Tuesday, August 8, 2017

Tuesday, August 8, Morning Global Market Roundup: Asia Stocks Deflate As China Trade Disappoints

By Wayne Cole
August 8, 2017

Asian shares went flat on Tuesday as disappointing Chinese trade data clouded the otherwise upbeat outlook on global growth, leaving currencies and commodities becalmed in summer doldrums.

MSCI's broadest index of Asia-Pacific shares outside Japan gave up modest early gains to be barely changed, though it was still within a whisker of its recent decade high.

South Korea's market dipped 0.2 percent while Japan's Nikkei eased 0.3 percent. China's main markets were also down a shade in thin trade.

Beijing reported exports and imports both grew much less than expected in July, breaking a run of better numbers from the Asian giant that had fueled optimism on global growth and a rally in industrial commodity prices.

Ratings agency Fitch this week lifted its outlook for the world economy for this year and next.

"The revisions are led by emerging markets and China in particular, whose recovery has been more pronounced than anticipated," said Fitch chief economist Brian Coulton.

"Data continue to suggest a synchronized global expansion across both advanced and emerging market economies. Spill-overs from the rebound in emerging market demand are reflected in the fastest growth in world trade since 2010."

On Wall Street, the Dow rose 0.12 percent, while the S&P 500 added 0.16 percent and the Nasdaq 0.51 percent. The Dow has risen 10 sessions in a row and three more would match the all-time winning streak in January 1987.

Volumes were light as the news flow dried up with the U.S. Congress and President Donald Trump on vacation and a bumper profit season drawing to a close.

Investors All In

"Earnings have been strong, liquidity is abundant and the message from corporate CEO's around the world was loud and clear," said Chris Weston, chief market strategist at broker IG.

"They are not concerned with Trump, geopolitics or trade restrictions, they see earnings growth as the main game in town and equity investors are aligned with this outlook."

He noted customers' cash holdings at investment manager Charles Schwab were historically low at just 11.5 percent of assets. "Traders and investors are all in on this market."

The same factors have spurred demand for a range of industrial commodities.

Copper futures extended gains after hitting two-year peaks on Monday, while Chinese rebar steel futures surged as much as 7 percent to their highest in more than four years.

Currencies were quieter as the dollar tried to keep a grip on the gains made after upbeat U.S. jobs data last week. Traders are now awaiting U.S. inflation data later in the week but it is widely expected to remain tepid, adding to views the Federal Reserve will maintain a cautious policy tightening stance.

Against a basket of currencies, the dollar was 0.16 percent lower at 93.286 and still not far from the recent 15-month trough of 92.548.

The euro was a shade firmer at $1.1814, while the dollar eased a touch to 110.62 yen.

Oil prices dipped as a rebound in production from Libya's largest oil field prompted selling and investors worried about higher output from OPEC and the United States.

Officials from a joint OPEC and non-OPEC technical committee are meeting in Abu Dhabi to discuss ways to boost compliance with the deal to cut 1.8 million barrels per day in production.

Brent crude futures eased 20 cents to $52.17 a barrel, while U.S. crude futures lost 16 cents to $49.23 per barrel.

Article Link To Reuters:

Oil Prices Fall Further As Libyan Field Resumes Production

By Aaron Sheldrick
August 8, 2017

Oil prices slipped further in Asian trading on Tuesday following a recovery in output at Libya's largest oil field and as doubts about OPEC-led production cuts continue to weigh on the market.

Global benchmark Brent crude futures were down 23 cents, or 0.4 percent, at $52.14 a barrel after dipping 0.1 percent in the previous session.

U.S. crude futures were down 18 cents, or 0.4 percent, at $49.21 a barrel, having fallen 0.4 percent on Monday.

Production from Libya's 270,000 barrels-per-day (bpd) Sharara field was returning to normal after a brief disruption when armed protesters broke into a control room in the coastal city of Zawiya, the National Oil Corporation (NOC) said on Monday.

Libya was exempted from a push to cut global production and bolster oil prices led by the Organization of the Petroleum Exporting Countries (OPEC) and other big producers like Russia.

The recovery of the North African country's output has complicated the OPEC's efforts to curb supply, fuelling doubts over the effectiveness of the output cuts. Libya produced 1.03 million bpd in July, according to the latest Reuters survey.

OPEC output hit a 2017 high in July and its exports hit a record.

Officials from a joint OPEC and non-OPEC technical committee are meeting in Abu Dhabi on Monday and Tuesday to discuss ways to boost compliance with the deal to cut 1.8 million barrels per day in production.

"Assuming that nothing comes from OPEC/Non-OPEC’s technical meeting in Abu Dhabi today, oils near term fate will most likely be determined by the official U.S. Department of Energy inventory data tomorrow evening Asia time," said Jeffrey Halley, senior market analyst at futures brokerage OANDA in Singapore.

The U.S. Energy Information Administration, part of the Energy Department, will releases its weekly petroleum status report at 1430 GMT on Wednesday, giving details on stockpiles and refinery runs.

U.S. crude inventories were expected to post their sixth straight weekly decline last week, while refined product stockpiles likely fell too, a preliminary Reuters poll showed on Monday.

Later on Tuesday the American Petroleum Institute, will release its own report on stockpiles and refinery throughput.

Oil output in the United States has remained high, although Baker Hughes data on Friday showed a cut of one drilling rig in the week to Aug. 4.

Crude oil imports to China for the January to July period rose 13.6 percent from the year ago period to 247 million tonnes, data from the General Administration of Customs showed on Tuesday.

Article Link To Reuters:

Investors Have Been Betting Big That Oil Will Rise. This Is How It May Go Wrong

By Barbara Kollmeyer
August 8, 2017

Speculative investors have been scooping up oil lately, a frenzy the likes of which hasn’t been seen for months, and some say it could all end badly.

So-called net long positions for WTI oil CLU7, -0.20% in the latest week—in other words investors betting that oil prices will rise—climbed a further 53,019 contracts in the week of Aug. 1, according to Commerzbank analysts citing data from the U.S. Commodity Futures Trading Commission and Bloomberg. That takes the level to just under 289,879 for the week, the highest since mid-April.

And they have in fact almost tripled, versus a low from five weeks ago, wrote the analysts. Check out the attached chart showing how demand has picked up:

Over the past six weeks, a nearly 20% rise in oil prices has been supported by these speculative investors, said the Commerzbank analysts.

A sharp drop in oil inventories has caused a shift in market sentiment, as it is “seen by many, market participants as a sign of market rebalancing,” said Carsten Fritsch, analyst at Commerzbank, in emailed comments. But he added that those hopes are probably “not warranted.”

“The inventory draw is mainly seasonal and is unlikely to last when demand cools off in September after the summer driving season and during refinery maintenance. The sharp depreciation of the US dollar also played a role in driving the oil price up,” said Fritsch.

Oil futures booked a slight weekly loss for the first week of August, but posted a 9.9% gain for July, the biggest monthly percentage gain since April 2016. Crude fell Monday as investors watched the outcome of a meeting of the Organization of the Petroleum Exporting Countries, and on concerns that major oil producers commitment to output caps may be wavering.

Article Link To MarketWatch:

Libya And Venezuela Could Be OPEC's Best Hope For Saving Oil Output Deal

-- OPEC and other oil exporters are meeting to discuss how to improve compliance with a deal to cut output.
-- Libya needs to come on board in order for the deal to work going forward, RBC Capital Markets' Helima Croft said.
-- Declining production from Venezuela could save the output cut deal, she said.

August 8, 2017

Two oil-exporting nations could decide the future of a historic deal to drain a worldwide glut of crude oil, according to Helima Croft, global head of commodity strategy at RBC Capital Markets.

It's not top producers Saudi Arabia and Russia, the architects of the accord, but conflict-plagued Libya and Venezuela, a petrostate on the brink of collapse.

Oil producers are meeting in Abu Dhabi on Monday and Tuesday to figure out how to improve compliance with a deal struck by OPEC and other exporters to keep 1.8 million barrels a day off the market. Analysts say top producers Saudi Arabia and Russia have limited options to convince producers to pump less.

The compact has been undermined by surging supply from U.S. drillers, as well as OPEC members Libya and Nigeria, which were exempt.

OPEC initially gave Libya a pass because the northern African nation was still restoring its oil supply after years of civil conflict. But output has surged about 50 percent to 852,000 barrels a day between November, when OPEC signed the deal, and June.

While Nigeria recently agreed to cap its output in the future, Libya has not yet made any commitments.

"They were never part of the deal. They're going to have to be brought into the deal to make this thing work going forward," Croft told CNBC's "Closing Bell" on Monday.

Meanwhile, Venezuela's production has slumped about 13 percent this year as its economic and political crisis worsens. International oil companies have begun pulling their workers out of Venezuela, Croft noted.

A further drop in production from Venezuela, a major crude oil supplier to U.S. Gulf Coast refineries, could be the secret to removing more barrels from the market and boosting stagnant oil prices.

"What actually could save OPEC is probably going to be Venezuela," Croft said.

Article Link To CNBC:

Iran Is Using Syria To Advance Toward The Mediterranean

Islamic State needs to be stopped, but Tehran is a far more menacing strategic threat.

