restrain the impulsive young leader. War fever is growing, as in Sen. Lindsey O. Graham’s (R-S.C.) comment Tuesday that conflict is “inevitable” unless Pyongyang stops testing weapons.

What is wise policy? Even as Trump ratchets up the pressure, he should quietly urge China to take the lead in a diplomatic solution. He should continue to make clear to Beijing that its economic and security interests would be severely harmed if the United States is forced to address the North Korea problem on its own, militarily.

Here’s a suggestion for Beijing: China should invite the other key players — the United States, Japan, South Korea, perhaps Russia — to gather in New York during the U.N. General Assembly meeting for talks about how to handle the North Korea problem. The model would be the “P5+1” group that sponsored the Iran nuclear talks. China was an observer back then; this time it would be the convener. Xi Jinping’s global status would be enhanced as he heads toward this fall’s big party congress that will shape his future as president.

Three months ago, Trump was ready for face-to-face diplomacy with Kim, under Chinese sponsorship. He seemed to be packing his bags back on May 1, when he said: “If it would be appropriate for me to meet with him, I would absolutely, I would be honored to do it.” Ingratiating language aside, that was the right instinct. But now, Trump feels burned that the Chinese couldn’t stop Pyongyang’s missile tests, and the White House wants Xi to take the lead.

There was a tone of personal betrayal in Trump’s tweets last weekend: “I am very disappointed in China . . . they do NOTHING for us with North Korea, just talk.”

Because of Trump’s pique toward Beijing, trade is back on the table. The United States is readying harsh trade sanctions against Chinese steel producers and perhaps against several big Internet companies, too. Sources tell me that a milder trade deal worked out by Commerce Secretary Wilbur Ross last month was scuttled by the White House, humiliating the Chinese, and Ross too, but sending the message that Trump is serious in demanding China’s help on North Korea as the price of trade flexibility.

The U.S. Pacific Command is readying military options. But Defense Secretary Jim Mattis knows better than anyone that a military conflict would be a catastrophe. A preemptive strike by the United States would risk the deaths of hundreds of thousands of Koreans and Japanese (and U.S. residents of Seoul), albeit with little risk to the American homeland. That may appeal to some members of Congress, but it would outrage the rest of the world. It would also spin the problem of nuclear proliferation into a lawless zone of unilateral action, harming U.S. interests.

China knows that the road ahead is potentially ruinous. China’s U.N. ambassador, Liu Jieyi, said last month: “Currently tensions are high and we certainly would like to see a de-escalation. . . . If tension only goes up . . . then sooner or later it will get out of control and the consequences would be disastrous.” China’s state-run press also keeps hammering Pyongyang.

Russia, too, seems willing to be helpful on North Korea, as it was on Iran — because its interests are harmed by an erratic nuclear-weapons state.

Trump has the opportunity for a foreign policy reset in the shadow of the North Korea crisis. Russian President Vladimir Putin has overreached and been rebuffed by congressional sanctions. Kim has overreached with his relentless missile testing. Xi has overreached by offering more than he has delivered on curbing Pyongyang.

The world is beginning to worry that Trump could go to war. Maybe that’s the moment when China helps to organize one of those “win-win” solutions that Xi is always talking about.

Article Link To The Washington Post:

The New Tesla Is Great, But It Isn't Progress

Too many of today's innovations are focused on solving problems rather than creating something new.

By Tyler Cowen
The Bloomberg View
August 2, 2017

Tesla Inc.’s new electric car has debuted to rave reviews; one writer called it “the most important car in the world right now.” In general, the commentary on the Model 3 has suggested the product delivers on its promise. Solar panels are falling exponentially in price, and there are periodic bursts of good news on the quest to develop a more durable and cost-effective battery. All of these developments would boost the prospects of green energy.

You might think the U.S. productivity slowdown is finally ending, but unfortunately the news isn’t as good as it first seems. Instead, we are specializing in a new and sadly necessary practice of what I call “defensive innovation.”

Defensive innovation is when you create a new product or capability to protect yourself against an impending disaster, such as the worst scenarios for climate change. It’s important, of course, to practice defensive innovation, but don’t confuse it with progress. The defense only stops your living standards from falling.

