FIG Topics of Interest

 

03/27/18

(Bloomberg) -- 
As the adoption of electric vehicles becomes faster and more widespread, the impact of EVs on oil demand is on the rise – contrary to what some observers say, there is a noticeable effect on gasoline and diesel demand, according to recent analysis from Bloomberg New Energy Finance.
Passenger EV sales exceeded 1 million for the first time in 2017 and are expected to increase above 1.5 million this year. Over half of all EVs are sold in China.
Annual EV sales
BNEF expects the global fleet of passenger EVs to displace 46,000 barrels per day of fuel in 2018, 84 percent of which will be gasoline. BNEF also forecasts fuel displaced by Chinese passenger EVs will exceed that of the U.S. in 2018 as battery electric vehicles in particular continue to be incentivized by local government.
It is possible to calculate the level of oil being displaced by each EV coming onto the road by assuming that every EV is purchased in place of a conventional vehicle. The analysis is underpinned by regional assumptions for the efficiency and utilization of passenger cars. Indeed, not all EVs are equal in terms of their impact on oil demand, as the efficiency of conventional cars and the annual mileage driven in each region differs substantially.
Fuel displacement by EVs
The U.S. recorded the highest level of fuel displaced by passenger EVs in 2017 on the back of the sale of 200,000 such vehicles. A greater number of EVs were sold in Europe, but fewer barrels of oil demand were displaced as Americans drive less efficient cars further on average compared with Europeans. Europe also has a high proportion of diesel cars compared with the U.S., and these tend to be more efficient than equivalent gasoline vehicles.
Most of the impact on fuel demand is being felt in China, underpinned by the rapid rollout of e-buses in Chinese cities. For every 1,000 e-buses on the road in the country, 500 barrels of diesel demand per day is unrealized. This compares with just over 16 barrels of oil equivalent per day for every 1,000 medium BEVs sold in China. Each e-bus on the road therefore displaces over thirty times more fuel than an average medium-sized BEV. Combined, passenger EVs and e-buses displaced over 180,000 barrels per day of fuel in 2017, equivalent to more than 1.5 percent of total Chinese oil demand.
Globally, in 2017 the cumulative displacement of gasoline and diesel by passenger EVs and e-buses exceeded 200,000 barrels per day for the first time. We expect this to increase to 280,000 barrels per day in 2018.

 

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

03/26/18

Regulators around the globe began work on replacements for Libor, the London interbank offered rate, well before the U.K.’s Financial Conduct Authority set to put the beleaguered interest-rate benchmark out of its misery. In the U.S., enter the Secured Overnight Financing Rate, or SOFR, a new reference rate being introduced next week by the Federal Reserve Bank of New York in cooperation with the U.S. Treasury Department’s Office of Financial Research. The debut of SOFR is a critical step in a quest to wean more than $350 trillion of securities off Libor.
https://www.bloomberg.com/news/articles/2018-03-26/america-s-libor-replacement-is-ready-for-its-debut-quicktake 
1. Why the push to replace Libor? For decades, Libor provided a reliable way to determine the cost of everything from student loans and mortgages to complex derivatives. It’s derived from a daily survey of about 20 large banks that estimate how much it would cost to borrow from each other without putting up collateral. Because fewer banks make such unsecured loans, Libor was becoming more theoretical than real. That was vastly compounded by the discovery of rampant manipulation by U.S. and European lenders that were forced to pay billions of dollars to settle rigging and other charges. All this is why the FCA pledged to stop compelling firms to provide estimates by the end of 2021, and why regulators around the world are rushingto establish alternatives. 
2. How did the U.S. come up with SOFR? To develop and implement a replacement for the dollar-denominated version of Libor, the Federal Reserve in 2014 set up the Alternative Reference Rates Committee (ARRC), which brought together representatives from the private sector and regulators. By May 2016, the committee had narrowed the search to two options: the New York Fed’s overnight bank funding rate, and a rate based on repurchase agreements, which are transactions for overnight loans collateralized by Treasury securities. After a series of roundtables, and with feedback from advisory groups, the committee identified the latter -- SOFR -- as the best candidate. 
3. How does it differ from Libor?Where Libor relied on the expectations of bankers, SOFR is based on real transactions from a swath of firms including broker-dealers, money-market funds, asset managers, insurance companies and pension funds. It’s different from Libor as well in that it’s a secured rate, since the repo rates it’s derived from are collateralized, or backed by assets. It’s an overnight rate, based specifically on overnight loans; Libor, by contrast, covered loan maturities ranging from one day to one year. And the volume of trading underpinning SOFR is significantly larger: In 2017, it regularly exceeded $700 billion daily, versus an estimated $500 million for three-month dollar Libor, according to ARRC data. 
4. When will the change take place? The New York Fed will start publishing SOFR (as well as two other repo-based rates) on April 3, around 8 a.m. New York time. The rate will reflect transactions from the previous day. 
5. What comes next? The ARRC is instituting a six-step plan that includes the creation of various derivatives based on SOFR. Along those lines, CME Group Inc. plans to launch monthly and quarterly SOFR futures on May 7, pending regulatory review. Development of a derivatives market is critical, because without a deep and liquid one, regulators won’t be able to create longer-term SOFR-based reference rates, a key goal in expanding usage among market participants. 
6. Is the market ready to dump Libor for SOFR?So far there’s been a degree of complacency in reducing long-term exposures to Libor, according to NatWest strategist Blake Gwinn. ARRC has established working groups in order to get credit-based market participants to adopt fallback language in contracts for products such as loans and mortgages in the event Libor stops being reported. That’s a first step toward the eventual goal of getting firms to make SOFR their benchmark of choice.

 

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

03/23/18

Congress approved the more than 2,200-page legislation swiftly with a midnight Friday government shutdown deadline looming. The plan was released only Wednesday night. The House approved the bill Thursday afternoon by a 256-167 vote with bipartisan backing.

The legislation would fund the government through the end of September. It would significantly boost military spending and increase funding for border security, infrastructure and efforts to fight the opioid epidemic, among other programs. It also includes measures meant to strengthen gun sale background checks and improve school safety.

Here are some of the bill's notable provisions:

  • It would boost Department of Defense funding by nearly $80 billion, the largest increase in 15 years, according to lawmakers. That includes a 2.4 percent pay increase for the military.
  • It would put $1.57 billion in new funding toward fencing along the border with Mexico and border security technology such as aircraft and sensors. Trump had sought billions more in funding for a physical barrier on the border after he promised to build a wall as a candidate.
  • The legislation would allocate billions in new funding toward opioid abuse treatment, prevention and research. Overall, it would put $4 billion toward those efforts.
  • The bill would put more than $10 billion more toward infrastructure projects to improve highways, airports, railroads and bridges. It will also put money toward high-speed broadband development. It would not directly fund a rail tunnel from New Jersey to New York that Trump opposed. But the project would be eligible for funding from programs that are getting a boost in the bill.
  • It would include a provision to strengthen the gun sale background check system, by pushing agencies to better follow existing procedures for the National Instant Criminal Background Check System. The so-called Fix NICS bill had bipartisan support.
  • The proposal would put more than $2 billion in new money toward mental health and school safety programs.
  • The legislation would adjust an issue from the GOP tax bill passed in December that helped agricultural cooperatives relative to corporate competitors. In return, Democrats secured an expansion of the low-income housing tax credit.

The bill would not include measures to shore up Affordable Care Act health insurance marketplaces, as some Republicans and Democrats hoped. It also would not pull funding for so-called sanctuary cities or Planned Parenthood, as some conservatives had hoped.

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

03/22/18

The House Rules Committee was set to meet Wednesday night, setting up a possible Thursday vote on the more than 2,200 page bill in the chamber. Earlier Wednesday, a GOP aide was noncommittal when CNBC asked whether the House would vote on the measure Thursday.