By Naftali Bennett
The Wall Street Journal
August 8, 2017

Hezbollah announced last month that it had captured the Syrian-Lebanese border area of Juroud Arsal from Islamic State forces. Far from being a minor development in a violent and unstable region, this marks another Iranian success in its quest for power and dominance across the Middle East.

Since its 1979 revolution, Iran has sought to become a dominant world power capable of imposing Islamic rule on as many people as possible. The Iranian regime finances and supports armed militias in other countries and is the world’s top exporter of terror. Hundreds if not thousands of Americans have died at the hands of Iran’s terrorist proxies.

An essential part of Tehran’s grand strategy is to control a land corridor from Iran to the Mediterranean Sea. Under the cover of Syria’s bloody civil war, Hezbollah is helping to build such a highway. Hezbollah, trained and supported by Tehran, is classified as a terror group by the U.S., France and the Arab League, among others.

Its effort endangers the entire Western world. Controlling this corridor would directly connect Iran with its proxies in Syria and Lebanon, allowing it to transfer advanced weapons cheaply and quickly. The highway would let Iran build its military presence on the Mediterranean, bringing much of Europe into the range of its air force, navy and mid-range missiles. Iran could even build arms factories outside its borders.

Iranian apologists frame Hezbollah’s capture of the border area as a victory over ISIS, as if the U.S.-led coalition ought to be cheering. ISIS needs to be stopped, but Iran is a far greater problem in the long run. Tehran shouldn’t be mistaken for part of the solution.

As Syria disintegrated through civil war, Iran acted swiftly. It broke international law and forcefully expelled the Sunni population and replaced it with Shiites. This changed the local demography to support Tehran’s planned land corridor through Syria and Iraq. Iran also sent its generals to train Bashar Assad’s troops. Hezbollah has effectively morphed from a terror group into a division of the Iranian army, working for Tehran not only in Lebanon and Syria, but also in Yemen and Iraq.

In the game of chess that Syria has become, Western leaders are so focused on the knight attacking their pawns they cannot see the queen maneuvering to defeat them. Mistaking ISIS as the most serious threat has allowed Iran to move its pieces forward and gain better position. The nuclear deal Iran signed in 2015 demonstrates Tehran’s patience, as it temporarily slows the country’s preparations to acquire nuclear weapons without stopping them over the long term.

I and others are concerned by the cease-fire in southern Syria brokered by the U.S., Russia and Jordan last month. With American and allied forces present in the north, Iran has focused its efforts on the south. The hiatus from violence in that region only gives Tehran another piece of territory in its bid to build a highway to the coast.

It will take time and patience to stop Iran. The international community needs to defeat Tehran wherever its forces advance: in cyberspace, on the battlefields of Yemen and Iraq, and in advanced-weapons laboratories. This effort will be both public and covert, economic and technological. If it results in direct military confrontation, Iran’s foes must be ready to win there too.

Iran must be made to pay a price every day its soldiers remain on Syrian soil helping the Assad regime kill its own people. Tehran’s leaders must know that every violation of the nuclear deal will trigger harsh sanctions. They cannot direct terror attacks in Europe, Asia and America and expect the world to ignore their actions.

There are many possible courses of action against Iran. Yet the free world—led by the U.S.—has yet to take the first and most important step: declaring that it cannot abide an Iranian empire from the Persian Gulf to the Mediterranean Sea.

Article Link To The WSJ:

Economics Could Be The Key To Ending The Syrian Civil War

Rebuilding Syria will take upwards of $100 billion a year—the kind of money that Assad's allies simply do not have.

The National Interest
August 8, 2017

President Donald Trump’s early moves on Syria policy have had their virtues. He has gradually ramped up the military pressure against ISIS, building on efforts established in the last years of the Obama administration. Trump has also worked to reestablish a credible U.S. redline against chemical weapons use, and also, to begin a new dialogue with Russia as of his July 7 meeting with Vladimir Putin in Hamburg, Germany that led to ideas for small ceasefire zones. King Abdullah II of Jordan has helped establish one such zone in southern Syria and there is some hope that it could serve as a model for things to come. Trump has also wisely disengaged from the futile Geneva negotiation process that the Obama administration believed might create a new government of national unity; the reality is that, backed up by Russia and with considerable battlefield momentum in recent years, the government of President Bashar al-Assad isn't going anywhere anytime soon. Devolution of power, at least temporarily, to various regions and subregions in Syria is a much more promising concept than wholesale replacement of the central government in Damascus.

However, much more is needed. No single unified Syria strategy with a step-by-step implementation plan is plausible; the war is too messy and complex to chart a full path to its resolution at this juncture. But America needs more elements of leverage as we seek to set the conditions for creating a path to wind down the war. A key ingredient in such thinking is to use our collective Western and Arab economic leverage wisely and strategically to help autonomous zones as they emerge. The ultimate goal is to persuade Assad to hand the reins of power to a successor regime, partly of his own choosing but with far less blood on its hands, so that his own people and the country's main population belt can access the kind of reconstruction aid that will only be made available to them once he is gone. Rebuilding Syria will take upwards of $100 billion a year—the kind of money that Assad's allies simply do not have. Hence our opportunity for using economics as leverage.

A necessary prerequisite to the full use of such an economic strategy, to be sure, is greater battlefield success. Right now, the only areas ripe for the kind of subnational economic assistance we propose are in the Kurdish north. Militarily, the United States and allies thus must bolster training and arms transfers to carefully chosen allies on the ground to help friendly strongholds emerge and solidify with the capacity to defend themselves. This is not exactly the same as creating "safe zones" because we would not declare any such zones officially or pledge to defend them at all costs. There would be no repeat of Srebrenica, Bosnia or other such tragedies when safe zones were promised, yet not upheld. We would, however, inform Assad that any attacks against certain zones of the country would lead us to take proportionate reprisal measures, at times and places of our choosing, against his air forces or other assets. This strategy should start in the country’s east, where the ongoing defeat of ISIS is creating a vacuum of power that already Assad and Iran are seeking to exploit.

But at the same time, we should be marshaling Western and Gulf financial resources into a pool of money that could be used to support the military elements of strategy. Almost all of the world's major donors—EU nations, the United States, Canada, Australia, Japan, South Korea, the Gulf states and the World Bank group—would likely be inclined to support such an approach given their generally compatible strategic interests in Syria.

The first goal would be to expedite provision of humanitarian aid as sanctuary areas emerged. Over time, we would seek to provide aid to help these areas rebuild. As noted, Assad and his government would get no reconstruction aid until he relinquished power, but they could receive generous humanitarian assistance once the fighting ceased. This would give Assad some incentive to stop fighting and to devise a transition plan so that areas of the country he now controls could fully share in the reconstruction effort.

Everyone would have to compromise somewhat under this approach. Assad, Russia, and Iran will have to accept that Assad cannot directly rule major Sunni and Kurdish areas any longer. Nor will large-scale aid flow to the parts of the country under government control until Assad is gone, except from the relatively shallow pockets of Russians and Iranians. The United States and like-minded states will have to accept that Assad will in fact have a hand in helping choose a successor regime, as will Moscow. The transition will not be the product of a neutral negotiating process in Geneva, though we should condition our support for reconstruction aid on the new regime’s willingness to limit support for Hezbollah. The new government would have to include Sunni and Kurdish representation, of course, and would have to commit to protecting Christian and other minority groups. It would not, however, be a truly democratic entity.

Of course, this is still not a complete plan for Syria. We will still need to find a way to defeat the Al Qaeda–linked element (the Front for Conquest) around Idlib, ideally with Russian collaboration. We also need to ensure that the stabilization of post-ISIS eastern Syria does not turn into a free-for-all—or a quick win for Iran. There would be an important role for Turkey in this outcome.

But an overall strategy that makes our strategy more realistic, and less at direct odds with Russia's core interests, also holds greater promise of achieving these latter ends. By formally changing the removal of Assad into a second-order issue, and one to be achieved through financial suasion over time rather than direct military action, the strategic use of economic power can help achieve most or all of our main objectives in Syria today.

Article Link To The National Interest:

What Next For The Islamic State?

ISIS in the wind.

August 8, 2017

The Islamic State may have lost much of its territory but, even if the loose international coalition fighting the would-be caliphate succeeds in ending its control of cities and towns, it is unlikely that ISIS will disappear anytime soon. There will be no formal surrender. Nor will the eventual defeat of the Islamic State necessarily de-legitimize its apocalyptic theology.

The theological problem is this: The late Turki al-Bin’ali, the grand mufti of the Islamic State, cited a hadith attributed to Muhammad declaring that there would be 12 true and legitimate caliphs before the end of the world. He counted Baghdadi as the eighth, giving ambitious or megalomaniacal upstarts theological cover to be number nine, ten, or eleven. This creates a win-win situation for those who wish to emulate the Islamic State. Success proves theological legitimacy but failure doesn’t count because its authors can be dismissed, in hindsight, as imposters.

So what happens next? Both Syria and Iraq will likely face at least a low-grade insurgency or protracted terror campaign. Mosul may be liberated, but more Moslawis collaborated with the Islamic State than many of the city’s political leaders like to acknowledge. Beyond that, what might the Islamic State, its remnants, and its veterans do next?

Here, the work of the International Center for the Study of Violent Extremism (ICSVE) is invaluable. Just two years old, ICSVE has distinguished itself for cutting-edge research based less on speculation and Washington group think than on provocative analysis founded on extensive interviews with Islamic State defectors and imprisoned returnees. It’s no surprise that the latest report by the United Nations Counter-Terrorism Committee Executive Directorate (CTED) dedicates a page to the summary of ICSVE work.