The military response to foreign threats is another example of defensive innovation. The risk and potential costs of cyberwarfare are escalating rapidly, and terrorist threats seem worse than they did in the 1980s or 1990s. The best case scenario is that we come up with better means of tracking and hindering cyber and terrorist attacks -- by cutting off funding or by tracing and halting potential perpetrators. Those too will be defensive innovations, aimed mostly at preserving capabilities we already have.

The American military might someday develop better protection against the new threat of North Korean intercontinental ballistic missiles, which might be capable of delivering nuclear weapons to U.S. cities, possibly even New York and Washington. Imagine something akin to Israel’s “Iron Dome,” but protecting a broader geographic area against a greater diversity of weapons. That would be an impressive achievement, but would be an essentially defensive innovation.

Sometimes defensive innovations are mixed in with positive advances. The aging American population faces a potential crisis of senility, dementia and Alzheimer’s disease. A very large number of nonfunctioning elderly people would impose a significant burden on the economy and on caretakers. If medical science miraculously eliminated those cognitive problems, that would be a very real gain in well-being and happiness for America’s elderly. But some of the gain would be defensive in nature, preventing millions of Americans from facing the burdens of caring for such individuals.

Similarly, the electric car is not entirely a defensive innovation. It may be zippier and fun to drive, with a new driver interface. Still, the truly exciting element of the electric car seems to be its potential for limiting carbon emissions and other forms of air pollution.

Driverless cars will save lives and ease commutes. But again they are a defensive product, as otherwise traffic congestion will be much worse.

The need for defensive innovation suggests that many observers overrate the true pace of technological progress. Too many exciting headlines are about cleaning up previous messes, and often those are messes we have made ourselves. Repair work is necessary, but it’s preventing a step backward rather than paving the way for higher living standards on a sustainable basis.

Note that in the earlier stages of economic growth, there is usually less defensive innovation, if only because there is less to defend. There are fewer resources to protect, and the pollution problems of poorer societies are either smaller-scale or simply intractable, short of having more prosperity. So when these poorer societies innovate, usually those are progressive developments. The relative paucity of defensive innovation does mean higher risk, of course, and that is a human cost. But if anything we are underestimating the progress those societies are making. They are accepting higher risks to move ahead more rapidly.

These days, too many of America’s defensive innovations aren’t even about protecting actual social values at all. Homeowners seem to have gotten better at limiting nearby real estate developments, and defenders of the status quo have honed their skills at policy gridlock. More and more of the federal budget is frozen into place to pay for entitlements. That stultification of the role of government is what happens when you get too good at defensive innovation.

So don’t be too easily impressed by even the truest and most reliable stories of tech advances. Instead ask yourself whether we’re playing offense or defense.

Article Link To The Bloomberg View:

Snap, Blue Apron Shake Confidence In Startup Valuations

Both companies now trade below what some venture-capital investors paid for their pre-IPO stakes.

By Corrie Driebusch and Maureen Farrell
The Wall Street Journal
August 2, 2017

Snap Inc. SNAP -4.17% and Blue Apron Holdings Inc. were supposed to herald a return of the great technology IPO. They have instead become vehicles of market dismay.

Both companies now trade well below their initial public offering prices. More disturbingly for venture-capital investors, those prices are below what some paid for their pre-IPO stakes. The result is renewed doubt about valuations across Silicon Valley’s private companies, whose worth has been climbing for a decade.

On Monday Snap shares touched a fresh low in volatile trading after some early shareholders in the messaging-app owner were allowed to sell their holdings for the first time.

In another ominous sign, yoga-studio owner YogaWorks Inc. in mid-July postponed its IPO on the eve of its debut, citing market conditions. AppNexus Inc., an advertising-technology company that was planning to go public as early as this fall, is now more likely to wait until next year, people familiar with the matter said.

Analysts and underwriters say that the weak performance of Snap, the largest tech IPO in more than two years, is stoking doubts among late-stage private investors. Such doubts could interrupt the cycle of ever-increasing funding rounds that has underpinned the lofty valuations of many tech startups.

The relationship between private and public markets has never been so lopsided. Currently, nearly 170 private companies are valued by their owners at $1 billion or more, according to Dow Jones VentureSource. That’s up from about 60 just three years ago. Thirteen private companies now fetch a valuation of $10 billion or more. Before the financial crisis, no venture-backed company had ever achieved a billion-dollar valuation before going public, according to McKinsey & Co.

