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Daily Intelligence Briefing – September 7, 2017

FEATURED TOPIC: REBUILDING: INVESTING IN HURRICANE CLEANUP AND RECOVERY 

Assessing the destruction left in Hurricane Harvey’s wake, Moody’s Analytics initially estimated property losses at $75 billion and lost business from shutdowns at $25 billion. Texas Governor Greg Abbot cited total damages equivalent to$180 billion, more costly than hurricane Katrina in 2005 or Sandy in 2012. Congress is currently speeding the passage of legislation which will send nearly $8 billion in aid to Texas, a down payment on much more investment the region will ultimately require to recover over the next few years. The vast majority of that money would go to the Federal Emergency Management Agency (FEMA), and $450 million would go to the Small Business Administration’s disaster loan program. To top it off, as of Sept. 4, more than 180,000 Harvey survivors were already approved for more than $148 million in aid from the agency. Again, this is only the tip of the iceberg.

At least 100,000 homes were effected by Harvey and up to 40,000 in the Houston area are completely destroyed. 30,000 people are currently staying in emergency shelters and more than 1 million are displaced. The immediate cleanup will inevitably affect stocks of waste management companies which will have to begin stripping homes of damaged and contaminated materials, including drywall, insulation, and flooring. Carpets, mattresses, and other furniture will have to go too, along with electric appliances. Hurricane Sandy produced 12 million cubic yards of waste and Hurricane Katrina more than quadrupled that with 55 million cubic yards. Houston, the fourth largest city in the US, along with the surrounding areas of Texas and Louisiana will likely leave an even larger mess. Temporary housing will also play a part in this cleanup effort and manufactured homes are already being deployed by FEMA. The agency has only 1,700 of the homes in its inventory, but they’ve begun asking pre-fabricated housing manufacturers to begin producing at least 4,500 units for families affected by Hurricane Harvey.

The first effects of Harvey sent some homebuilder stocks plummeting as construction sites were damaged and delays tacked onto current projects. However, as a sector, real estate could rally from the inevitable rebuilding. The cost of labor and commodity materials like lumber, concrete, and industrial metals which are already experiencing high prices, will likely be pushed upward by increased demand.

When it comes to infrastructure, $25 million of federal funding will go toward emergency road and bridge repairs, while more than $100 million will be available for other infrastructure needs. Harvey, however, may finally refocus the President and federal government’s agenda on much-needed infrastructure. Domestic infrastructure has been a mess even before these two storms, receiving a grade of D or D+ from the American Society of Civil Engineers for the last 19 years. The American Society of Civil Engineers estimate $4.6 trillion is needed to adequately address the U.S.’s infrastructure needs over the 2016-2025 period. Aside from rebuilding alone, proper investment in new infrastructure are necessary to prevent as much destruction as possible during future natural disasters

Harvey is, unfortunately, not the end of the story. Hurricane Irma, already more powerful than Harvey and any Atlantic hurricane in recorded history, is now barreling toward Florida. The state’s Governor has already declared a state of emergency and this storm will likely culminate in even more destruction to the American mainland that will require exponentially larger amounts of investment going forward.

HERE, IN THE MEANTIME, are some of the latest articles relating to Hurricanes Harvey and Irma (summarized in the REAL ESTATE Section):

  • Hurricane – Harvey, Irma And Trump: Strong Tailwinds For Infrastructure Stocks
  • Hurricane – Hurricane Irma is already causing insurance stocks to plunge
  • Hurricane – House Approves $8 Billion in Aid for Hurricane Harvey Recovery
  • Hurricane – FEMA Requesting Manufactured Homes for Harvey Victims

CHART: Homebuilders/Home Improvement (XNB, ITB, PKB) vs Waste Management (EVX) vs Materials (XLB)


OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:

  • Markets: 
    • Bonds – Investment Gurus Counsel Catching Reform Tailwinds in Latin America 
    • Bonds – Apple’s Bonds Are Acting More and More Like Government Debt 
    • FX – Canadian dollar surges higher after surprise rate tightening  
  • Economics and Trade: 
    • Australia – Australia’s Economy Builds on Winning Streak
    • U.S. – Trump reaches deal to fund US government until December 
    • U.S. – Fed sees pickup in economic growth, but inflation remains muted
    • Trade – South Korean export to Russia up 61% in 2017 
    • Trade – Mexico signs e-commerce deal with China’s Alibaba Group  
  • Services: 
    • Retail – China leads global recovery of luxury watch market 
  • Technology: 
    • Semiconductors – Newly-discovered semiconductor dynamics may help improve energy efficiency phys
    • Smartphones – Huawei has surpassed Apple as the world’s second largest smartphone brand  
  • Transportation:  
    • Aviation – China to buy over $1tn worth of planes by 2036 as economy expands – Boeing  
  • Commodities: 
    • Lithium – The Company Aiming to Get Lithium From Oil 
    • LNG – Natural gas pipeline projects move closer to development 
    • Oil – France Plans to End Oil Output by 2040 With Exploration Ban 
    • Aquaculture – Global fish industry set to scale record in 2017  
  • Energy & Environment: 
    • Solar – Huge Tunisian solar park hopes to provide Saharan power to Europe 
    • Batteries – Tesla, Vestas pair up to develop ways to combine storage and wind  
    • Batteries – New water-based battery part could be key in preventing exploding electronics  
  • Endnote: 
    • OECD Corporate Tax Rates

JOE MAC’S MARKET VIEWPOINT

CURRENT MRP THEMES

  CAPEX  (L)

  Cybersecurity  (L)

  Defense  (L)

  Emerging Markets  (L)

  France  (L)

  Gaming  (L)

  Gold  (L)

  Homebuilders  (L)

  India  (L)

  Oil Services & Equipment  (L)

  Oil & U.S. Energy  (L)

  Steel  (L)

  TIPS  (L)

  Long Dated Treasuries  (S)

  Robotics & Automation (L)

  U.S. Financials  (L)

  U.S. Regional Banks  (L)

  Value over Growth  (L)


About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

   MAJOR DATA POINTS

Top   

  • United States, MBA Mortgage Applications, WoW, wk9/1: 3.3% from prior -2.3%
  • United States, Redbook, WoW, wk9/2: 4.4% from prior 4.3%
  • United States, International Trade, MoM, JUL: $-43.7 B from prior $-43.6 B
  • Italy, Retail Sales, YoY, JUL: 0% from prior 1.3%
  • Senegal, Inflation Rate, YoY, AUG: 1.9% from prior 2%
  • Kazakhstan, PPI, YoY, AUG: 7.7% from prior 4.8%
  • Czech Republic, Industrial Production, YoY, JUL: 3.3% from prior 3%

   MARKETS

Top   

Bonds – Investment Gurus Counsel Catching Reform Tailwinds in Latin America 

Investors including Pacific Investment Management Co. and Schroders Plc say a rally in Latin American bonds has further to go as economic growth picks up and governments across the region pursue measures designed to make doing business easier. Notes from companies based in Argentina, Mexico and Brazil have returned at least 10 percent this year on average, trouncing the benchmark emerging-market index and outpacing major peers. JPMorgan Chase & Co.’s regional gauge has outperformed the broader measure of bonds from developing economies by more than 3 percentage points.

Latin American notes have been supported by a jump in corporate profits — earnings are up almost 20 percent in the second quarter from a year earlier — brought on by the fastest economic growth since 2013. Traders see the rally getting fresh support from measures such as a pension overhaul in Brazil, a loosening of price controls in Argentina and fiscal tightening in Mexico. B  

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Bonds – Apple’s Bonds Are Acting More and More Like Government Debt 

Investors casting about for safe options as U.S. lawmakers hurtle toward a debt-ceiling showdown seem prepared to designate Apple Inc. bonds as the new Treasuries. Apple’s sale of $5 billion of bonds Tuesday was even designed to mimic the U.S. government curve, with benchmarks for repeat issuance of debt due in two, five, 10 and 30 years, according to Ben Emons, chief economist at Intellectus Partners LLC. B 

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FX – Canadian dollar surges higher after surprise rate tightening 

The Canadian dollar surged to its highest level in more than two years against its US counterpart on Wednesday, after the country’s central bank surprised markets by raising interest rates to 1 per cent in response to a stronger economy. The Canadian dollar, commonly known as the “loonie”, appreciated more than 2c to $1.2119, before easing to $1.2213 in late London trading, a gain of 1.2 per cent on the day.