In 2016, its director Anne Speckhard and senior research fellow Ahmet Yayla published ISIS Defectors: Inside Stories of the Terrorist Caliphate, a work which gives a better description of the inner-workings of the Islamic State than any other journalistic or diplomatic account. Yayla, an adjunct professor of criminology, law, and society at George Mason University and a former Turkish counter terrorism officer, recently published a new article detailing the Islamic State’s efforts to spark lone wolf attacks based on a reading of ISIS’s newest work of propaganda, “Lone Wolf’s Handbook.”

In a July 20 article, he highlighted the dual necessity of shutting down Islamic State activists’ cyber access and blocking the return of Islamic State veterans to Europe, North Africa, and elsewhere. That might be pretty logical, but it is amazing how uncoordinated both strategies are across the international community. The cyber issue is especially important, Yayla notes, because the Islamic State is establishing a “virtual caliphate” to propel its existence even after its last enclave falls.

The cyber strategy should not be just about counter-messaging, but also disruption. ICSVE addresses counter-messaging by using its prison and defector interviews to weave together videos and other media products in which the veterans of the Islamic State directly challenge the indoctrination they received. As for disruption, this is too often only discussed in the abstract, but ICSVE has gone further. On July 15, Speckhard and ICSVE fellow Lorando Bodo together published a useful report detailing how law enforcement and intelligence can identify “nefarious Telegram users” without the help of the application’s administrators. Telegram, for whatever reason, appears to have become the Islamic State’s social media application of choice.

As the last Islamic State banner falls in Syria and Iraq, it will be tempting for Western politicians to declare victory. Former Obama administration officials will also claim that their strategy, so roundly criticized by Donald Trump during his campaign but later in large adopted by the new president, is vindicated. But, any celebration will be premature. The Islamic State and the movement it represents will change form and may change its name, but it will not disappear. There may be no crystal ball to gauge the future but, when it comes to the Islamic State, Speckhard, Yayla and the rest of the ICSVE seem increasingly to come closest.

Article Link To Commentary:

Immigration Anxieties, Then And Now

Circumstances today resemble those in 1924, when Congress curtailed legal entry.

By Walter Russell Mead
The Wall Street Journal
August 8, 2017

It should come as no surprise that the Trump administration has endorsed the Raise Act, a bill by Sens. Tom Cotton and David Perdue to reduce the number of legal immigrants to the U.S. while giving greater priority to highly skilled workers. Immigration reform drove President Trump to victory in 2016, and he is unlikely to drop it now.

Yet immigration has been—and remains—a key to America’s success. From colonial times, the country’s ability to integrate newcomers has facilitated its economic and technological achievement. From Alexander Hamilton to Albert Einstein to Steve Jobs, immigrants and their children have enhanced American dynamism, challenged American insularity, and played critical roles in developing American power.

But the public doesn’t always support a welcoming immigration policy. In 1924 the Johnson-Reed Act reduced legal immigration from the Old World by about 80%. Not even Hitler’s persecution of the Jews could persuade Americans to raise the quota.

Four factors turned the U.S. restrictionist in the 1920s. First, the numbers felt overwhelming. In 1910, almost 15% of American adults—3 in every 20—were foreign-born.

Second, the immigrants arriving in the early 20th century were overwhelmingly from Eastern and Southern Europe, rather than the traditional source countries in Northern Europe and the British Isles. This wave of migrants was seen as culturally alien and thus a challenge to American values and coherence. The native population’s fears amplified racism and xenophobia. The Ku Klux Klan, largely crushed by federal counterterrorism policies in the 1870s, was revived into a restrictionist force that was anti-Semitic and anti-Catholic as well as antiblack.

Third, economic uncertainty was already high. The Industrial Revolution was disrupting society. Family farms, the foundation of middle-class prosperity and security for generations, were failing nationwide. Inequality was rising, incomes for many in the middle class were stagnant or falling, and the new economy was more volatile and offered less security. Native-born rural Americans feared that immigrants would compete for jobs and depress wages, and that their political power would marginalize traditional American values and concerns.

Fourth, a small proportion of immigrants brought violent ideologies with them. Anarchist terrorists had attacked heads of state and political leaders around the world. Luigi Galleani, an Italian immigrant to the U.S., organized mainly other immigrants and inspired attacks—valorized as “propaganda of the deed”—against prominent people and institutions. His disciples were believed responsible for a 1920 Wall Street bombing that killed 38. Russia’s Bolshevik Revolution also sparked fears that immigrants might carry the “bacillus” of communism.

Do these factors sound familiar today? Immigration levels are at historic highs, the cultural gap between immigrants and the native population is wide, the economic outlook for many Americans is troubled, and a (very) small number of immigrants sympathize with horrific ideologies abroad. A fifth and serious additional factor, not paralleled in the early 20th century, is the presence of millions of illegal immigrants. As Mr. Trump understood, illegal immigration corrodes public sympathy for high levels of legal immigration.

Meanwhile, some of the classic arguments in favor of immigration may need to be re-examined. If automation will destroy millions of routine jobs in the next decade, how much unskilled labor does the U.S. require?

Nevertheless, America still needs immigrants. Their talent and dynamism are more vital than ever. If U.S. companies want to maintain their technological edge and profitability in a competitive world, they need skilled immigrant workers. Immigrants create jobs and industries, making the future brighter for all Americans, while paying into the country’s hard-pressed social-insurance system.

Yet history suggests that when public opinion sours on immigration, policy eventually follows. Now that process may be getting under way. Public dissatisfaction with the relatively liberal immigration policies in place helped drive the 2016 election. The Raise Act is provocative, perhaps intentionally so. But giving greater priority to highly skilled immigrants, while reducing total numbers, might secure the many benefits of a liberal immigration regime while reducing the political fallout. Properly designed, a new system might offer Silicon Valley and other employers better access to the specialized professionals they need, while also addressing the politically potent concerns of Mr. Trump’s populist base.

America’s ability to welcome and integrate immigrants remains one of its strengths, but history suggests that a dogmatic insistence on the current policy may well stoke an anti-immigrant backlash. It is more prudent to accommodate these concerns than to defy them.

Article Link To The WSJ:

U.S. Credit-Card Debt Surpasses Record Set At Brink Of Crisis

U.S. consumer credit-card debt just passed an ominous milestone, beating a record set just before the global financial system almost collapsed in 2008.

By Jennifer Surane
August 8, 2017

Outstanding card loans reached $1.02 trillion in June, data from the Federal Reserve show, as lenders including Citigroup Inc. and JPMorgan Chase & Co. compete to sign up cardholders who may carry balances -- a relatively lucrative business in a prolonged period of low interest rates.

The bet is that this time it won’t end so badly. In 2008, a drop in home prices spiraled into a global financial meltdown, and after the jobless rate surged toward 10 percent, banks wrote off more than $100 billion in credit-card loans over the next two years.

Investors have been skittish over the potential for defaults to rise ever since card balances eclipsed $1 trillion in February. Credit-card issuers Capital One Financial Corp., Synchrony Financial and Discover Financial Services said write-off rates ticked up in the second quarter from the previous three months.

Article Link To Bloomberg:

Netflix Buys Comics Publisher Millarworld To Feed Films And TV

By Lisa Richwine and Narottam Medhora
August 8, 2017

Netflix Inc on Monday said it has bought comics publisher Millarworld, bringing on board renowned comic book writer Mark Millar and a host of character franchises it can mine for TV shows and movies.

It is the first acquisition by Netflix, the 20-year-old streaming-video pioneer that is building a library of original series and films in a bid to hook new customers around the world.

Two of Millarworld's best-known comics, "Kick-Ass" and "Kingsman," are not part of the deal, whose terms Netflix did not disclose.

The purchase of a character stable mimics the strategy of Walt Disney Co. Disney bought Marvel Studios in 2009 and has churned out blockbuster movies, TV series and toys based on its superheroes. Some Marvel shows run on Netflix.

Mark Millar, a Scottish writer and former Marvel employee, runs Millarworld with his wife, Lucy.

Three of Millarworld's franchises - "Wanted," "Kick-Ass" and "Kingsman" — have been adapted into films that have taken in nearly $913 million combined at global box offices.

Although "Kick-Ass" and "Kingsman" are not part of the deal, it does bring Netflix a range of other franchises across genres from science fiction to fantasy, plus superheroes and real-world characters.

"Mark is as close as you can get to a modern-day Stan Lee," Netflix's chief content officer, Ted Sarandos, said in a statement, referring to the 94-year-old creator of comic book franchises such as "Spider-Man," "Avengers" and "X-Men."

Millar spent eight years at Marvel, where he developed comic books and story lines that resulted in movies such as "Logan" and "Captain America: Civil War."

It is unclear if Netflix will spend the sums Marvel does on its movies, which can cost up to $250 million. Netflix's development has focused on TV series and smaller budget movies, but it is moving toward big-budget films. It spent $90 million on the Will Smith movie "Bright," due out in December.

The acquisition of Millarworld is likely financially immaterial to Netflix, Raymond James analyst Justin Patterson said via email. He said his research showed comic book adaptations draw large audiences on the streaming service.