Funding dedicated to private startups is robust. North American venture firms as of July 2017 had nearly $96 billion in uninvested capital, the most on record, Preqin estimates. Separate from that,SoftBank Group Corp. recently launched a $100 billion vehicle to invest in private tech firms, the largest such fund ever.

The IPO market, meanwhile, is on shaky ground. While the roughly $30 billion raised in 105 offerings in the U.S. in through July is nearly triple the comparable amount last year, it’s an easy comparison: Last year marked the slowest for IPOs in more than a decade, according to Dealogic.

What’s more, IPOs, usually priced to outperform benchmarks, are generating weak returns. U.S. IPOs are up 11% this year through Friday, on average, according to Dealogic—only slightly better than the S&P 500’s 10% gain. Technology IPOs, which are up 19% on average, have underperformed the S&P 500 tech sector, which is up 22%.

Following the Blue Apron and Snap stumbles, entrepreneurs and investors are increasingly questioning whether the private market is in for a correction that would bring it more in line with its public counterpart. They point out that many of the most highly valued private companies, including Uber Technologies Inc., lose money and have an uncertain path to long-term growth and profit.

Roelof Botha, a partner at Sequoia Capital, the big Silicon Valley investor, said he expects more companies have and will continue to hit valuation bumps as investors become more discriminating in the pre-IPO markets.

“Private companies sometimes have unrealistic expectations that prices will go up consistently,” he said, adding that he doesn’t anticipate a sharp drop in pre-IPO valuations in the market more broadly.

Nearly two years ago, well-known venture capitalist Bill Gurley outlined in an interview with The Wall Street Journal reasons why he saw danger ahead for many of the most-highly valued startups. But valuations have kept rising.

In June, for example, Pinterest Inc. raised another $150 million, valuing the image-search startup at $12.3 billion, compared with $11 billion in 2015.

And even though late-stage private investors such as Fidelity are facing losses in the Blue Apron and Snap IPOs, there’s no sign they plan to exit from the market. Fidelity portfolio managers will continue to invest in private companies they believe are good long-term opportunities, according to a spokesman. He added that the investments in Snap and Blue Apron represent small positions in the Fidelity funds that make private investments, which have also bet on winners such as Facebook Inc.

Not all recent tech IPOs have disappointed. Last week, Redfin Corp., a Seattle online real-estate company, priced above expectations and its stock has since soared.

But it will take more than that to wash away memories of Snap and Blue Apron from investors’ minds.

When Blue Apron launched its IPO roadshow in June, its banking team pitched investors a price that would value the meal-kit delivery startup at nearly $3 billion, above the roughly $2 billion it fetched in a 2015 private round. Investors pushed back, citing concerns about the company’s marketing costs and customer turnover, according to fund managers.

Blue Apron priced its shares 40% below its target. The shares have since fallen more than 30%, making Blue Apron’s IPO the worst of the year for a company raising at least $100 million, according to Dealogic. Blue Apron is now worth under $1.3 billion.

The public markets have been similarly rough on Snap. The company’s shares soared 44% in their first day of trading in March after pricing above the targeted range, in what many viewed as a positive sign for the new-issue market. Since its first quarterly earnings report as a public company in May showed the Snapchat parent added new users at a disappointing pace, the stock has struggled. Snap shares on July 10 dropped below their $17 offering price.

Then, on July 11, came a bombshell: Analysts at Morgan Stanley, the lead underwriter on the marquee offering, cut their price target by more than 40% to $16. The shares fell nearly 9% more that day and have continued to slide. They closed Monday down 1% at $13.67 and now trade below the company’s last private funding round.

Article Link To The WSJ:

Snap's IPO May Benefit Investors After All

By Rob Cox
August 2, 2017

Snap's messages may disappear, but one thing could yet endure from its calamitous initial public offering: an incentive to treat shareholders more fairly. Inspired by investor discomfort over founder Evan Spiegel's decision to hoard all his company's voting rights for himself and a few of his bros, the compilers of America's most influential stock benchmark will henceforth bar multiple share classes. It's a victory for democratic capitalism.

The S&P Global unit that decides which stocks are included in the S&P 500 Index – to which investors around the world passively dedicate trillions of dollars of wealth – said on Monday it would no longer admit companies that violate the one-share, one-vote principle of corporate governance. That means Kappa Sigma brother Spiegel, whose company's public shares bestow upon their owners no say whatsoever in its affairs, will not be indoctrinated into a far larger and more important fraternity than the one he joined at Stanford.