Canada has been in the vanguard of G10 central banks other than the Federal Reserve shifting policy away from monetary stimulus. Its decision brings into even sharper focus Thursday’s European Central Bank meeting, with traders already keenly awaiting any signs of tapering. That, said Niall Coffey at Avoca Global Advisors, showed how “Canadian officials now appear more sensitive to their foreign exchange rate policy because of the Trump administration’s frequent trade protectionist rhetoric” and the upcoming renegotiation of the Nafta agreement. Mr Coffey expected further upside for the loonie, expecting it to reach C$1.15 before the end of the year. FT

   ECONOMICS AND TRADE

Top   

Australia – Australia’s Economy Builds on Winning Streak 

Australia’s economy shrugged off the effects of a cyclone in March to grow strongly in the second quarter, helped by soaring business confidence and higher commodity prices. Gross domestic product grew by 0.8% in the second quarter from the first quarter and 1.8% from a year earlier, data showed Wednesday. Australia has now completed 26 years of growth since the last recession in the early 1990s. The upbeat data reflect rising business confidence in Australia, which has played out in much stronger employment growth and rising non-mining investment. Alan Oster, chief economist at NAB, said the strong growth firms up the probability that the next move in Australian interest rates will be higher. Iron-ore prices, still an important factor in economic growth, have been higher than expected over recent months, fanning confidence and generating added income for resource companies. WSJ

U.S. – Trump reaches deal to fund US government until December 

Donald Trump has reached a deal with Republicans and Democrats that will fund the US government until December 15 and provide a short-term increase in the debt ceiling, in a temporary measure that pushes back a bruising battle over must-pass legislative measures. After a White House meeting with Mr Trump and their Republican counterparts, Nancy Pelosi and Chuck Schumer — the top Democrats in the House and Senate — said they had reached a deal to ward off a government shutdown, avoid a debt default and also provide Hurricane Harvey-related aid. Mr Mnuchin had urged Congress to lift the $19.8tn ceiling on the government debt by September 29 to avoid default. The move also pushes back what was a September 30 deadline to pass a budget and avoid a federal government shutdown. FT

U.S. – Fed sees pickup in economic growth, but inflation remains muted 

The U.S. economy expanded at a modest to moderate pace in July through mid-August but signs of an acceleration in inflation remained slight, the latest survey conducted by the Federal Reserve showed on Wednesday. Policymakers have raised interest rates twice this year but the prospect of a third in 2017 appears increasingly uncertain against a backdrop of weak price pressures despite the U.S. economy humming along with low unemployment and continued growth. 

Many of the Fed’s 12 districts reported that businesses were having difficulty filling job openings at all skill levels, but this was not resulting in a widespread boost to salaries. The Fed is seen holding its benchmark rate steady at its next meeting in two weeks time, but economists largely expect policymakers will take another step in removing accommodation by announcing an imminent reduction of the Fed’s $4.2 trillion bond portfolio. R

Trade – South Korean export to Russia up 61% in 2017

South Korean export to Russia in 2017 increased by more than 60%, while import has gone up 45%, as of the end of July, said Lee Keun-Wha, head of the department of Russia and the CIS countries of the Korean International Trade Association, in an interview with TASS ahead of the 2017 Eastern Economic Forum on Wednesday. Given that the global level of Russian exports increased in the first quarter of this year by 36%, and import by 26%, this is a very good indicator, Lee said. Recently, Seoul has been cooperating with Moscow in such areas as the developments of “smart” transport systems, e-government, climate change, air quality improvement in large cities and a number of other areas. TASS

Trade – Mexico signs e-commerce deal with China’s Alibaba Group  

Mexico’s government said on Wednesday it has inked a deal with Alibaba Group Holding Ltd, to get Mexican products and services, especially from small- and medium-sized firms, onto the top Chinese e-commerce firm’s platform. The deal comes as Mexican President Enrique Pena Nieto wraps up a trip to China to discuss trade and investment, as part of a strategy to diversify and open new markets for his country’s products. During Pena Nieto’s trip, China’s vice trade minister, Wang Shouwen, said China was interested in possibly establishing a free trade agreement with Mexico. R

  REAL ESTATE

Top   

Hurricane – Harvey, Irma And Trump: Strong Tailwinds For Infrastructure Stocks

Initial estimates put the damage from Hurrican Harvey into the billions of dollars — Hannover Re, one of the largest re-insurers in the world, predicted a price tag of $3 billion on insured losses. Near-term, we’re likely to see a hit to the overall economy, much the way we did after Hurricane Katrina hit New Orleans. Accuweather projected it to have a $190 billion impact on the economy, which means we are likely to see a downtick in the economy in September and into October.

Potentially adding to the pain inflicted by Hurrican Harvey is the latest storm, Hurricane Irma, which as we write this has been upgraded to a category 5 as she continues to strengthen. The combination of these two storms is likely to rekindle the larger need to rebuild domestic infrastructure, a key tenant of candidate Trump’s 2016 election platform. Over the last two decades, with the exception of Rail, every category of infrastructure has received a failing grade from the American Society of Civil Engineers. Forbes

Hurricane – Hurricane Irma is already causing insurance stocks to plunge

Stock prices of home insurers tied to Florida plunged Tuesday after Irma strengthened into a Category 5 storm. With winds topping 175 mph, Irma on Tuesday became the strongest hurricane on record in the Atlantic basin outside of the Caribbean Sea and Gulf of Mexico, according to the National Hurricane Center.

“There is no modern historical precedent for a Miami hurricane, because the last direct hit was back in the 1920s. A direct hit from Irma could disrupt rail and container activity, and damage infrastructure for transportation, in addition to putting thousands of lives at risk,” wrote Roberto Friedlander, head of energy trading for Seaport Global Securities. “Combined with rainfall, then we are looking at catastrophic flooding to a vast area that already has problems with water levels. Real estate risks are simply gigantic.” CNBC

Hurricane – House Approves $8 Billion in Aid for Hurricane Harvey Recovery

The House on Wednesday overwhelmingly approved nearly $8 billion in disaster aid in response to Hurricane Harvey. The vast majority of that money would go to the Federal Emergency Management Agency, and $450 million would go to the Small Business Administration’s disaster loan program. And with Hurricane Irma barreling toward Puerto Rico and Florida, more disaster aid is likely to be needed quickly.

Looming over the House vote was an emerging plan in the Senate to link an increase in the debt limit to the hurricane measure — a move that could lead to a showdown with House conservatives. The particulars of the debt limit increase remained unclear on Wednesday. The Senate Democratic leader, Chuck Schumer of New York, and the House Democratic leader, Nancy Pelosi of California, announced that Democrats were prepared to offer their support for a three-month increase along with the hurricane aid. That would give Democrats leverage later this year when other matters, including a longer-term government funding deal, could be negotiated between both parties. Among other things, lawmakers need to provide funds for the Children’s Health Insurance Program, and they need to reauthorize the National Flood Insurance Program and the Federal Aviation Administration. NYT

Hurricane – FEMA Requesting Manufactured Homes for Harvey Victims

The Federal Emergency Management Agency has asked pre-fabricated housing manufacturers to produce at least 4,500 homes for families affected by Hurricane Harvey, according to the agency. The request is substantial and is expected to be the first of a wave of requests. Within the last 18 months alone, the industry provided FEMA with 4,283 homes, but the agency currently has just 1,700 in its inventory.

Former FEMA chief Craig Fugate told CBS News that the homes cost about $100,000 apiece which includes the home price, installation, maintenance and removal. There are 21 factories that build manufactured homes in Texas, according to the Texas Manufactured Housing Association. This may help to cut down on the delivery time it will take to get the homes to people who need them in Houston and surrounding areas. CBS

 

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