Netflix last month reported second-quarter revenue of $2.79 billion and net income of $65.6 million.

Millarworld will continue to create and publish new stories and franchises under the Netflix label, the company said.

Netflix also could expand further into consumer products. The company has stepped into merchandising with apparel and other products related to "Stranger Things."

Shares of Netflix rose 0.6 percent to $181.37 on Nasdaq.

Article Link To Reuters:

Tesla Seeks $1.5 Billion Junk Bond Issue To Fund Model 3 Production

By Nick Carey and Paul Lienert
August 8, 2017

Tesla Inc (TSLA.O) said on Monday it would raise about $1.5 billion through its first-ever offering of junk bonds as the U.S. luxury electric car maker seeks fresh sources of cash to ramp up production of its new Model 3 sedan.

The move to issue junk bonds - lower-quality investments that offer higher yields - represents a bet by Tesla Chief Executive Elon Musk that bond investors will be as hungry as stock investors to back the company on expectations that its Model 3 will be a hit.

Tesla shares are up 67 percent this year, pushing the company's market value to about $60 billion, above that of top U.S. automakers General Motors Co (GM.N) and Ford Motor Co (F.N), even though Tesla has yet to make an annual profit.

"Bond investors, who typically don't love companies that don't make money, will be far more forgiving when it comes to Tesla," said bond expert Robbie Goffin, managing director of FTI Consulting, citing the company's stellar stock market value.

Tesla was to start pitching potential investors on Monday, IFR reported, citing lead bankers on the deal.

So far, Tesla has been raising money to pay its bills with a combination of equity offerings and convertible bonds, which eventually convert into shares. In March, the company raised $1.4 billion through a convertible debt offering.

Following the announcement, Standard & Poor's reaffirmed its negative outlook for the automaker and assigned a "B-" rating for the bond issue - deep into junk credit territory. S&P also maintained its "B-" long-term corporate credit rating on Tesla.

"We could lower our ratings on Tesla if execution issues related to the Model 3 launch later this year or the ongoing expansion of its Models S and X production lead to significant cost overruns," S&P said in a statement on the bonds.

Moody's assigned a junk "B3" rating to the bond issue and said the company's rating outlook was stable.

The rating agency said the overall company's "B2" rating was supported by the fact that if Tesla ends up in serious financial trouble, its brand name, products and physical assets would be of "considerable value" to other automakers.

The automaker's debt load increased significantly last year when it bought solar panel maker SolarCity.

CFRA equity analyst Efraim Levy said the bonds provide Tesla with funds "at least into mid-2018."

"There is a risk they could still run out of money," he said. "Then you’d go back to the equity markets and hope it’s not too late" to raise more money.

Burning Cash

The latest effective yield on single-B rated bonds maturing in seven to eight years, the class for a Tesla issue, is around 5.5 percent, according to Bank of America/Merrill Lynch Fixed Income Index data.

Tesla’s bond will price later this week after several days of meetings with credit investors, who will weigh factors including the absence of a borrowing history, its lack of profit and its high cash-burn rate against its growth potential and its attractiveness as an environmentally friendly “green” issuer.

Ultimately, the depth of investor interest will determine the bond's interest rate.

Tesla is counting on the Model 3, its least pricey car, to become a profitable, high-volume manufacturer of electric cars.

Tesla said last week that it had 455,000 net pre-orders for the Model 3, which has a $35,000 base price, and that the sedan was averaging 1,800 reservations per day since it launched late last month.

At the launch, Musk, however, warned that Tesla would face months of "manufacturing hell" as it increases production of the sedan.

Tesla had over $3 billion in cash on hand at the end of the June quarter, compared with $4 billion on March 31.

The company has said it expects capital expenditures of $2 billion in the second half of this year to boost production at its Fremont, California assembly plant and a battery plant in Reno, Nevada.

Tesla's cash burn has prompted short-sellers like Greenlight Capital's David Einhorn to bet against the Palo Alto, California company.

Goldman Sachs, Morgan Stanley, Barclays, Bank of America Merrill Lynch, Citigroup, Deutsche Bank and RBC are the book-runners on the bond offering, IFR reported.

Shares of Tesla closed down 0.5 percent at $355.17 on Monday.

Article Link To Reuters:

Online Lenders Upbeat About Turnaround Progress, But Worries Linger

By Anna Irrera and David French
August 8, 2017

LendingClub Corp and OnDeck Capital Inc surprised investors on Monday with strong growth forecasts that sent the online lenders' stocks soaring, but analysts said the sector's health was still a concern.

Online lenders soared in popularity after the financial crisis when banks pulled back from traditional lending and borrowers sought other options. But rising delinquencies have made it harder to raise funds for fresh loans, prompting the sector to review its business model, which tends to attract borrowers with low credit quality.

LendingClub, which serves individuals, and OnDeck, which caters to small businesses, are cutting costs and trying to attract borrowers with better credit.

Executives of both companies were upbeat about the progress in their turnaround plans after they reported second-quarter results.

"It's great to be back to growth," LendingClub Chief Executive Scott Sanborn said in an interview. "We are excited about the momentum building in the business and the massive opportunity that lies ahead."

Sanborn took on the CEO role last year after his predecessor, LendingClub founder Renaud Laplanche, was ousted in a scandal over disclosures and potential conflicts of interest.

In a post-earnings interview, OnDeck CEO Noah Breslow called it "a positive quarter."

"We have done a lot of work to restructure the business," he said.

OnDeck shares closed 18.5 percent higher at $5, and LendingClub ended up 4.8 percent $5.46. The stocks rose in after-hours trading but remain far below their initial public offering prices of $20 and $15, respectively.

On conference calls, analysts probed executives about their forecasts, questioning whether online lenders could deliver on promises for loan growth, credit quality and profitability.

While OnDeck's initiatives were bearing fruit, the company remains a "'show me' story for investors," BTIG analyst Mark Palmer wrote in a research note.

Prosper Marketplace Inc, another online lender, has been looking to raise a new round of funding in exchange for equity at a price that would slash its market value by more than 70 percent, people familiar with the matter told Reuters on Friday. The sources requested anonymity because they were not authorized to speak publicly about the matter.

The Information first reported last week on Prosper's fundraising effort.

Earnest Corp is looking to sell itself for $200 million, Bloomberg News reported on Friday, far less than the $300 million it has raised from investors.

The sector has been expected to consolidate for several months, and mergers could be on the horizon, venture capitalists, investment bankers and analysts said in recent weeks. In theory, companies can improve profits by merging because they would need to spend less money on marketing and technology, and be able reach more customers.

"There have been too many princes wanting to be kings and they will not all be successful," Ryan Gilbert, partner of financial technology venture capital firm Propel Venture Partners, said in an interview.

Article Link To Reuters:

EPA Resignation Facts

The rest of the story behind those loud civil-servant protests.

By The Editorial Board
The Wall Street Journal
August 8, 2017

The media and federal unions are making a cause celebre out of federal scientists who have resigned and then denounced Trump Administration policies on the way out. We’re all for shrinking the government workforce, but the political melodrama could use a few leavening facts.

The latest splash is from Elizabeth Southerland, until recently the director of science and technology in the Environmental Protection Agency’s Office of Water. Ms. Southerland ended a 30-year EPA career last week with an internal memo decrying Donald Trump’s “draconian” budget cuts, and his “industry deregulation.” She said her “civic duty” required that she warn that “our children and grandchildren” face “increased public health and safety risks and a degraded environment.”

This follows the much-publicized April departure of Michael Cox, who quit the EPA in Washington state after 25 years, complaining in a letter to Administrator Scott Pruitt about “indefensible budget cuts” and efforts to “dismantle EPA and its staff as quickly as possible.”

Both EPA employees are of retirement age, and they are right to bow out if they can’t in good faith work for Mr. Pruitt. Their letters nonetheless reveal an entrenched and liberal federal bureaucracy. Though career civil servants who are supposed to serve political appointees of any party, they have clearly become progressive ideological partisans.

Their exits also explain why so much of the EPA workforce is misrepresenting or missing the point of Mr. Pruitt’s policy changes. Ms. Southerland raps the Administrator’s call to rebalance power between the feds and states, as she claims the EPA “has always followed a cooperative federalism approach.”

Really? During the combined presidencies of George H.W. Bush, Bill Clinton and George W. Bush, the EPA imposed five federal air-quality implementation plans on states. Barack Obama’s EPA imposed 56.

The Obama EPA also stripped states of their statutory development authority, whether with its pre-emptive veto of Alaska’s Pebble Mine, or its Waters of the United States rule that gave the feds de facto sway over tens of millions of acres of private land. EPA employees embraced these new powers, but they violate the Constitution and hurt the environment.

Ms. Southerland seems to have forgotten that the largest clean-water disaster in recent years resulted from the EPA’s 2015 decision to punch a hole in the Gold King Mine in Colorado, turning the Animas River yellow with waste water and heavy metals. The agency shares blame for the Flint, Michigan, lead crisis, having failed to alert the public.

The Fish and Wildlife Service has a dismal record recovering endangered species, while the Forest Service’s logging restrictions have left millions of acres of dead, bug-infested trees as tinder for catastrophic wildfires.

Mr. Trump has proposed a 30% cut in EPA funding, but Congress won’t cut anything close. Mr. Pruitt’s decision to refocus on core jobs like Superfund cleanups means a shift in EPA spending in any event. The goal should be an EPA that is more efficient and effective—rather than one measured by employee numbers.