There are many reasons to rejoice in this call by S&P Dow Jones Indices. In the short term, it means Snap's crummy performance won't be gumming up the party for hundreds of other companies in the benchmark. When Spiegel offered investors a chance to ride his coattails, enough of them acquiesced to the demands and delivered $3.4 billion of fresh capital. After a quick pop, their voluntary servitude has been rewarded with a quarter of disappointing results and a 23 percent decline in the value of their investment. That includes a 3 percent slide following the snub from S&P.

For all the fund managers and individual buyers who suffered through Snap, however, they can take comfort in helping pave the way for a precedent that ought to benefit future participants in American capital markets. The exclusion of Snap – or Blue Apron, another debutante with tilted voting rights that has watched 35 percent of its value incinerate since listing – should force companies to reconsider whether to create different classes of stock when they gather underwriters and prepare to seek money from new investors.

FTSE Russell, the index-compiling division of the London Stock Exchange, is trying to crack down on unequal voting rights, too, but the S&P is the only major Wall Street institution so far providing a carrot for enterprises to adopt this best practice. The U.S. stock exchanges, unlike big counterparts in London and Hong Kong, provide few restrictions on companies wanting to treat some investors differently than others, namely their founders and venture-capital cronies. That's why, for instance, Chinese internet juggernaut Alibaba opted for a New York listing instead of one in Hong Kong.

There is also no prohibition from the Securities and Exchange Commission, the guardian of investor interests in the United States, on hydra-headed equity arrangements of the sort Snap perpetrated. The agency tried to prevent them in the late 1980s, but the effort was shot down in court. And it goes without saying that underwriters are paid to enable whatever behavior best induces their chief-executive clients to hand over fees in the neighborhood of 7 percent of the value of stock they hawk.

It's hard to say whether S&P's new guidelines will encourage the next startup wunderkind, be it Airbnb or Uber, to give future investors the same rights accorded to, say, Brian Chesky or Travis Kalanick, the respective founders of those private firms. Like those who came before them, including Facebook's Mark Zuckerberg or Google's Larry Page, they may not need to worry about inclusion in the S&P 500 Index. Money will fly through the door to support their fast-growing organizations, whatever the conditions.

Facebook shares debuted at $38 and after stumbling a bit out of the gate have since more than quadrupled in value to around $169. And Google, now Alphabet, hit the public market at $85 a share nearly 13 years ago. It's trading at $933 today. By contrast, the S&P 500, to which they belong, has gained 123 percent since Google went public and around 88 percent since Facebook did (see graphic: Grandfathers of bad governance

Supplicants to feudalistic share structures might point to this as prima facie evidence that the S&P would have underperformed without the inclusion of these superstars. Take those shares out and the benchmark would have done poorly. Perhaps, but the counter-argument is that none of the companies necessarily would have fared any differently either if they had just one share class. One study published in May by an investor trade group also found that multiple classes of stock neither helped nor hurt a company's ability to deploy capital sensibly.

So far this year, Alphabet's C shares, which confer no vote, have modestly lagged those of its one-vote A shares, rising 18 percent and 20 percent, respectively. Its super-vote B-shares are held by Page, fellow co-founder Sergey Brin and other executives. Though the no-vote shares trade at a slight discount to the voting stock, this suggests that when a company is doing well, owners tend to benefit in tandem.

When times are tough, that may not be the case. Take Under Armour, the once-hot apparel maker which also has three share classes and just unveiled disappointing results and a restructuring. The ones that founder Kevin Plank first sold to investors in 2005 at $13 apiece now fetch $18.32, including an 8 percent slide on Tuesday. But since creating a new, no-vote class of stock in April 2016 they are down 60 percent. Those new vote-free shares immediately traded at a discount, and have lost 78 percent of their value.

The point is that today's stock market darlings won't remain so forever. When the inevitable growth plateau comes, they will be glad to be included in the world's most widely followed index, particularly if, as seems likely, the trend toward investing in low-fee funds that track indexes like the S&P 500 keeps outpacing inflows into the high-fee, low-return active variety. Index inclusion gives investors another reason to own their shares.

