Import Surge

Imports into U.S. seaports are higher than seasonal patterns as retailers and manufacturers try to increase imported goods before the new round of trade tariffs goes into effect in January 2019. Amid the trade war between the U.S. and China, retailers and manufacturers have been setting monthly records in the amounts of goods that they have been importing during the fall months. The larger than expected volume of trade imports not only displays the effects of the underlying trade tensions between the U.S. and China on businesses but also make it hard to understand the underlying normal economic trends during this time of the year. The trade gap is expected to be the widest on record this year. However, due to the underlying trade tensions, we cannot determine whether the gap is due to the current goods stockpiling, a weaker yuan, strong demand due to the strong American economy, or a mix of factors that are not clear at this time to the current deviation from normal economic trends this year.

Ports in Los Angeles and Long Beach, the main destination for China’s imports, handled a combined 849,908 20-foot equivalent units (TEU) of imports in October. While ports in these two regions are the normally top hub for container imports, this year’s number represented a rise of 17.7% in imports from the same month last year and 10.2% from September.

For example, Yusen Terminal in Los Angles has opened an additional entry gate for the significant increase in container imports. As an effect of the trade war, containers in the Yusen Terminals that used to average four-boxes high,  now measure an average of five- or six-boxes high.

On the East coast, ports in Norfolk, Virginia, and Savannah, Georgia have experienced a similar rise in imports from September to October. In Norfolk, Virginia,  The Port of Virginia reported that imports rose 17% to 127,677 TEUs from September to October. In Georgia, ports reported imported cargo reached 205,836 TEUs, a rise of 18.5% from September to October.

Imports into these ports have been driven primarily by apparel, furniture, and manufacturing companies hoping to pull their import volume before the trade tariffs hit in January. Panjiva research group reported that apparel imports rose 19.7% year-over-year in October, furniture imports were up 14.7%, and auto-parts imports rose 9.9% last month compared to a year ago.

Additionally, companies such as Costco Wholesale Corporation, Floor & Décor Holdings Inc., Lumber Liquidators Holdings Inc., and Eaton Corporation are all planning on increasing their imports this year before the tariffs go into effect in January.

While many of these companies hope to escape trade tariff by pulling their imports forward, they face a certain indirect costs risk. By acquiring their inventories earlier, and holding their inventories longer retailers risk being stuck with large quantities of products that they might not sell. In addition,  shipping companies face a potential drop-off in demand after experiencing this surge when the tariffs finally go into effect in January. They also face a significant decline in business if the U.S. and China potentially resolve their difference and companies start destocking and scaling back new orders for inventory.

Source:

https://www.wsj.com/articles/imports-surge-at-u-s-ports-as-companies-brace-for-new-tariffs-1542310733

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Nvidia – Crypto-Bust

After Nvidia’s disappointing earnings report was released on Thursday afternoon, the Company’s shares opened on Friday morning at $163.60, a 19% drop from Thursday closing price of $202.63. Nvidia has been one of the strongest performers in the tech-sector sector in the last two years with its share price growing  10 times between early 2016 and 2018. Its price has risen from around $27 since 2016 to a peak of around $280 this September. The company has to experience tremendous growth over the last 2 years as cryptocurrency gained popularity because its hardware chips have been a popular tool cryptocurrency miner, who needed intense computing power than Nvidia’s hardware such as the Pascal chip provides. On Thursday’s earnings call, the company’s Chief Executive Jensen Huang projected negative outlook for the fourth-quarter blaming the decline in cryptocurrency leaving it a significant amount of excess inventory and missed revenue target in almost all its cryptocurrency related products.

On its third-quarter earnings report, company’s revenue and profit were both short of Wall Street’s expectations.

During the earnings call, the company shared that revenue was $3.18 billion and its adjusted profit was $1.84 a share. Analysts had expected an adjusted profit of $1.93 a share and $3.24 billion in revenue. The company had also projected $2.7 billion in revenue, compared with $2.91 billion a year earlier.

The revenue forecast reflects an expected decline of its Pascal hardware and a seasonal decline in its gaming-console business. Additionally,  game console revenue rose 13% to $1.76 billion, and its data-center segment reached $792 million, up 58%, but both fell short of Wall Street’s expectations.

The company’s cryptocurrency related sales revenue had declined from last year due to the company’s inability to sell the pascal processor chips, often used by crypto-miners, that it had accumulated a large inventory of during the longer-than-expected crypto-boom. In addition, while it has amassed a  large inventory of the Pascal processing chip, it has now released a new processor, The Turing chip, for professionals and gamers that it previously targeted with the Pascal Chip. It also experienced a decline in revenue from OEMs and intellectual property sales related to cryptocurrency, resulting in a total fall of 23% of revenue from the previous quarter related to its crypto business.