Ms. Southerland’s exit may also free up some dollars. Federal records show she earned $249,000 last year in combined salary and bonus—$1,000 less than a Supreme Court Justice and about $200,000 more than the average taxpayer. She’ll receive an annual lifetime pension worth about 75% of the average of the last three years of her career. With that sinecure, she should forgive taxpayers for thinking a little fiscal discipline at EPA might be in order.

Article Link To The WSJ:

What Happens In Washington Matters To Markets

Stocks won't keep flying high without tax reform, deregulation and infrastructure spending.

By Komal Sri-Kumar
The Bloomberg View
August 8, 2017

With the recent Senate decision not to implement even a so-called skinny repeal of Obamacare, the Trump administration is at crossroads. President Donald Trump, and some of his senior advisers, would still like to pursue a repeal of the existing health-care structure. Several senators and congressmen would, instead, prefer to focus on corporate and personal tax cuts in an effort to boost growth.

Although reforming health care and achieving annual gross domestic product growth of 3 percent or more were both important Trump campaign promises, which objective the administration pursues first would have major implications for investors. Specifically, emphasis on health care as the top priority would lead to disappointment for equity investors. Financial market participants were hoping to benefit from dismantling onerous regulations, cutting corporate taxes and introducing plans for infrastructure spending. Realistically, the U.S. Congress can’t handle both major issues at the same time.

With sharply divergent views even among Republicans on issues ranging from covering patients with pre-existing conditions to maintaining payments to insurers to subsidize low-income participants, no quick resolution to the health-care debate is likely. Top officials such as Treasury Secretary Steven Mnuchin also have to persuade Congress to increase the federal debt limit -- Bloomberg Intelligence estimates that the U.S. government will run out of money as soon as Oct. 3. A default on Treasury debt, or a government shutdown, would be among the consequences of not passing a debt bill on time.

Such competing pressures mean that if health care does stay on the congressional agenda, tax reform and deregulation may not happen before 2018, at the earliest. In addition, failure of the much ballyhooed health-care effort has led to recriminations among Republican members of the Senate, and deteriorating relations between the Senate and Trump. If Trump and the Senate try yet again to repeal Obamacare and fail, investor confidence in a subsequent passage of market-friendly reforms is likely to take another hit, with unfavorable implications for the equity market.

Equities don’t reflect such investor concerns yet. A healthy increase in U.S. corporate profits through the second quarter helped push markets to new records, leading some analysts to suggest that any policy impasse in Washington is of little consequence for financial markets. Some even say that government inaction would be a positive development since it would mean less interference in the market mechanism.

There are no grounds for such complacency. Expectation of fewer restrictions on banks’ activities was important in explaining the rise in financial-industry valuations so far this year. Trump’s statement that he would spend as much as $1 trillion on infrastructure projects caused shares of companies such as Caterpillar Inc. and Aecom to jump as soon as the election results were known in November. Shares of both companies remain well above where they were before the election. Lack of action on these fronts would signal that equity markets need a correction from their overvalued levels. For example, the Standard & Poor’s 500 Index is trading at an elevated 21 times the past 12-month per-share earnings, and at more than 30 times earnings, according Yale professor Robert Shiller’s cyclically adjusted P/E (CAPE) measure.

Simply put, corporate earnings need the tailwind of favorable tax and regulatory policies if they are to continue rising. For example, the 15 percent corporate tax rate favored by Trump compared with the current top rate of 35 percent, if enacted, would go a long way toward encouraging U.S. corporations to repatriate a large share of the more than $2 trillion that they hold abroad to avoid the high U.S. taxation. Some of the funds would be used to pay higher dividends to shareholders, but a major portion is likely to be employed to expand production and hire workers.

What are investors’ options? Stocks would continue to be attractive if they get support from long-promised Trump stimulus measures. On the other hand, if policy discussions remain focused on health care, investors may decide to reduce risk in their equity exposure, find that gold shines even brighter than it has in recent weeks, and look for safety in U.S. Treasuries.

Article Link To The Bloomberg View:

The New Socialism Of Fools

By J. Bradford DeLong
Project Syndicate
August 8, 2017

According to mainstream economic theory, globalization tends to “lift all boats,” and has little effect on the broad distribution of incomes. But “globalization” is not the same as the elimination of tariffs and other import barriers that confer rent-seeking advantages to politically influential domestic producers. As Harvard University economist Dani Rodrik frequently points out, economic theory predicts that removing tariffs and non-tariff barriers does produce net gains; but it also results in large redistributions, wherein eliminating smaller barriers yields larger redistributions relative to the net gains.

Globalization, for our purposes, is different. It should be understood as a process in which the world becomes increasingly interconnected through technological advances that drive down transportation and communication costs.

To be sure, this form of globalization allows foreign producers to export goods and services to distant markets at a lower cost. But it also opens up export markets and reduces costs for the other side. And at the end of the day, consumers get more stuff for less.

According to standard economic theory, redistribution only comes about when a country’s exports require vastly different factors of production than its imports. But there are no such differences in today’s global economy.

In the United States, a balance-of-payments surplus in finance means that more Americans will be employed as construction workers, capital-goods producers, and nurses and home health aides. Similarly, a surplus in services means that more Americans will work not only as highly educated (and well-remunerated) consultants in steel-and-glass eyries, but also as, say, janitors and housekeepers in motels outside of Yellowstone National Park.

At the same time, a deficit in manufacturing may create more manufacturing jobs abroad, in countries where labor costs are low relative to capital; but it destroys relatively few jobs in the US, where manufacturing is already a highly capital-intensive industry. As Stanford University economist Robert Hall has been pointing out for three decades, more Americans are employed selling cars than making them. The commodities that the US imports from abroad embody a significant amount of relatively unskilled labor, but they do not displace much unskilled labor in America.

So, at least in theory, the shift in US employment from assembly-line manufacturing to construction, services, and caretaking may have had an impact on the overall distribution of income in terms of gender, but not in terms of class. Why, then, has there been such strong political resistance to globalization in the twenty-first century? I see four reasons.

First and foremost, it is easy for politicians to pin the blame for a country’s problems on foreigners and immigrants who do not vote. Back in 1890, when politicians in the Habsburg Empire routinely blamed Jews for various socioeconomic ills, the Austrian dissident Ferdinand Kronawetter famously observed that “Der Antisemitismus ist der Sozialismus der dummen Kerle”: anti-Semitism is the socialism of fools. The same could be said of anti-globalization today.

Second, more than a generation of inequitable and slower-than-expected economic growth in the global North has created a strong political and psychological need for scapegoats. People want a simple narrative to explain why they are missing out on the prosperity they were once promised, and why there is such a large and growing gap between an increasingly wealthy overclass and everyone else.

Third, China’s economic rise coincided with a period in which the global North was struggling to reach full employment. Contrary to what the followers of Friedrich von Hayek and Andrew Mellon have always claimed, economic readjustments do not happen when bankruptcies force labor and capital out of low-productivity, low-demand industries, but rather when booms pull labor and capital into high-productivity, high-demand industries.

Thus, neoliberalism does not just require open and competitive markets, global change, and price stability. It also depends on full employment and near-permanent booms, just as economist John Maynard Keynes had warned in the 1920s and 1930s. In recent decades, the neoliberal order failed to deliver either condition, most likely because doing so would have been impossible even with the best policies in place.

Fourth, policymakers did not do enough to compensate for this failure with more aggressive social policies and economic and geographic redistribution. When US President Donald Trump recently told upstate New Yorkers that they should leave the region and seek jobs elsewhere, he was simply echoing the past generation of center-right politicians in the global North.

The global North’s current political and economic dilemmas are not so different from those of the 1920s and 1930s. As Keynes noted then, the key is to produce and maintain full employment, at which point most other problems will melt away.

And, as the Austro-Hungarian economist Karl Polanyi argued, it is the role of government to secure socioeconomic rights. People believe that they have a right to live in healthy communities, hold stable occupations, and earn a decent income that rises over time. But these presumed rights do not stem naturally from property rights and claims to scarce resources – the coins of the neoliberal realm.

It has been ten years since the global financial crisis and the start of the “Great Recession” in the global North. Governments still have not repaired the damage from those events. If they do not do so soon, the “-isms” of fools will continue to wreak havoc in the decades ahead.

Article Link To Project Syndicate:

The 2020 Democratic Purity Olympics Are Already Under Way

The Bernie Sanders supporters attacking Kamala Harris are itching to refight 2016 and demand a level of purity that, lo and behold, only one candidate can possibly attain.

The Daily Beast
August 8, 2017

Wouldn’t you know it, on the very delicious-to-watch week that Republicans start jumping off the leaky Trump frigate, some Democrats began testing attacks on one of their own, possible 2020 presidential contender Kamala Harris. The charge, leveled by a few folks on the left, including one member of the Democratic Party Unity Commission (!), is the usual one: that Harris is a corporate stooge in the mold of you-know-who and if the Democrats are even thinking about nominating her, the dis-unity commission will get to work sabotaging her.

I hold no particular brief for Harris, who’s been a senator for all of seven months. Frankly, to me, this presidential talk seems awfully premature. Yes, Barack Obama had served briefly; he was elected to the Senate in 2006 and started running for president the next year, whereas Harris would have three years under her belt. But Obama had electrified the political world with that convention speech back in 2004, and that night he showed obvious presidential potential. Harris asked some good questions in two Senate hearings, but I’m a little mystified as to why that gets her on presidential lists. She was shortlisted by some people before she was even elected.

In addition to that her critics have one good point. As David Dayen pointed out in the New Republic in early 2016 as her Senate run was getting off the ground, she has a history of being overly cautious (uh, just like you-know-who), especially with regard to her decision not to prosecute Steve Mnuchin’s bank for foreclosure violations. The California attorney general’s office had found ample evidence of possible wrongdoing, but Harris declined to pursue the matter and hasn’t said why.

So she should say why, if she runs for president, and people can judge whether her response is adequate. That’s part of the scrutiny.

But these attacks have the feel of something else. They have the feel of a group of people, most or all of them Bernie Sanders supporters, itching to re-fight 2016 and demand a level of purity that lo and behold only one candidate can possibly attain.

I wrote this many times in 2016, and I’ll write it again here: The fact that Sanders is from the state he’s from gives him the luxury of purity. I don’t doubt that he’s principled. But it’s also a fact that he (along with colleague Pat Leahy) faces less pressure from powerful interests than probably any other senator in the country.

Why? Because of the nature of their state. Nearly every state has either a big corporation of a large extractive industry or something. Not Vermont. Vermont has no huge banks. It’s home base to no massive corporate conglomerates. It doesn’t have a single billionaire. The biggest “company” in Vermont is the state university. And of course it’s home to all the left-leaning back-to-the-earth types who started moving there in the 1970s. When that’s your state, and it’s 95 percent white to boot, and a mere 150,000 votes will win you statewide elections, you have a lot of freedom to do and say whatever you please (although on the one issue that might cause him problems in the state, guns, we saw him trim his sails aplenty in 2016).

When you’re running in California, it’s a different ball game. Harris has raised $16.5 million since 2015, when she started running for the Senate. She got off easy because no first-rank Republican pursued the Senate seat; in 2022, assuming she hasn’t moved into the White House, she can probably expect that things will be different and she’ll need to raise $50 million. Bernie, by contrast, raised around $7.8 million for his last election but spent only $3 million and at this point could win by spending $200,000 if he wanted to.

Harris is running in an insanely more expensive state. It’s also a much more complex state. California has tech, of course, but also huge banking and retail and oil-refining businesses, and a hundred other things. A senator shouldn’t prostrate herself before these interests, but as they all represent jobs in her state, she can’t simply denounce them as capitalist predators. She’s bound to take some donations that Sanders would refuse—or simply wouldn’t need to solicit in the first place. And I can guarantee you that if Bernie Sanders were a senator from California, he either wouldn’t be the same Bernie Sanders we know today—or he wouldn’t be a United States senator.

Virtually every potential candidate will have some blemish or another. During the health care debate, Elizabeth Warren was “bad,” if you want to put it that way, on the medical device tax. Which is to say she was against it. Why? A lot of them are made in her state. Sherrod Brown has taken positions on coal that aren’t perfect from the environmentalist point of view. Coal is mined in his state. This is what senators do, and it’s what they should do. They all can’t be from Vermont.

Someone, probably David Sirota, will respond to this column by saying we don’t need any lectures on electability from Tomasky, who assured us Hillary would win. And it would be a fair point. I was sure she would win. I and everybody else in America except Allan Lichtman, but still; I was wrong.

So I’m going to try to refrain, for the next three years and three months (!), from giving electability lectures. But this isn’t that. This is an argument that demanding a precise stance from candidates because one candidate takes that position and therefore it’s the only right and true position is absurd. One example—even Dean Baker, about as left as a mainstream economist can be, will tell you that he’s not sold on a $15 minimum wage because “we really don’t have enough data to say with much certainty what the employment impact will be.” So turning $15 into a litmus test is just a political posture that’s intended to stifle actual debate and doesn’t have anything to do with economic substance.

If this kind of thing is starting this early, we have reason to fear that 2020 will be worse than 2016. And we know how that ended.

Article Link To The Daily Beast:

The 2020 Democratic Purity Olympics Are Already Under Way

Here Are All The Signs Investors Are Growing More Worried About Retail

Retail REITs lag behind S&P 500 by about 19 percentage points; Avis Budget shares tumble in after-hours trading on guidance.

By Luke Kawa and James Crombie
August 8, 2017

The latest U.S. jobs report laid bare some of the sobering tribulations faced by American retailers: they’ve shed jobs on an annual basis for the first time since 2010, when the sector’s employment was just starting to rebound following the Great Recession.

The challenges are mounting as Amazon.com Inc. continues to grab market share in a secular trend in favor of e-commerce at the same time that cyclical consumption, the engine of U.S. growth, may be sputtering. Big-ticket spending items like autos have seen a marked slowdown in sales during 2017. And even maintaining the current pace of spending growth could prove difficult for U.S. consumers: the household savings rate is at a nine-year low.

"Weak consumption, another miss on auto sales and the drop in ISM non-manufacturing sparked another round of concerns that the expected medium-term slowing in consumption may already be materializing," wrote Andrew Hollenhorst, Citigroup fixed income strategist in New York, referring to the ISM’s gauge of activity in services industries.

Rental-car companies showcase the latest signs of stress about firms that rise and fall on the back of the U.S. consumer -- and it appears across different asset classes. Shares of Avis Budget Group Inc. tumbled in after-hours New York trading on Monday as the firm cut its annual earnings-per-share guidance and missed expectations in its second-quarter results.

Nowhere is anxiety about the fate of American retailers more evident than in one of the most liquid exchange-traded funds tracking the sector. The SPDR S&P Select Retail ETF, which routinely sees short interest well in excess of 100 percent of the equity float, is down about 6 percent year to date. This is an equal-weighted basket of retail stocks, in which Amazon’s price changes wield as much influence as those of the much smaller Five Below Inc.

In the junk bond market, retail has separated itself from the pack in an undesirable fashion. In aggregate, spreads have tightened to levels not seen in three years, a trend the retail subgroup has completely bucked. A big gap in yields has emerged since last November:

While on the surface, the employment trends point to relative margin relief for physical retailers, there’s also cause to be concerned about volumes. Department stores continue to cede ground to non-store retailers (a segment that covers Amazon but doesn’t include sales made through the websites of brick-and-mortar stores):

And this disruption has taken its toll on publicly traded retailers. For instance, when Amazon announced that Sears would begin offering its Kenmore line of appliances on the e-commerce site on July 20, the result was a net destruction in equity market value.

It’s little wonder, then, that five-year credit default swap spreads for the likes of Macy’s Inc. and Toys R Us Inc. have widened materially in 2017.

Mall operators have likewise been unloved in 2017, with the retail real estate investment trust subgroup trailing the S&P 500 Index by about 19 percentage points through Monday’s close.

Article Link To Bloomberg:

Free Lunches’ Like The $15 Minimum Wage May Hurt The People They’re Meant To Help

By Catherine Rampell
The Washington Post
August 8, 2017

Progressives generally support better labor protections, including policies meant to provide higher wages, more predictable working hours, increased bargaining power, and greater access to paid family leave, sick leave and overtime. And given the raw deal that workers get so often, these are all policies that I generally support as well.

But lately, as Democratic leadership has increasingly embraced the far-left impulses of its base, I’ve become convinced that the left needs to think harder about the unintended consequences of such benevolent-seeming proposals.

In isolation, each of these policies has the potential to make workers more costly to hire. Cumulatively, they almost certainly do.

Which means that, unless carefully designed, a lefty “pro-labor” platform might actually encourage firms to hire less labor — or at least to shift toward contract labor that’s exempted from these cherished protections.

These are not mere hypotheticals. A two-tier labor market, in which some lucky workers are entitled to generous compensation and job security and the rest are hung out to dry, already plagues countries, such as France and Japan, with traditionally stronger labor protections than the United States.

But these are not outcomes that lefty politicians and policy wonks seem keen to grapple with. It’s easier, or perhaps more politically convenient, to assume that “pro-worker” policies never hurt the workers they’re intended to help.

Take the proposal to raise the federal minimum wage to $15 an hour, a policy endorsed in the Democratic Party’s new “Better Deal” platform.

An increase in the federal minimum wage, stuck at $7.25 for eight years, is long overdue. But more than doubling it would likely result in massive job losses and cuts in work hours.

We’ve already seen preliminary evidence that raising wages in Seattle to $13 has produced sharp cuts in hours, leaving low-wage workers with smaller paychecks. And that’s in a high-cost city. Imagine what would happen if Congress raised the minimum wage to $15 nationwide.

In West Virginia, the median hourly wage is just $14.79; in Arkansas, it’s $14.48; and in Mississippi, it’s a depressingly low $14.22. A $15 minimum wage could be binding on more than half of jobs in these states. In fact, in every state (not including D.C.), it could cover at least a quarter of positions.

That might seem like good thing. Why wouldn’t you want to improve the living standards of as many people as possible?

The answer: You won’t actually be helping them if making their labor much more expensive, much too quickly, results in their getting fired.

Similarly, a year ago, the Obama administration issued a new overtime rule.

This rule massively expanded the universe of white-collar employees entitled to time-and-a-half pay for working beyond 40 hours per week. Before, white-collar workers earning salaries up to $23,660 were generally entitled to overtime. The new rule more than doubled the threshold, to $47,476.

The new threshold was to be implemented in one fell swoop, starting last December. There was fierce debate within the Obama administration about the wisdom of such an abrupt increase, but those who mentioned this to me declined to ever do so on the record. Meanwhile, left-leaning groups cheered the millions whose pay was about to go up.

Then, a court blocked the rule in November, and several weeks ago the Trump administration began the process of revising it. During his confirmation hearings, Labor Secretary Alexander Acosta cautiously suggested that a cutoff of about $33,000 might be appropriate, though he wanted to spend more time looking at the effects on workers and firms.

As strange as it feels to say something nice about policies being pursued by the Trump administration, this might be a better approach.

On this and other labor issues, says Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, “We need to be debating whether a cost-benefit test is passed, something on which reasonable people can disagree.” Instead, Strain says, a lot of thoughtful, well-meaning people on the left seem to be looking for a free lunch — that is, for policies with all winners, no losers and no costs. (Kinda like the right’s attitude toward tax cuts, I might add.)

Here I confess that I’ve been guilty of this. I’m often drawn to studies and stories about pro-labor policies that “pay for themselves.” And while there often is a pro-business or macroeconomic case to be made for policies that help workers, I pledge to be more mindful about potential unintended costs as well.

Readers, I hope you’ll hold me to this. And anyone else peddling free lunches, too.

Article Link To The Washington Post:

Washington Dysfunction Fuels Uncertainty For Businesses

By Damian Paletta
The Washington Post
August 8, 2017

Corporate uncertainty about whether the Trump administration will be able to deliver on numerous promises — including tax cuts, health care, a China crackdown and infrastructure — has forced many companies to put important hiring and investment decisions on hold, potentially crimping an economic expansion that appears ready to accelerate.

A Washington Post review of dozens of conference calls in recent weeks between chief executives and analysts show how the fog of policymaking is paralyzing many companies from taking risks that in normal times would help them grow. The conference calls were held as part of a quarterly ritual in which executives discuss their firm's performance and outlook for the future, and they give voice to some of the reasons U.S. economic growth has been so weak at a time when inflation and interest rates remain historically low.

One manufacturing company is having a hard time making acquisitions because other companies are waiting to see what happens with tax incentives.

A staffing executive says firms are still hesitant to boost hiring until they know more about what Washington plans to do on taxes and regulation.

A financial industry CEO, Ronald Kruszewski of Stifel, said that investors are nervous about new opportunities because of “lack of clarity from Washington on deregulation and tax policy.”

CSX chief executive E. Hunter Harrison said, “I’ve never been through a time when this country is like it is, politically, ever.”

“I’ve never dreamed of a time like this,” Harrison told analysts during a recent conference call to discuss the performance of his railroad company. “So I don’t know what’s going to happen in Washington, and the scary thing is I don’t think they’ve got a clue, either.”

Many of the executives did not blame President Trump or Congress directly for the uncertainty, but they remarked that promises made at the beginning of the year have not come to fruition and might not anytime soon.

“What we need is predictability,” Craig Arnold, chief executive of Eaton told analysts during his recent call.

Eaton is a power-management company that was founded in the United States but is now based in Ireland, where corporate taxes are lower.

“And I think in this environment of uncertainty … it simply freezes the investment community. And so I think more than anything, what the business community needs is some certainty around what the policies will be,” Arnold said.

A number of chief executives said they were very encouraged by the policies Trump was pursuing but said they were still waiting for final decisions to be made.

John Ferriola, chief executive of steel giant Nucor, said on his earnings call that there was a “positive view coming out of Washington” that “could have an impact on our volumes, and it will be a positive impact, without a doubt.” He added: “President Trump has made some commitments to us, and we expect him to stand behind those commitments. We're certainly working to make that happen.”

Trump has proposed slashing the corporate tax rate from 35 percent to 15 percent, rewriting health-care rules, getting rid of 80 percent of all regulations, toughening trade relations with China, Mexico, South Korea, and Canada, and creating a $1 trillion infrastructure package.

He has speculated about elevating one of his top economic advisers — Gary Cohn, a former Goldman Sachs president — to become the new Federal Reserve chairman, which could have a direct impact on future interest rates, and he has nominated former congressman Scott Garrett to lead the Export-Import Bank, though he used to oppose the agency’s existence.

These changes, if followed through on, would have major consequences for the economy and thousands of businesses. But now they are in policy limbo and haven’t come to fruition, as the president and the Republican-led Congress try to absorb the lessons from their failed attempt to repeal and replace the Affordable Care Act.

“When policy uncertainty goes up, firms that are more exposed to the policy have a bigger pull back,” said Steven Davis, a professor of international business and economics at the University of Chicago Booth School of Business.

He said so many policies are up in the air that “at this point it’s not clear a lot will happen,” a sentiment shared by a number of top executives.

Arnold, the Eaton chief executive, said it was “difficult to really take much to the bank in terms of what we’ve heard from the administration to date in terms of their ability to get legislation through.”

Companies seemed to express the most confusion about what might happen on tax policy.

Scott Page, the chief executive of CoBiz Financial, a Denver-based financial services firm, told analysts the banks he runs in Colorado and Arizona have “purposefully pulled back” from financing public projects, waiting “until there is better clarity from Washington D.C. on corporate tax rates.”

BOK Financial executive vice president Stacy Kymes remarked on the Oklahoma bank’s call that lending for commercial and industrial projects “was essentially flat.”

“We believe that the uncertain environment in Washington relative to tax policy is stalling growth and that some certainty around the administration and Congress’s future direction will free up new deals that are waiting on the sidelines,” Kymes said.

The cautionary talk can seem oddly out of place when the stock market is at record levels, unemployment is low and corporate earnings are high — things Trump has touted for weeks.

But that picture of the economy doesn’t tell the whole story.

The economy is growing, albeit slowly. Inflation is low. Interest rates are low. But business confidence, much higher than it was during the Great Recession, has retreated a bit since June. Consumer confidence, too, was at a 12-year high, but it has also eased.

Companies are hiring, and the economy added 209,000 new jobs in July. Businesses are investing. But the remarks from corporate executives suggest they could be doing even more. A number of companies are still hesitant to expand, waiting for more direction from policymakers about things like taxes and regulations.

“The sentiment remains high amongst our middle-market client base,” said M. Keith Waddell, president of Robert Half International, a staffing company. “But they’re wait-and-see types, and they’re still waiting to see.”

Many companies had high hopes for Trump’s promised infrastructure plan, but that effort has been delayed in part because the White House hasn’t decided how to finance it or pitch it to Congress.

That means a number of infrastructure projects have been sidelined, Husqvarna chief executive Kai Warn told analysts on his recent call. This Swedish company makes power equipment like chain saws, lawn mowers and garden tractors, among other things, and it has a large presence in the United States.

“There was an expectation that the Trump infrastructure efforts would materialize a bit early,” he said. “That hasn’t come through. And now everybody sits with a lot of other projects which they need to put into implementation.”

John Wren, chief executive of Omnicom Group, a global marketing firm, said many companies are holding back from investing on things like advertising until they have a clearer picture on “where the government’s moving.”

“There’s nobody who can look out two or three years at this point and say with certainty that they’re going to know what tax policy is, what health-care costs are going to be,” he said. “And so I think that causes many companies to pause in terms of the investments that they’re trying to make, and advertising and marketing is part of what suffers along with other businesses as that occurs.”

On some Washington issues, such as whether lawmakers would agree to raise the debt ceiling, chief executives didn’t even want to speculate.

JetBlue Airways chief executive Robin Hayes was asked what would happen if there’s a government shutdown in October, a real possibility that would impact airports and travel.

“Well, I’ll avoid the questions on the government shutdown, if that’s okay,” Hayes responded.

The White House and congressional Republicans are planning to make a big push on their effort to cut taxes in the coming weeks, aiming to rework the tax code for the first time in 31 years, but passage of these changes will be difficult because they haven’t yet agreed on what the cuts should look like.

And the White House is also promising to jettison numerous regulations in a way it says will help companies, but this process could take years and run into bureaucratic and legal challenges.

In the meantime, a number of companies are sitting tight or plan to forge ahead, cautiously.

“We came out of an election and people were waiting to see what was going to happen, if anything,” Gregory Sandfort, chief executive of Tractor Supply Co., a home improvement chain, told analysts on his call. “And I think once we got through that cycle, second quarter needs surfaced and people came back out and shopped … I like the footsteps. I like the fact that we were able to maintain our business in big ticket. So I feel good that the consumer is feeling comfortable right now. Hopefully, nothing else in Washington can sway them the other direction.”

Article Link To The Washington Post:

The End Of Typing: The Next Billion Mobile Users Will Rely On Video And Voice

Tech companies are rethinking products for the developing world, creating new winners and losers.

By Eric Bellman
The Wall Street Journal
August 8, 2017

The internet’s global expansion is entering a new phase, and it looks decidedly unlike the last one.

Instead of typing searches and emails, a wave of newcomers—“the next billion,” the tech industry calls them—is avoiding text, using voice activation and communicating with images. They are a swath of the world’s less-educated, online for the first time thanks to low-end smartphones, cheap data plans and intuitive apps that let them navigate despite poor literacy.