It's a trend that is arguably already benefiting the likes of Rupert Murdoch's Twenty-First Century Fox, Ralph Lauren, Tyson Foods, McCormick and Ford Motor, all of which are mature, even borderline ancient, companies with more than one class of stock that will be grandfathered in to the S&P 500. It's also another reason for Snap to disappear from investor portfolios for all eternity.

Article Link To Reuters:

Inside Goldman Sachs Struggle To Climb Out Of Last Place In Trading

A 40% second-quarter decline in fixed-income activity sparks charm offensive designed to showcase a more customer-friendly Goldman.

By Liz Hoffman
The Wall Street Journal
August 2, 2017

After catching a tennis match at Wimbledon in July, Goldman Sachs Group Inc. GS 0.74% trading chief Pablo Salame paid a visit to the London offices of bond-fund giant Pacific Investment Management Co.

His message to the Goldman client: “How can we do better?” according to people briefed on the July meeting.

The next day, Goldman reported quarterly trading numbers that were the worst on Wall Street. Those followed a disappointing first quarter in which Goldman failed to catch an upswing in debt trading reported by rivals.

A 40% second-quarter decline in fixed-income activity, which includes bonds traded by Pimco and its ilk, left Goldman with first-half trading revenue that trailed its major banking rivals—a first since Goldman went public in 1999.

The slump has rattled executives, sparking a charm offensive designed to showcase a more customer-friendly Goldman, focused on solving clients’ problems rather than steering them into trades that benefit the firm’s bottom line.

It has also tipped the scales in favor of more immediate action at the firm, despite a yearslong debate around whether changing market conditions were temporary or deep-rooted and how aggressively Goldman should respond to them.

“It could be secular, it could be cyclical, doesn’t matter, who knows?” finance chief R. Martin Chavez said last month on the bank’s earnings call. The bottom line: the firm has to go where its clients want to go.

Chief Executive Lloyd Blankfein, himself a former trader, has scheduled one-on-one meetings with some of the firm’s top traders, according to people familiar with the matter.

Senior executives and salespeople have fanned out to top clients, pitching trade ideas and talking down the bad quarter, according to people on both sides of the outreach.

The firm also is leaning on its investment bankers to pitch their corporate clients on hiring Goldman’s traders for products that protect against swings in currency values and interest rates.

Meanwhile, Goldman is working with a financial-data company to better understand what percent of each client’s trading business it is getting, and how it can sell more products to existing clients, according to people familiar with the matter.

Trading is the engine that has historically powered Goldman. The firm led the development of the institutional stock-trading market in the 1960s and dominated it for decades. In the 2000s, it was at the forefront of an explosion of complex debt instruments that ushered in a golden age of Wall Street profits.

​Even after post-crisis declines, trading still accounts for almost half of Goldman’s revenue.

Big banks make fees by arranging trades for clients, ranging from simple corporate bonds to complex derivatives​ tied to interest rates or currency prices.

The more complex ​instruments, which are often used by active investors like hedge funds, ​command higher fees. Plain-vanilla products are ​a low-margin, high-volume game.

Market and regulatory changes since the financial crisis have hit Goldman especially hard. Regulations closed its proprietary desks, which once made billions of dollars betting with the firm’s own money.

A steadily rising stock market has also pushed investors away from risky investments and toward simpler products ​where giant banks such as J.P. Morgan Chase & Co. dominate.

Goldman’s trading desk, by contrast, has been more geared toward hedge funds—which have been less active as they face outflows and more trading moves to exchanges.

“The business changed around them,” said James Mitchell, an analyst with Buckingham Research Group. “If you’re a hedge fund and you’re worried about investors pulling money next quarter, are you really going to be asking Goldman to build you a five-year yen swap?”

The shifting ground caused consternation within Goldman. In March 2016, a fixed-income sales executive, Tom Cornacchia, spoke publicly of an internal split between those who believed the business had changed for good and those betting on a return to the past.

Mr. Cornacchia cast himself in the former camp, which felt the firm needed to adapt. The executive—who left the firm last September—said he had urged salespeople to be more patient and more client-focused, not to expect to land a trade with every phone call.

‘If you’re a hedge fund and you’re worried about investors pulling money next quarter, are you really going to be asking Goldman to build you a five-year yen swap?’—Buckingham Research Group analyst James Mitchell

For a firm that has long hunted big game—and where bonuses are set by “gross credits” that correspond to an employee’s revenue generation—that was uncomfortable for some, Mr. Cornacchia said. “There’s a lot of denial,” he said at the time.