After its earnings call, of the 35 analysts that cover Nvidia more than half have changed their price targets in response to the company’s earnings report. Inventory problems related to cryptocurrency affecting sales, slow data-center growth and possible volatility in the SOX index due to the Trade Wars all contributed to the price target changes for Nvidia by analysts

Sources:

https://www.marketwatch.com/story/nvidia-stock-sees-worst-day-in-a-decade-as-more-than-half-of-analysts-cut-price-targets-on-crypto-chip-hangover-2018-11-16

https://www.wsj.com/articles/nvidia-misses-forecasts-as-gaming-data-center-businesses-lag-1542320328?mod=djemMoneyBeat_us

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PG&E Wildfire Troubles

PG&E, California’s largest utility provider, had its stock experience the largest single-day plunge on Monday since the early 2000s after the company announced that it could face liabilities exceeding its $ 1.4 Billion insurance coverage if officials determine that a malfunction in its electrical equipment started the Woolsey fire.
This news raised concerns for investors because PG&E is still paying for liabilities from wildfires in California from 2017 where fire investigators linked PG&E’s equipment to 17 wildfires in Northern California last year. Now, some analysts believe that potential liability from the 2017 fires still remains at as much as $15 billion. PG&E only has $1.4 Billion in insurance coverage right now and has completely drawn down two revolving credit facilities worth a combined $3.3 billion to pay off upcoming debt maturities. The company said it currently has roughly $3.5 billion in cash. Therefore, with its liabilities from 2017 and upcoming debt maturities. investors are worried that the company cannot withstand potential additional liabilities from the 2018  wildfire.
PG&E’s bonds also suffered sharply from this news with the company’s 6.05% notes due 2034 trading down from 105 cents to 91 cents on the dollar. Its yield premium to Treasurys rose from  2.08 percentage points to around 3.67 percentage points, which is a large movement for an investment-grade bond.

While the company’s stock had suffered from Monday to Thursday dropping 56% over the course of 4 days, it rose 38% on Friday amid talks that the state might save the utility from potential wildfire liability costs that threaten to drive it into bankruptcy. The company was last driven to bankruptcy when California experienced an energy crisis in 2000. That bankruptcy was the biggest utility bankruptcy in U.S. history, and Utility officials do not want to repeat the bankruptcy.

On Thursday Michael Picker, president of the California Public Utilities Commission indicated a desire for the utility company bill customers to share some costs associated with the wildfire. He shared that this strategy might mitigate PG&E’s liabilities, and save it from bankruptcy. This news boosted PG&E’s stock nearly 38% from $17.40 to $24.40 on Friday. However, right now state legislators have shown little agreement with this proposal and are not taking actions to pass legislature letting PG&E pass some of its liability costs to its customers.

Sources:

https://www.wsj.com/articles/pg-e-stock-tanks-on-wildfire-liability-concerns-1542225588

https://www.wsj.com/articles/pg-e-stock-rises-as-regulator-mulls-utilitys-future-1542380905?mod=hp_lead_pos4

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Copper’s Recent Outperformance Over Other Industrial Commodities

Copper is often used as a barometer for the global economy, as copper is a key component in the majority of electrical machinery, from household items to military jets. Over the summer, copper prices fell more than 20% when the global trade war between the U.S. and China escalated. This occured, firstly, because China accounts for nearly half of all global demand for copper and the trade war will slow down China’s demand for the commodity. Secondly, as the trade war escalates, the weakening of global economy also contributes to the downfall of copper prices.

Investors are now seeing that the demand for copper is not necessarily bad because of its necessity and the decrease in global copper production. Since the beginning of November, copper prices have risen 5.3%. This also suggests that the investors are finding the resumed talks between the U.S. and China’s top officials regarding their trade relationships to be comforting. The investors are also optimistic about the G20 meeting later this month where the outcome will have major impact on the global economic well-being as well as copper prices.

Sources:

https://www.wsj.com/articles/growth-worries-threaten-coppers-luster-1542373200

https://www.wsj.com/articles/copper-gains-as-dollar-weakens-1542394879

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The U.K.’s Brexit Deal

As the deadline for Brexit is approaching on March 29, 2019, many are concerned about the future of the United Kingdom and the European Union. The U.K. Prime Minister Theresa May recently proposed a Brexit deal that received major backlash after her cabinet’s approval. There have been six government ministers’ resignations since last Thursday, which haven deepened the political turmoil over the Brexit deal.

May’s Brexit deal has been criticized by many, including by those who want a clean split from the E.U. and by those who want to stay in the E.U. Therefore, there seems to be little chance that the deal gets through the Parliament. Since the deadline of Brexit is approaching, if the European or British Parliament rejects the Brexit deal proposed by Prime Minister May, the chances of getting a no-deal Brexit is high. Under a no-deal Brexit, there will be a huge economic setback as companies in the U.K. will no longer have easy access to E.U. markets.

As a result, due to the political turmoil and the uncertainty of Brexit deal, the pound dropped significantly by around 2% against dollar. This could also potentially lead to a stepping down of the Prime Minister because of her failure to stand up against the E.U. and get a deal for the U.K.’s national interest.

Sources:

https://www.wsj.com/articles/u-ks-may-expects-to-appoint-new-brexit-secretary-in-next-day-or-two-1542359938

https://www.wsj.com/articles/companies-start-to-sweat-prospect-of-no-deal-brexit-as-deadline-looms-1542364200

https://www.wsj.com/articles/european-officials-to-meet-to-approve-draft-brexit-deal-1542269504

https://www.nytimes.com/2018/11/16/world/europe/theresa-may-brexit-agreement.html

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Alphabet to Launch Driverless Car Service

Alphabet’s Waymo unit has recorded millions of miles on its self-driving project over the last few years to test and ensure the performance of its technology. After testing its driverless car on non-employees through the Early Rider program last year in order to understand the needs of potential customers, John Krafcik, the CEO of Waymo announced last week  that the driverless car service will launch in Phoenix within the next two months.

The launch in Phoenix is an expansion of the Early Rider program, where participants can travel within the service parameter using self-driving service at anytime. Waymo expects businesses to be its biggest customer, as businesses including Walmart, Avis Budge Group Inc., and AutoNation Inc. have already expressed a willingness to pay for their customers’ self-driving service to shuttle their them to stores. This is mainly due to the low cost of the driverless technology since there will not be any labor cost involved. Mr. Krafcik is willing to take the expansion process step-by-step because it is an extremely challenging technology. As Waymo is entering its very early stages of commercialization, it will be ahead of its competitors to implement the driverless technology to reshape the market for transportation.

Sources:

https://www.abc15.com/news/region-phoenix-metro/central-phoenix/bloomberg-driverless-waymo-cars-could-run-commercially-in-phoenix-in-december

https://www.wsj.com/articles/waymo-ceo-says-alphabet-unit-plans-to-launch-driverless-car-service-in-coming-months-1542135341

 

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General Electric Wading Through Tough Times

General Electric, the once renowned conglomerate and ultra-safe investment, is now in trouble. Since losing its coveted triple-A status in 2015, the conglomerate’s credit rating is hovering at BBB- (three notches above junk-bond status), and has $115 billion in outstanding debt.

The downfall started due to GE’s struggling core energy business, charges from GE Capital’s insurance liabilities, and dwindling cash reserves. This has only been exacerbated by GE’s complex financial reporting and $22 billion in unexpected charges tied to its power unit.  

As it currently stands, General Electric relies on $41 billion in revolving credit lines from over 30 banks, and in November it cut its common-stock quarterly dividend to just one penny. Through strategic divestitures and a refocus on its power and aviation businesses, GE is looking to regain a strong balance sheet and a single-A credit rating. On Tuesday, the conglomerate announced that it would be selling a $3.7 billion (or around 20%) stake in Baker Hughes, an oil-field-services company. Additionally, it agreed to sell its locomotive business and spin off its health-care unit.

Since the beginning of the year, GE’s stock lost half of its value, and bond prices have fallen between 5% and 18% just in the last month. Its bond was the most traded one within the U.S. corporate-debt market in the last two weeks, with more than $10 billion dollars being transacted. The implications of GE bonds becoming junk are significant. GE would become about one-tenth of the $1.2 trillion debt market, and would force many investors to rethink their understanding of risk. It would also affect pension and mutual funds, which are heavily invested in GE and have rating requirements on the bonds they hold.

To hedge from the risk of default, many investors (including lending banks) are buying credit-default swaps (CDS) which pay in the event that GE defaults. Increased demand for GE CDS has doubled their price and indicates an increased perceived risk of default over the next five years of about 16%, up 7% since the end of October.

Sources:

https://www.wsj.com/articles/ge-credit-crunch-ripples-across-wall-street-1542220488

https://www.wsj.com/articles/ge-selling-spreads-to-bond-markets-1542131394

https://www.wsj.com/articles/ge-to-sell-up-to-20-stake-in-baker-hughes-1542113936

 

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