In a statement earlier Wednesday, Ryan spokesman Doug Andres reiterated the president's support, saying the Wisconsin Republican and Trump "had a good conversation about the wins delivered for the president." After the bill's release, Ryan promoted it as a boost for the military, saying it "fulfills our pledge to rebuild the United States military." In another sign of Ryan's effort to win support from the president and his conservative members, his office said he would appear Thursday morning on "Fox and Friends," a show Trump watches and famously tweets about.

"Every bill takes compromise, and there was plenty here, but at the end of the day we Democrats feel very good because so many of our priorities for the middle class were included," Senate Minority Leader Chuck Schumer said in a statement. "From opioid funding to rural broadband, and from student loans to child care, this bill puts workers and families first."

Here are some of the bill's notable provisions:

  • It would boost Department of Defense funding by nearly $80 billion, the largest increase in 15 years, according to lawmakers. That includes a 2.4 percent pay increase for the military.
  • It would put $1.57 billion in new funding toward fencing along the border with Mexico and border security technology such as aircraft and sensors. Trump had sought billions more in funding for a physical barrier on the border after he promised to build a wall as a candidate. He proposed the border money in exchange for legal protections for hundreds of thousands of young undocumented immigrants, but Democrats did not budge.
  • The legislation would allocate billions in new funding toward opioid abuse treatment, prevention and research. Overall, it would put $4 billion toward those efforts.
  • The bill would put more than $10 billion more toward infrastructure projects to improve highways, airports, railroads and bridges. It will also put money toward high-speed broadband development. It would not directly fund a rail tunnel from New Jersey to New York that Trump opposed. But the project would be eligible for funding from programs that are getting a boost in the bill.
  • It would include a provision to improve the gun sale background check system, by pushing agencies to better follow existing procedures for the National Instant Criminal Background Check System. The so-called Fix NICS bill had bipartisan support.
  • The proposal would put more than $2 billion in new money toward mental health and school safety programs.
  • The legislation would adjust an issue from the GOP tax bill passed in December that helped agricultural cooperatives relative to corporate competitors. In return, Democrats secured an expansion of the low-income housing tax credit.
  • The bill would not include measures to shore up Affordable Care Act health insurance marketplaces, as some Republicans and Democrats hoped. It also would not pull funding for so-called sanctuary cities or Planned Parenthood, as some conservatives had hoped.
Click here to download a pdf of this article, Missile.pdf
 
 

03/21/18

Current government funding expires at the end of the day Friday. House Republicans had already delayed their planned vote by a day, to Thursday. Now, under current rules, a vote might not be held until Friday, leaving little time for the Senate to act. Otherwise, another stopgap spending bill would be needed to keep the government open.
"What will it take to get this done? Exhaustion," said Pennsylvania Republican Charlie Dent, a member of the House Appropriations Committee.

House Speaker Paul Ryan of Wisconsin told his colleagues Tuesday that decisions still hadn’t been made on whether to finance President Donald Trump’s border wall or to provide $900 million for the Hudson rail project, known as Gateway, which Trump opposes.
New York Democratic Representative Nita Lowey accused Republicans of trying to add multiple provisions that they know will be rejected by Democrats. “They could just drop all their poison pills and we can get on with it," she said.

Lowey said she was concerned that money for the Hudson River project may be left out of the bill even though House Appropriations Chairman Rodney Frelinghuysen, a New Jersey Republican, is one of the lawmakers pushing to finance it.

The spending bill would increase funding for the military by $80 billion and on domestic programs by $63 billion over previous budget limits as set out in the bipartisan budget agreement that ended a February shutdown. In addition to the $1.2 trillion that was part of the February agreement, the military would also receive $71 billion in war funds not subject to budget caps.

Also unresolved was whether to include a revision to the tax overhaul passed in December to change tax breaks for agricultural grain cooperatives. The tax breaks are opposed by grain companies. Representative Frank Lucas, an Oklahoma Republican, said he was still fighting to get that provision in and opposing an effort to have a separate vote on it. "That would be bad policy, we need to get this done now," he said.

Click here to download a pdf of this article, 31444.pdf
 
 

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.

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

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.

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

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