Meanwhile, Goldman ceded ground to rivals. Among top U.S. trading shops, Goldman has lost 10 percentage points of fixed-income market share by revenue since 2010 to J.P. Morgan Chase and Citigroup Inc., according to regulatory filings.​​

In the first quarter, Goldman’s fixed-income revenue was essentially​ flat from a year earlier, compared with double-digit percentage gains at J.P. Morgan, Bank of America Corp. and Citigroup.

The firm had wrong-sided the “Trump trade,” stockpiling products it expected clients would desire as long-term interest rates rose and the dollar gained in value, according to people familiar with the matter. Instead, long-term rates fell relative to short-term ones, and the dollar slid in March.

In the second quarter, the culprit was the commodities unit, which posted its worst three-month stretch in Goldman’s 18 years as a public company.​ The business ended the quarter in the black, ​but barely, as the bank struggled to adequately hedge its inventory, according to people familiar with the results.

Goldman has responded by turbocharging a push—begun about two years ago—to court mutual funds, asset managers and other so-called “real money accounts.” These investors typically have long-term horizons and are less prone to flameouts than hedge funds, which can close their doors after a few bad quarters.

It has bolstered a sales group started in 2014 under partner Stacy Bash-Polley that aims Goldman’s sales firepower ​at ​its biggest and most profitable clients.​

Besides his visit to Pimco in July, Mr. Salame, the Goldman trading executive, also recently visited J.P. Morgan’s asset-management division.

Article Link To The WSJ:

U.S. Auto Sales Fall In July As Carmakers Slash Rental Fleet Sales

By Joseph White and Paul Lienert
August 2, 2017

U.S. carmakers said on Tuesday they continued to slash low-margin sales to daily rental fleets in July as the overall pace of U.S. car and light truck sales fell for the fifth straight month.

The annualized pace of U.S. car and light truck sales in July fell to 16.73 million vehicles, down from 17.8 million vehicles a year earlier, according to Autodata Corp, which tracks industry sales.

Investors sold shares in the Detroit Three automakers on Tuesday. General Motors Co (GM.N) fell about 3.5 percent and Ford Motor Co (F.N) slid about 2.5 percent.

Several major automakers, including GM, Ford, Fiat Chrysler Automobiles (FCHA.MI) (FCAU.N), Nissan Motor Co (7201.T) and Hyundai Motor Co (005380.KS) said they sharply reduced rental car sales in July, and they portrayed the decisions as putting profit ahead of sales volume.

Automakers have used low-margin sales to rental fleets to avoid factory shutdowns. With more flexible labor agreements, the Detroit automakers have shifted course. They are quicker to idle factories to reduce supply, and they are demanding higher prices, industry officials said. Fiat Chrysler has killed several models it once sold to fleets.

Big U.S. rental car companies such as Hertz Global Holdings Inc (HTZ.N) and Avis Budget Car Rental [CARXXB.UL] at the same time are restructuring their fleets as values decline for rental cars they resell, and as ride services such as Uber Technologies [UBER.UL] bite into their business.

In a more troubling sign for Detroit, combined sales of large pickups fell 4 percent, and sales of large sport utility vehicles declined by 20 percent. Only the Ford F-series, up 6 percent, improved on year-ago results among major truck models.

Declining sales could leave the Detroit Three with too many plants in North America, Jeff Schuster, a forecaster with LMC Automotive, said on Tuesday at an industry conference in Traverse City, Mich. The decline in July's annual sales pace from a year ago equates to the output of four assembly plants.

GM gained little ground in its effort to reduce inventories of unsold vehicles. The automaker had 104 days of supply at the end of July, down from 105 days at the end of June. GM has promised investors to reduce inventories to 70 days by year-end.

Ford said July sales fell 7.5 percent, but inventory fell to 77 days from 79 the previous month. Fiat Chrysler said sales dropped 10 percent.

Among the top Japanese companies, only Toyota Motor Corp (7203.T) reported a year-to-year gain, with sales up 4 percent. Honda Motor Co (7267.T) sales fell 1 percent, and Nissan sales fell 3 percent.

GM, Ford and Fiat Chrysler have said second-half financial results likely will be lower than first-half results, in part reflecting production cuts in North America and pricing pressures.

Article Link To Reuters: