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Today’s Featured Topic A Transportation Renaissance is Underway in America Summary: There’s a transportation boom going on in the United States, supported by a stronger economy, regulatory changes, and shifts in consumer shopping habits. This is lifting the trucking and railroad sectors, and even some domestic maritime freight companies. After years of so-so growth, the US economic engine is accelerating to a point where second quarter 2018 GDP is expected to exceed 4%. Meanwhile, recent tax cuts and a robust job market have given consumers more confidence to spend. Indeed, U.S. retail sales just posted its biggest gain in six months. Consequently, trucking companies are racing to keep up with surging demand for freight services, as factories bulk up production and retailers build up stocks.Truckstop.com, which matches available freight loads to trucks in the sector’s spot market, is seeing 500,000 to 600,000 loads a day posted on its system these days. That’s more than double the 250,000 average daily loads the market usually carries. This surge in demand is met with supply constraints. A federal law went into effect this Spring that effectively limits the number of hours and miles a driver can log behind the wheel each day. Truckers must now have electronic logbooks in their rigs to prove compliance, and because the technology is expensive to install, smaller independent truckers have been forced to exit the business. The tightening capacity and a severe shortage of drivers is pushing freight rates higher. But, given the importance of last mile shipping in the ecommerce era, trucking companies may not have to suffer margin compression, as they are able to easily pass on these higher costs to their end users for now. Meanwhile, the new GOP tax law gives them more cash for capital spending and to add capacity. This has allowed the market for new heavy-duty trucks to grow at a nearly unprecedented pace this year. Manufacturers already have an order backlog of more than 200,000 trucks, or 8.4 months of production, even though we’re still in the first half of 2018. The trucking capacity crunch is benefiting the rail sector which has also received a huge boost from increased intermodal transportation — whereby two or more different modes of transportation, such as rail and truck, are used to convey goods. The intermodal process usually begins with a container being moved by a truck to a rail, and then back to a truck to complete the process. Oftentimes, but not always, the truck covers short haul and the rail covers long haul transportation. Intermodal freight volumes have more than doubled since 2000, with about 25 million containers moved via intermodal shipping each year. Just this year, traffic is already up 7% year-to-date. Factors contributing to this growth include the rise of e-commerce, increased congestion on U.S. highways, improved rail service, and higher fuel costs. The railway system requires less fuel than road transport, so intermodal ends up being 15-20% cheaper than trucking alone, and it is more environmentally friendly. Other secular shifts — from the long-term decline of coal deliveries to competition from trucking — have forced railroads to undergo a cycle of corporate restructuring and strategic changes to improve efficiency. Furthermore, railroads have spent nearly $100 billion on rail infrastructure and equipment over the past several years, including on high-horsepower locomotives and upgraded tracks. North America’s comprehensive rail network now makes it possible to easily send shipments from the Atlantic to the Pacific, and everywhere in between, so railroads stand to gain more traffic that moves to online retailers’ distribution centers. In the midst of this rosy outlook, there are some are headwinds to consider. More than 50% of commercial railroad business comes from trade, making the rail sector sensitive to trade wars. Given how tightly integrated global supply chains have become, a slowdown in trade due to new tariffs means there would be fewer finished and semi-finished goods to transport between manufacturers (domestic & overseas) and end users. Another headwind, albeit further in the future, is the rise of electric and autonomous trucks. Electric trucks will minimize the relative fuel efficiency advantage of railroads, while autonomous trucks will take care of the trucker driver shortage. America’s transportation renaissance is benefiting companies such as J.B. Hunt Transport Services (JBHT), with its trailer fleet of more than 100,000, and XPO Logistics (XPO). On the rail side, beneficiaries include Union Pacific Corporation (UNP), which links Pacific Coast and Gulf Coast ports with the Midwest and Eastern United States gateways through its rail network, and CSX Corporation (CSX) which offers rail services in addition to transporting intermodal containers and trailers. The shipping side of the transportation industry has a bleaker outlook than trucking and rails. Excess capacity has plagued the shipping sector for several years, so a trade war would be outright bad for them. Moreover, they will soon face higher costs due to new low-sulfur-emission regulations that will require retrofitting their ships or replacing them to become compliant. A few domestic-oriented companies may be able to profit from the stronger US economy. These include Matson, Inc. (MATX) which offers ocean freight transportation to non-contiguous U.S. states such as Hawaii & Alaska, and Kirby Corporation (KEX) which operates domestic tank barges in the United States. Last November MRP wrote about the trucking industry’s inflection point, and indeed 2018 is proving to be a “trucker’s market”. Rail transport is also experiencing a moment of glory, with intermodal rail hitting new records each month. It is little wonder then that both sectors are outperforming the broad transporation index and the S&P 500, as reflected in the charts below. We’ve also summarized the following articles related to this topic in the Transportation section of today’s report.
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Chart: IYT vs SEA vs Rail (CSX, UNP) vs Trucks (XPO, JBHT) vs US Maritime (MATX, KEX) vs S&P 500 (SPY) |
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Other Disruptive Change
Labor, Education & Demographics
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Joe Mac’s Market Viewpoint |
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The Federal Reserve has said for years that it wants to get inflation in the U.S. back to 2% per year. Some indicators are already showing inflation rates higher than that. But, the Fed persists with its fixation on the core personal consumption expenditures (“PCE”) deflator as a superior measure. That number has been stuck below 2% since May 2012. The trend of the inflation data, however, may be changing soon. Joe Mac’s Market Viewpoint: CAPEX Booms! →
Other Viewpoint Reports Joe Mac’s Market Viewpoint: The Inflation Complication → Joe Mac’s Market Viewpoint: A Review of MRP Themes → |
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Current MRP Themes |
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Major Data Points |
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US Consumer Sentiment at 3-Month High The University of Michigan’s consumer sentiment for the US increased to 99.3 in June of 2018 from 98 in May, preliminary estimates showed. Figures beat market expectations of 98.5, reaching the highest in three months due to consumers’ more favorable assessments of their current financial situation and more favorable views of current buying conditions for household durables. In contrast, expectations declined to the lowest level since the start of the year due to less favorable prospects for the overall economy. TE |
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US Stocks Close Down on Tariffs Wall Street closed in the red on Friday 15 June 2018 after the Trump Administration announced it will impose around $50 billion tariffs in imports from China, raising concerns of a trade war. TE |
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Dollar Hits 7-Month High The dollar index against a basket of major currencies jumped to 95.03 on Friday, its highest level since last November, after the ECB signalled on Thursday it will keep interest rates at record lows well into next year. TE |
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European Shares Slump on Trade War Worries European stock markets closed deep in the red Friday amid rising concerns over trade war between the world’s two biggest economies after the Trump administration announced tariffs on USD 50 billion of Chinese imports. Beijing already said it would retaliate immediately. TE |
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Argentine Peso at Fresh Low Amid Central Bank Turbulence The Argentine peso touched a new record low of 28.35 per USD on Friday, reversing from a strong rally earlier in the session as investors digest the unexpected resignation of the central bank governor and his replacement by the finance minister. Changes in the central bank happened nearly a week after the country announced a $50 billion deal with the IMF. TE |
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Oil Prices Slump Ahead of OPEC Meeting Oil prices fell on Friday amid rising concerns major oil producers will ease restrictions on oil supply during the OPEC meeting next week. The US crude was down 2.1% to $64.67 a barrel and Brent crude oil dropped 2.5% to $73.25 a barrel around 12:10 PM NY time. TE |
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Other Disruptive Change |
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Digital Currencies: Much of bitcoin’s 2017 boom was market manipulation, research says New research says at least half of the 2017 rise in bitcoin prices was due to coordinated price manipulation using another cryptocurrency called tether. By tracking Bitfinex transactions, which are recorded on a public ledger, it was found that another cryptocurrency, tether, was used to buy bitcoin after large price falls. The authors tracked that pattern and found periods of suspicious bitcoin price activity tied to the issuance of tether, which is purportedly pegged to the value of the U.S. dollar. Bitcoin rose to almost $20,000 in December after starting last year below $1,000. This year, the world’s first and most popular cryptocurrency has lost more than half its value, trading near $6,252 on Wednesday afternoon. Bitfinex is one of the largest cryptocurrency platforms in the world by trading volume, and while it is registered in the Caribbean and owned by a British Virgin Islands company, it also has offices in Asia and Europe. In December, the Commodity Futures Trading Commission sent a subpoena to Bitfinex and Tether. In 2016, the CFTC fined Bitfinex $75,000 for failing to register with the agency and offering “illegal” cryptocurrency transactions. A few months later, hackers stole 119,756 bitcoins from the Caribbean-based exchange. CNBC EM: Why Asia’s Emerging Markets Are Looking Better Than Their Peers Asia wasn’t spared when investors soured on emerging markets around the world in late April, a shift driven by the dollar’s resurgence. Stocks in Malaysia and Indonesia have tumbled in recent months. Several Asian currencies have depreciated against the dollar this year, including the Indian rupee and Philippine peso. Government-bond yields have surged, with the 10-year yield in Indonesia shooting up to 7.28% from 6.31% at the end of December. But investors say Asia’s emerging markets look stronger than some of their peers, thanks to actions they have taken since the 2013 “taper tantrum,” when investors fled emerging markets after the Federal Reserve signaled it was getting closer to reducing stimulus. Those moves have bolstered central-bank credibility in the region. That hasn’t happened to the same degree in Argentina or Turkey, the two countries at the center of this spring’s emerging-market turmoil. Asian stock markets’ skew toward technology shares is another factor that could help buffer them from broader emerging-market swoons, given investors’ ardor for the sector. Tech shares, including the likes of Alibaba Group Holding Ltd. and Tencent Holdings Ltd. , recently had a 27% weighting in the MSCI’s Asia Pacific index excluding Japan. The latest monthly figures still point to sharp outflows from Asia in both April and May. Foreign investors pulled an estimated net $8 billion from emerging Asian stocks and bonds last month, making it the region hit worst by the exodus of cash. WSJ
US: Economic Growth in U.S. Leaves World Behind The U.S. economy is revving up just as Europe and other major economies lose steam, jeopardizing a rare period in which the world’s largest economies have been accelerating in unison. The European Central Bank on Thursday took another step toward ending the massive stimulus measures it has used in an effort to boost growth since 2015. But ECB officials also said they would hold interest rates steady through summer next year, a sign that they felt the eurozone economy remains fragile. In an indication of growing economic vigor in the U.S., the Federal Reserve on Wednesday tapped the brakes again, raising the benchmark interest rate by a quarter of a percentage point and signaling it may quicken the pace of future rate increases because of a strengthening economy and tightening labor markets. The economies’ diverging paths were expressed most prominently in the euro, which on Thursday suffered its worst day against the dollar in two years. The euro lost 1.88% against the U.S. currency, its biggest drop since the day after the U.K. voted to leave the European Union. Many investors counted on a revitalized Europe to lead that growth in 2018. But recent labor strikes in France, political turmoil in Italy and softer economic data are causing investors to rethink that premise. WSJ Elections: Colombia is heading for a run-off presidential election. Here’s what’s at stake Last month, Colombia held its first presidential election since the government signed a historic 2016 peace agreement with guerrilla movement the Revolutionary Armed Forces of Colombia. After the first round of voting, Conservative Ivan Duque and leftist Gustavo Petro are heading to a run-off. One of the main issues at play in the election is the peace agreement between the government and the rebel group, which is known as FARC. Duque opposes the peace deal, claiming that it is too lenient on the former guerrilla members and has campaigned to modify the amnesty clause for them. On the other hand, Petro is supportive of the peace agreement, and is unlikely to change the terms. The two leading candidates would also move the country in opposite directions when dealing with the crisis in Venezuela. Approximately 1 million Venezuelans have entered Colombia since the country fell into an economic crisis in 2017. In terms of the Colombian economy, Petro is advocating for less reliance on oil and exports. He also says he wants to tackle big business conglomerates in the country. Duque represents a more business-oriented model that would attract more investor confidence while Petro has highlighted social policies, which may not directly benefit the economy. CNBC Central Banks: Central bank withdrawal means tighter times ahead for borrowers With the world’s two largest central banks now pulling back the economic props used to battle multiple crises, a so-far sturdy global recovery faces a new challenge as rising interest rates begin to take hold. For U.S. consumers, home mortgage rates already have risen enough over the last few months to offset the extra cash the average family could expect from recently enacted tax cuts, a potential drag on the consumer spending that continues to power the U.S. recovery. Credit card and auto loan rates are also rising. Globally, emerging markets that racked up debt in an era of cheap money now face a turning point as global capital that had been attracted there by higher returns moves elsewhere. The European Central Bank on Thursday said it would scale back its longstanding asset purchase program in September and end it in December, a day after the U.S. Federal Reserve approved its seventh rate increase since 2015 and outlined plans for steady rate rises to come. The Fed is also drawing down its $4 trillion portfolio of bonds, putting further pressure on interest rates. R
Central Banks: Why the Fed Tweaked an Obscure Interest Rate This Week On Wednesday, the central bank adjusted how it sets the interest rate on excess reserves. It on Wednesday raised the range to 1.75 percent to 2 percent, from 1.5 percent to 1.75 percent. The Fed said the interest rate on excess reserves would now be set 0.05 percentage point below the top of the range. As a result, the interest rate on excess reserves is now 1.95 percent. The rate in question was introduced to give the Fed control over the reserves it holds in banks. If banks make too many loans, the economy could overheat. If this happens, the Fed can raise the interest rate on excess reserves to persuade banks to keep money at the Fed, rather than deploying it in the economy. The government has recently been issuing a lot more debt to finance its deficit, much of it in the form of Treasury bills that are sold to investors. But to find sufficient buyers, the Treasury has had to pay higher rates on Treasury bills. This helped attract money out of the federal funds market into Treasury bills, and in turn that caused the fed funds rate to move higher and closer to the top of its range. This caught the Fed’s eye. The central bank wants to avoid a situation in which the fed funds rate moves above the Fed’s target range. As a result of the change, the market may set the federal funds rate further below the upper band — which is what the Fed wants. NYT Labour, Education & Demographics Higher Ed: Despite overall setbacks, one MOOC on AI gains ground Despite some setbacks, some massive open online courses are growing, with three of the 10 most popular courses provided on Coursera, a leading provider of MOOCs, produced by Deeplearning.ai. Ng’s machine learning course, which was Coursera’s first MOOC, has enrolled more than 1.7 million, and his new series of courses introduced last year have enrolled 250,000. Another online MOOC provider, Udacity, offers most of its courses without university help, and is valued at more than $1 billion. Despite some big numbers, reports have shown that MOOCs don’t retain students, citing one case where a series of courses offered by a collection of universities only certified 5.5% of the 841,600 students who registered. Of that group, 35% of registrants didn’t view any of the course material. Some analysis suggests that MOOCs may not be a destination but a proving grounds for future opportunities, and a way for institutions to identify talent to see who has digital fluency, a willingness to contribute, grit and motivation and collaborative skills. Some online courses now screen potential workers or students or help pre-train them. EDive Advertising & Media: Look out, Facebook and Google: Amazon is becoming an advertising giant While much has been said about Amazon.com Inc.’s aggressive bets on brick-and-mortar retail, health care and many other industries, the company has quietly built a sizable and growing business in an area dominated by two other tech titans: digital advertising. Advertising pulled in up to $4 billion for Amazon last year, and the company said first-quarter revenue from ads and other service offerings more than doubled this year. Despite the dominant digital-ad positions of Alphabet Inc.’s Google and Facebook Inc., that growth is expected to continue: Amazon ad revenue is expected to be $9.5 billion this year and nearly double to $18.58 billion in 2020. Those impressive numbers are in part propped up by the company’s vast trove of personal data that comes in the form of Prime memberships. Because the 100 million-plus Prime accounts are linked to specific people, the company can help advertisers find and track users from their existing databases as well as locate new potential customers. So far, Amazon has not managed to siphon an outsize amount of revenue from Facebook or Google. Somewhere between 15% to 20% of Amazon’s ad dollars are coming from the social media and search giants, but the vast majority of the Seattle company’s ad money is moving from traditional media such as print, radio and TV. MW Advertising & Media: People are turning away from Facebook to Whatsapp for their news Facebook is being used less and less to find and share news while people are increasingly turning to alternative platforms like Whatsapp instead. The use of Facebook for news dropped by 9 percent from 2017 to 2018 in the U.S., with news consumption among younger groups falling 20 percent. Average news consumption on Facebook globally has declined 6 percent since 2016 until now, while Whatsapp saw a 4 percent increase in that time period. Instagram and Snapchat news usage rose 3 percent and 2 percent respectively in two years. Both Whatsapp and Instagram are owned by Facebook. Snap-owned Snapchat has been driving news content on its platform, with a redesign in February prioritizing publishers and content creators. The Reuters Institute said that consumers were finding the private nature of messaging services like Whatsapp more appealing, and were more willing to share and engage in news content. It found that people felt uncomfortable about their growing networks of friends on Facebook and, as a consequence, were less disposed to use the platform for news. Facebook has recently looked to change its approach to news on its platform, updating its News Feed in January to prioritize local news. The company has also removed a feature that showed trending news and said earlier this month that it was testing breaking news notifications. CNBC
Beverages: ‘Big swings’ in consumers’ beverage preferences are reordering the category’s leaderboard Sales in the US beverage industry have grown 14% to $450bn in the last five years and a majority of beverage stakeholders are optimistic the trend will continue. The biggest beneficiary in terms sales growth is ready-to-drink tea, and in terms of volume is still bottled water, with flavored seltzer making a strong showing in the past two to five years as well. Looking forward, in the next five years sales will follow this trend with sales of kombucha and ready-to-drink tea leading the way with a projected compound annual growth rate of 14%. Bottled water also will continue to climb with sales of flavored bottled water projected to grow 8-9% followed by carbonated water at 6%, still bottled water at 4%, tonic water at 2-4% and coconut and plant-based water at 2-4%. Another significant shift is a move to more “mindful, superior drinking,” which could hit hard the liquor, beer and wine segment while opening up opportunities for nonalcoholic alternatives. Better-for-you flavored pre-mixes are benefiting from this. Sophisticated sodas, such as ginger ales and tonics, and seltzers also are seeing a lift from this trend, which are projected to represent a $9 billion opportunity in the next five years. Just as consumers are seeking better-for-you options when they indulge, they are looking for more function from their everyday beverages as well, these include milk-alternatives, plant-based protein drinks, kombucha and probiotic drinks, and caffeinated beverages, as well as products with adaptogens, collagen, botanicals and traditional medicinal plants. FNavigator
FoodTech: One order of eggs, hold the hens: How acellular agriculture will reshape food Known as acellular agriculture, companies like the Bay Area’s Clara Foods have figured out how to get yeast microbes to produce actual egg proteins. And you might not have realized it, but you already have an idea of how it works. When you feed sugar to baker’s yeast, the yeast produces CO2 to make the bread rise. When you feed sugar to brewer’s yeast, it produces alcohol. Well, these entrepreneurs have engineered a yeast that produces, in this case, actual egg proteins. After removing the yeast from the protein it created, what’s left isn’t an egg alternative. It’s actual egg white proteins, but without the chicken. Other companies, like Geltor and Perfect Day, are doing the same with gelatin and cow’s milk, and both are doing it animal-free. With fermentation, there are still resources needed, but such precision agricultural techniques could pump out a constant flow of liquid egg whites for consumers with a small fraction of in the inputs its competitors in the egg industry need. FDive
Grocers: Britain’s Robot Grocer Is Coming to the U.S In a warehouse an hour west of London, robots zip across a grid of thousands of crates filled with groceries, picking up cartons of milk, heads of broccoli, tubs of lemon sorbet, cans of tomato soup, and whatever else Britons might want for dinner. The system has caught the eye of American supermarket giant Kroger Co., which in May bought 6 percent of Ocado and hired it to build and operate up to 20 distribution hubs as Kroger takes on Walmart Inc. and especially Amazon.com Inc. in e-commerce. Kroger hasn’t settled on details of the rollout but expects to start shipping groceries from an Ocado-run warehouse in two years. Coming on the heels of similar contracts in France, Sweden, and Canada for everything from the robots to the software that gets groceries to shoppers’ homes within a one-hour window, the Kroger deal marks a breakout moment for Ocado. The company has spent the past five years seeking, and failing to close, such deals with supermarket chains worldwide. The turnaround, CEO Steiner says, can be attributed to Amazon’s $13.7 billion acquisition of Whole Foods Market last year. Ocado has gained a reputation for reliability and upmarket fare but building its system was expensive: Although grocery revenue last year grew 12 percent, to £1.3 billion ($1.7 billion), Ocado has logged £847 million in capital expenses since 2011, and in 2016—its best year—it saw just £12 million in pretax profit. B |
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