FIG Topics of Interest

 

03/20/18

In many ways, it feels like a brave new world. Chairman Jerome Powell makes his debut with an expected interest-rate increase, replacing Janet Yellen. Financial conditions have tightened and the five rate increases under Yellen since December 2015 are finally being felt in the real economy, at least in mortgage rates. Tax reform has passed and Congress is lifting government spending caps, boosting the near-term growth outlook.

Yet Fed officials swear by their data dependence, and the numbers look strikingly similar to when the policy-setting committee last met. The inflation pickup officials have been waiting for still hasn’t materialized, wages are ticking higher but hardly surging, economic growth is chugging along and the job market continues to pull people off the sidelines.

These five charts lay out the conditions the central bank faces as it lays out its new road map and its policy outlook this year.

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03/19/18

Congress has already passed five stop-gap spending bills during the current fiscal year amid squabbles over a longer-term agreement. Lawmakers finally broke through last month, when they approved a bill that would allow them to increase spending on defense and domestic programs by about $300 billion over two years. Funding at home would go to things such as improving infrastructure and fighting the opioid crisis. 
However, that measure did not actually allocate the money. Congress had another six weeks to craft legislation appropriating the money to agencies and programs. 
Lawmakers have not yet released the so-called omnibus bill to fund the government.

 

The bill this week is unlikely to include any provisions to extend protections under the Deferred Action for Childhood Arrivals program, which Trump ended in September with a six-month delay. The Trump administration floated pairing money for the president's proposed border wall with protections for the immigrants, but the idea fell flat. Court battles have left DACA in place, for now.

But lawmakers have still made immigration an issue this week.

Some Republicans have pushed for the bill to include more spending for immigration enforcement. Others want to add a provision that would allow the Trump administration to take funding away from so-called sanctuary cities. Democrats are unlikely to back either proposal.

The Affordable Care Act is also a sticking point. Some Democrats and Republicans want to include provisions to help lower health-care premium costs on Obamacare exchanges.

Conservatives have objected to what they call propping up the law they often criticize. Some Republicans also want to bar subsidies for insurers who cover abortion.

Trump has also reportedly objected to a provision to put $900 million toward a rail tunnel project under the Hudson River. House Republicans in both New Jersey and New York could object to the spending bill if it does not include the funding meant to improve transportation into New York City.

Congressional leaders could release a spending proposal by Monday, leaving only a few days for lawmakers to both read it and hash out final disagreements.

Click here to download a pdf of this article, Missile.pdf
 
 

03/16/18

The collapse of Toys “R” Us Inc. is yet another blow for landlords, who now will have gaping holes of suburban retail space up for grabs. And few tenants would want them.

The debt-laden toy chain, with more than 700 stores across the U.S., became one of the largest victims of the retail decline when it announced on Thursday that it would go out of businessafter a failed rescue effort. The liquidation could dump millions of square feet of real estate onto a market that’s already bloated with vacancies from retailer bankruptcies and store closures, a trend that’s been escalating as shoppers increasingly turn to the internet.

Toys “R” Us has stores in all types of shopping properties -- from standalone locations to community strip centers to large regional malls. Many centers are in the hands of publicly traded real estate investment trusts that lease space to the chain and may struggle with declining values for the properties. Some stores are owned by Toys “R” Us itself.

Other chains with locations of roughly the same size as Toys “R” Us stores, including Best Buy Co. and Bed Bath & Beyond Inc., are focusing on expanding their online businesses and remodeling existing stores rather than adding new locations. Target Corp. has said it plans to open dozens of smaller stores over the next two years, but they’ll be in cities and near colleges campuses.
With other big-box retailers, such as office-supply chain Staples Inc., potentially closing stores of a similar size, “the potential replacement tenants have a lot of negotiating power” with landlords, Deutsche Bank’s Reardon said in an interview. “The competition is not that intense.”

Click here to download a pdf of this article, Missile.pdf
 
 

03/15/18

For those worried about the ability of U.S. state and local governments to cover promised pension checks, the Census Bureau announced a milestone that should add to their fears: by 2030, for the first time, senior citizens will outnumber children.

In 12 years, about one in five Americans will be of retirement age, and by 2035, those 65 and older will outnumber those under 18 by about 2 million, according to the latest estimates released by the agency. The consequences are wide-ranging, from the solvency of Social Security to increased health-care costs for an aging population.
 

The swelling ranks of retirees from public service, such as police officers and teachers, will also present a strain on state and local government retirement systems that have about $1.6 trillion less than what they need to cover the benefits workers are counting on.

That shortfall is the result of investment losses, overly aggressive investment forecasts, inadequate contributions and perks granted in boom times. Governments will need to pay more into the funds to make up that gap, putting a squeeze on their budgets that could imperil their bond ratings and diminish services for residents.

After the recession, American governments laid off workers and cut back on hiring, leaving fewer paying in as the number of retirees grows. The ratio of active workers to those receiving benefits has dropped to 1.42 from 2.43 in 2002, according to a survey of the largest public pensions conducted by the National Association of State Retirement Administrators.

Fully funded plans would have enough assets to cover the projected payouts. But for those already facing gaps, the burden to pay for the benefits for current and future retirees will be even higher.

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03/14/18

Sales of U.S. grocery anchored shopping centers rose more than 5% in 2017, bucking the trend of declining trading volume across most major types of commercial property last year as investors poured into the grocery sector seeking to take advantage of its near-legendary income reliability. 
Neighborhood centers anchored by supermarkets and other grocery retailers have continued to attract buyers, even as grocers slowed expansion, opening nearly 29% fewer stores last year following a burst of expansion and store openings of 2016, according to JLL’s recent Grocery Tracker 2018 report. 
Meanwhile, market fundamentals for neighborhood centers that constitute the bulk of grocery-anchored centers continue to look very healthy relative to malls and power centers, CoStar analysts say. 
Annual demand growth for neighborhood grocery-anchored centers has outstripped supply since 2010 and is expected to do so again in 2018 before reaching a tipping point next year, according to CoStar's 2018-2022 retail forecast.
 

Click here to download a pdf of this article, Missile.pdf
 
 

03/13/18

Four of the Federal Reserve's 12 districts saw a marked increase in steel prices, due in part to a decline in foreign competition. Price growth for lumber and other building materials picked up due to an uptick in construction activity, according to the Fed's latest Beige Book survey released Wednesday. A combination of stronger demand, supply constraints and higher materials prices increased non-labor costs, especially in construction, manufacturing and transportation. 
"[U.S.] steel producers reported raising selling prices because of a decline in market share for foreign steel and expectations about potential outcomes of pending trade cases," the Fed said. "Manufacturers further down the supply chain reported sizeable increases in the price of steel that they purchased." 
Ken Simonson, chief economist of the Associated General Contractors (AGC), said the tariffs could be "damaging to the construction industry in multiple ways." 
"Steel is nearly ubiquitous in construction," Simonson said. "Aluminum is used in all types of buildings for window frames and curtain walls, siding and other architectural elements. The price of both imported and domestic metals is likely to rise immediately. That will reduce or eliminate any profit for contractors who have already signed a fixed-price contract for a project, but who have not yet bought metal products." 
The increases in materials will cause bidder to hike prices for future projects, causing governments and other public owners of property, who generally on fixed budgets, to reduce the number or scope of projects put out to bid such as schools, highways, bridges or other infrastructure. Some private projects will be shelved or canceled, as construction cost increases make them uneconomic, Simonson said. 
Simonson said price increase notices continue to hit contractors' inboxes, noting that he saw an announcement from the American Buildings Co. South division of Nucor Buildings Group of a 7% price increase on pre-engineered metal buildings effective March 20. 
According to an estimate this week by Trade Partnership Worldwide, an international trade and economic consulting firm, the plan would increase U.S. iron and steel, aluminum and other non-ferrous metals employment by about 33,450 jobs.  The tariffs would eliminate 179,334 jobs throughout the rest of the economy for a net loss of nearly 146,000 jobs, including more than 28,000 construction positions. 
The tariffs "threatens to drastically increase the prices of many building materials specified by architects," said Carl Elefante, president of the American Institute of Architects (AIA). 
"Structural metal beams, window frames, mechanical systems and exterior cladding are largely derived from these important metals," Elefante said. “Inflating the cost of materials will limit the range of options they can use while adhering to budgetary constraints for a building." 
Elefante added that the administration’s proposed $1.7 trillion infrastructure program will not achieve the same value if critical materials become more expensive," and the potential for a trade war puts other building materials and products at risk. 
"Any move that increases building costs will jeopardize domestic design and the construction industry, which is responsible for billions in U.S. gross domestic product, economic growth and job creation," Elefante said.



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03/12/18

"This is a very exceptional mechanism that is rarely used. It's a bit considered like an atomic bomb, because really to use this is like saying 'look we are really at a level where we cannot use anti-damping or anti-subsidies'," Luisa Santos, the international relations director at BusinessEurope, told CNBC Monday. U.S.'s allies, including the European Union and Japan, are hoping to be excluded from new tariffs that Trump announced last week. The decision to raise steel import taxes by 25 percent and aluminum by 10 percent could hurt not only those industries directly, but also carmakers and construction firms which use the raw materials. Trump decided that the tariffs would be the best way to deal with overcapacity in these sectors and based his argument on national security. European and Japanese trade officials are meeting U.S. counterparts this week as they seek clarity as to what is the basis for being excluded from the new tariffs. "The issue is that these measures are mainly affecting (U.S.) allies. They claim that the measures are directed to China, but it's basically Canada, EU, Japan, South Korea, these are natural allies of the U.S.," Santos said. "If they exclude all these countries, there aren't many countries left that will be subject to the measures," she added. Meanwhile, European steel and aluminum businesses are reportedly preparing for a collapse in local prices if the tariffs are indeed applied to their region. Charles de Lusignan, from the Steel Association for Europe, told CNBC Monday morning that ultimately the tariffs could mean a scaling back in Europe, with firms letting people go, cutting investment and also innovation.

Click here to download a pdf of this article, Missile.pdf
 
 

03/09/18

"It makes people in the United States who have not stood up to support free trade much more anxious to do so now that they see the possible consequences of the benefits of free trade being taken away," he added.
Capital Alpha's Lucier said an overhaul of U.S. trade policy had long been an issue lawmakers on Capitol Hill wanted to confront, though it had taken Trump's threat to impose global duties to force the issue to the top of the agenda.
"Trade had been on the backburner, Trump is forcing it on the front-burner. The question is with this disruption can we figure out a way to unite with our trading partners and come up with a positive strategy that actually works?
"I think it is actually positive rather than negative even though it is certainly not a conventional approach to motivating people," he said.
Several global trade chiefs have decried the prospect of trade tariffs, with the International Monetary Fund (IMF) and World Trade Organization (WTO) also publicly critical of its potential ramifications.
"For me and for Belgium and for Europe, we are very worried about the possibility of an escalation because Europe can take some measures and then the United States takes some other measures and then we have a (trade) war," Kris Peeters, deputy prime minister of Belgium, told CNBC on Friday.
In reference to the likelihood of an intensifying trade dispute, Peeters said: "Starting a war is not so difficult; ending a war is very, very difficult."

Click here to download a pdf of this article, Missile.pdf
 
 

03/08/18

Big oil and big corn are touting opposing studies released this week on proposed biofuels policy reforms under consideration by the Trump administration, part of an ongoing clash between the two sides over the future of the program.
Valero Energy Corp, a major oil refiner, funded a study by Charles River Associates that supports placing a cap on the price of biofuel blending credits under the U.S. Renewable Fuel Standard (RFS) - a change meant to help refiners that complain the RFS now costs them a fortune.
A rival report from Iowa State University, also released this week, said such a cap on credits would backfire by eroding U.S. demand for corn-based ethanol and potentially lowering corn prices, already under pressure from a supply glut. The corn industry did not directly fund the Iowa State study, but does provide funding to the university.
The studies are meant to inform the administration’s deliberations on how, and if, to reform the RFS - which has become a major point of tension between two of President Donald Trump’s most important constituencies.
The RFS requires oil refiners to blend increasing amounts of biofuels, mainly corn-based ethanol, into the fuel supply each year, or buy the renewable fuel credits, called RINs, from other companies that do the blending.
The regulation was introduced during the administration of President George W. Bush to help farmers, cut petroleum imports, and improve air quality. But a surge in the price of RINs in recent years has upset merchant refiners who say the policy now costs them hundreds of millions of dollars a year.
Trump waded deeply into the debate last week, urging representatives of both sides to accept a compromise deal that caps prices for the credits while also removing seasonal limits on high-ethanol blend gasolines to expand the biofuels market.
A cap would control costs for small refiners and help them stay afloat, said Brendan Williams, vice president of government relations for refining company PBF Energy (PBF.N).
The biofuels industry likes the idea of expanding high-ethanol blend gasoline sales, but has pushed back on the idea of a cap. “The RFS is a well-designed program,” said Brooke Coleman, head of the Advanced Biofuels Business Council. “Part of the whole mechanism working is that the price of RINs may go up, and so you should go long on biofuels.”
“It’s a strategy to kill the RFS and to kill the economic incentive to blend,” said Coleman, referring to a 10-cent cap.

Click here to download a pdf of this article, Missile.pdf
 
 

03/07/18

“I can’t believe this is happening,” Michael Purves, Weeden & Co.’s chief global strategist, said by phone. “I wrote up Cohn’s departure this morning as a real risk to consider. I thought it’s like a 35 percent probability event. I was just amazed that Trump is letting this happen.”
“Of all the Trump administration resignations, this will be the one most meaningful for markets,” said Michael O’Rourke, chief market strategist at JonesTrading Institutional Services. “Cohn was the administration official financial markets had the most confidence in. This opens the environment up to whole new wave of uncertainty. The likelihood of a trade war just jumped dramatically.”
“A lot of people saw him as a calming influence to the Trump administration,” said Nick Twidale, Sydney-based chief operating officer at Rakuten Securities’ Australian unit. “Now he’s gone, there’s that perception that maybe they’re letting loose the hardline aspects of the Trump administration to go even harder on protectionism.”
“Policy uncertainty has underpinned a lot of the market’s recent volatility,” Stephen Wood, chief market strategist for North America at Russell Investments in New York, said by phone. “This speaks to the instability. He’s an advocate for free trade policy so there would be expectation that protectionist voices would be more representative in the administration.”
“Cohn’s huge accomplishment was tax reform, which responded to low corporate taxes abroad by bringing the U.S. corporate sector back to a competitive position,” said Barry Bannister, chief equity strategist at Stifel Nicolaus & Co. “Almost all nations had been under-cutting the U.S. on corporate tax rates and export subsidies such as refunding sales taxes at the point of export, which is prevalent abroad.”

Click here to download a pdf of this article, Missile.pdf