Incumbent tech companies are finding they must rethink their products for these newcomers and face local competitors that have been quicker to figure them out. “We are seeing a new kind of internet user,” said Caesar Sengupta, who heads a group at Alphabet Inc.’s Google trying to adapt to the new wave. “The new users are very different from the first billion.”

A look at Megh Singh’s smartphone suggests how the next billion might determine a new set of winners and losers in tech.

Mr. Singh, 36, balances suitcases on his head in New Delhi, earning less than $8 a day as a porter in one of India’s biggest railway stations. He isn’t comfortable reading or using a keyboard. That doesn’t stop him from checking train schedules, messaging family and downloading movies.

“We don’t know anything about emails or even how to send one,” said Mr. Singh, who went online only in the past year. “But we are enjoying the internet to the fullest.”

Mr. Singh squatted under the station stairwell, whispering into his phone using speech recognition on the station’s free Wi-Fi. It is a simple affair, a Sony Corp.model with 4GB of storage, versus the 32GB that is typically considered minimal in the developed world.

On his screen are some of the world’s most popular apps—Google’s search,Facebook Inc.’s WhatsApp—but also many that are unfamiliar in the developed world, including UC Browser, MX Player and SHAREit, that have been tailored for slow connections and skimpy data storage.

Those three apps, not among the top 100 downloads in the U.S., were in India’s top 10 over the 30 months through June, according to App Annie, which tracks apps; many of America’s most popular apps aren’t in India’s top 100.

Mr. Singh’s phone uses Google’s Android operating system, which nearly monopolizes India’s smartphone market in phones from companies such as South Korea’s Samsung Electronics Co. and India’s Micromax Informatics Ltd.

Apple Inc., in contrast, has a 3% smartphone market share in India, estimates market-research firm Kantar Worldpanel, in part because its least expensive iPhone costs over $300; in India, more than 90% of smartphones cost less than that.

Apple declined to comment on its India strategy. During a call with analysts last week, Apple Chief Executive Tim Cook said he was “very, very bullish and very, very optimistic about India.”

‘Up For Grabs’

Scenes like Mr. Singh’s are playing out on smartphones across Asia, the Middle East and Africa in places with pockets of less-educated people who are just getting online. UC Browser is a top download in countries such as Indonesia and Yemen. SHAREit is popular in Iran and South Africa. MX Player is big in Bangladesh, Oman and Cambodia.

“Since these are new consumers, everything is up for grabs,” said Jan Chipchase, founder of Studio D Radiodurans, a consultancy that analyzes consumer behavior in emerging markets. “That’s the potential for disruption.”

The sheer size of the Indian market means gaining even a small share can bring huge traffic and expansion. Only around 400 million of India’s 1.3 billion people are online, according to the latest numbers from the Telecom Regulatory Authority of India.

This year, more Indians are getting online en masse thanks to a price war. Aiming to bring new customers to the web, Reliance Jio Infocomm Ltd.—a new phone service backed by an Indian billionaire—offered free unlimited 4G-speed data for six months starting last September. That forced competitors to slash rates as well. Data usage in India shot up from less than half a gigabyte per customer a month to more than 6GBs, said Rajan Mathews, director general of the Cellular Operators Association of India.

India’s largest cellular company, a Vodafone Group PLC subsidiary, said it figured out new users didn’t understand data limits, so it has given them an option of buying unlimited data at less than 25 cents for an hour. “The way the journey seems to start today is with social messaging, YouTube and entertainment apps,” not email or social media, said Sandeep Kataria, chief commercial officer at Vodafone India. “Five years ago it was the other way around.”

In the year through June, use of YouTube in India has more than doubled, while Gmail use fell 15%, according to App Annie. In the U.S., YouTube growth was 48% over the same period, while Gmail use was up 13%.

Facebook’s WhatsApp messenger service says its top two markets are India and Brazil. It has become the first stop on the internet for many who have been using it instead of email or social media. WhatsApp saw the opportunity early on, said WhatsApp Vice President Neeraj Arora, and has its employees come home from India and other emerging markets with suitcases full of the many different types of smartphones on the market to ensure its service works on them.

Facebook has sponsored free Wi-Fi hot spots across India. It has “2G Tuesdays” in its Menlo Park headquarters, when developers can experience a slow connection and how Facebook works on it. It has built a lighter version of Facebook for emerging markets. Facebook says it has just over 200 million active users in India, the largest number outside the U.S.

Nimble Adversaries

Global tech titans are monitoring local competition in emerging markets, where nimble adversaries often are the first to figure out ways to serve the less affluent, less educated web surfer.

The emerging leaders are “building apps and services that respond to local needs, and in doing so, they’re building products for the future of the internet,” said Google’s Mr. Sengupta. “The next generation of global tech companies are just as likely to come out of a local coffee shop in Bangalore or Ho Chi Minh City as they are from Silicon Valley.”

That includes apps on Mr. Singh’s phone. UC Browser, from Alibaba Group Holding Ltd.’s UCWeb, is optimized to use less data for low-speed connections like those India’s poor use. UC Browser, with a less-than-1% market share in the U.S. and Europe, controls more than 40% of India’s mobile browser market, according to research firm StatCounter.

SHAREit, an app from China’s Lenovo Group Ltd. , lets people transfer music and movies to friends’ phones offline—a popular feature among poor users avoiding the cost of going online. MX Player lets people store online videos to watch offline.

Another app popular in India is Babajob, recently acquired by online classified portal Quikr India Pvt. Ltd., which provides job ads for basic positions such as driver, maid and gardener that pay less than $200 a month. It uses a simple interface that can work by voice. It has reached more than eight million job seekers and 500,000 employers, said Vir Kashyap, one of the company’s founders.

In contrast, LinkedIn Corp. has been focusing on the higher-end jobs in India, although it is looking into ways to help blue-collar workers find jobs, said Akshay Kothari, head of LinkedIn India. It launched LinkedIn Lite, an app less data-heavy so people can use it on 2G phones, he said, because “we need to make sure that connectivity and technology is not a barrier,” for job seekers.

Google has revamped the way certain searches look in India. Seek a local cricket star, and the top of the search is crowded with photos and videos instead of long lists of links. Google’s YouTube created apps in India to make it easier for users to share videos directly—helping them avoid data costs and circumvent slow internet speeds.

One five-person Google team took a long train ride through the western Indian state of Maharashtra recently to poll passengers. “How does he get new music?” asked project manager Scott Velicer through a translator. “Ask him if he has trouble getting to know the name of songs he hears on TV.”

The team showed passengers a “low-fidelity prototype,” basically phone screens printed on paper with different apps and instructions, asking what they would do if they saw one of the screens. The group later stood at the Lonavla Station and discussed what it learned. “People here don’t read the text,” so the icons need to be easy to understand, Mr. Velicer said.

Google has also benefited from the dominance of its Android operating system.

Apple has been upping its bet on India, contracting with a manufacturer to assemble handsets locally, rolling out a bigger retail network and investing to support developers of more apps aimed at Indians. It has begun offering Apple Music—available for Android phones—for a lower price than in the U.S.

Last year, Indian banks launched a mobile payment system that after a simple sign-up process allows the less-tech-literate to make payments and transfer money from their accounts with their phones. Paytm, the biggest mobile money app in India, now has more than 200 million users in India, vastly more the number of credit-card holders in India.

PayPal is one of the most popular services for international transactions in India, but has yet to launch a payments system for the domestic market. PayPal Holdings Inc. said it plans to start a domestic service and that its deep experience and better technology will help it catch up.

Some poor users say they are willing to pay for data even if it means forgoing consumption of things like cigarettes to afford prepaid cards. Sales of shampoo and some snacks foods have slipped for certain consumers as they put more rupees aside for their phones, say consumer-goods companies such as NestléSA .

In few places is the impact of newfound internet access as striking as in the New Delhi station. More than half a million people a day chug through the station, where signs declare the standard porter rates: “Luggage up to 40 kg. 60 rupees” (94 cents). The station’s more-than-1,000 porters rush taxis and jump on moving trains, shouting: “Coolie, coolie, coolie.” For 30 rupees, they fill up on roti and dal at a garage-sized structure labeled “Coolie Shelter,” where they can nap, play cards and lock up their few belongings.

Most porters still think smartphones and the internet are only for the rich and literate. The internet is “not for us,” said porter Sajid Khan. “We are not educated, we are like this,” he said, sticking his thumb out and pressing it down slowly to mime how he signs documents.

But a growing minority of porters have been using cheap smartphones to get online since the station started offering free Wi-Fi in 2015. One brags he now uses the web to download videos of religious songs using an app called VidMate. Another explains how through his phone he tracks how far a train has reached using an app called Indian Train Locator Live.

Mr. Singh said he gets to the station early every morning to send his friends and family at home recorded messages via WhatsApp. “Is everyone OK in the village? Anyone die?” he asks into his phone. Recorded replies come back throughout the day.

He scours the internet for shows and clips using YouTube, Google and MX Player all day. On YouTube, he starts with a voice search. “Woman singing Rajasthani folk songs,” he said in Hindi and looked at the screen to see what shows up. He downloads more than 20 clips a day to watch at night when he returns to the flophouse room he shares with five other porters.

“Life has become better. Life has become faster,” he said. “I wish I had it earlier. We wouldn’t be so backward.”

Article Link To The WSJ: