November 20, 2017

Emerging Markets and Idiosyncratic Risk

Posted in Keith Knutsson tagged at 2:34 am by Keith Knutsson

Morgan Stanley is betting on improving performance of emerging markets, citing improving asset valuations and widening rate differentials as the key factors. For the past year, growth and decreasing current account deficits are the drove the emerging markets gains this year.

After a good performance for the year, due to underlying confidence in EM reduction in risk factors such as falling commodity prices and reduced anxiety over the outlook for China’s economy, the high-yield currencies of emerging markets are also extremely sensitive to US interest rate hikes. Additionally, there is a multitude of idiosyncratic reasons why assets in the emerging market class have experienced downward pressure in the past weeks.

The markets are considering the mentioned NAFTA worries going forward. Foreign Minister Luis Viegaray cited the possible impact of cooperation with the U.S for security and immigration as a concerning factor.

In South Africa doubts persist on the adoption of policies needed to drive growth, investment and job creation for several years due to infighting in the ruling African National Congress. The power struggle over who should succeed Jacob Zuma as its leader in December and as president in 2019 is proving challenging.

Keith Knutsson of Integrale Advisors stated, ”If the current risk factors in the Emerging Markets are as temporary as they seem, there is exceptional potential for investors.”

An increase in global liquidity could lift emerging markets in the coming weeks. Natural rise in prices of oil should help liquidity, but due to the price increase taking root in tensions within the Middle East the effect has been limited.

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November 15, 2017

Saudi Arabia, OPEC, and Russia: The Conflicts of $60 Crude Prices.

Posted in Keith Knutsson, Real Estate tagged at 2:04 am by Keith Knutsson

The new political risk from Saudi Arabia that arose from the Crown Prince Mohammed bin Salman detaining several prominent business people within the country, including officials and princes, results in uncertainty for oil investors. Given that Saudi Arabia is the world’s second-largest crude producer and the biggest exporter, oil prices are heavily affected by political developments. Until the smoke clears, the market will continue to put a risk premium on the oil prices.

Crude moved past $60 per barrel for the first time in two years due to these developments, and at $70 a barrel the US shale supply would soar; rising oil prices allow shale companies to increase operations. The Energy Information Administration expects mean U.S. lower-48 oil production to ramp up by 620,000 barrels / day in 2018. That estimate will be adjusted upwards if oil prices continue upward. With these numbers in mind, Saudi Arabia is facing challenges on the supply side of the oil market and is unlikely to make big shifts in policy. Current ministers will moderately attempt to curb production by almost two million barrels a day throughout 2018 as producers target drawdown inventories and bolstering prices.

Within these dynamics Russia seems reluctant to let prices rise far, suggesting that at $60 a barrel enhances the possibility of it ditching the output agreement. The oil minister mentioned that OPEC and its partners still have five months to decide whether to extend the agreement and that an extension is dependent on market conditions.

Keith Knutsson of Integrale Advisors commented, “The rising oil prices are certainly an interesting development in the Saudi Aramco IPO; the president has already suggested a New York listing for the 2018 IPO of the state’s energy giant.”

October 26, 2017

U.S. Industrial Production Recovers in September 2017

Posted in Keith Knutsson tagged at 1:17 am by Keith Knutsson

U.S. industrial production showed signs of steady growth in the month of September. This is a recovery from the biggest drop we’ve seen in approximately eighteen months. Nevertheless, output continued to lag due to the disruptions caused by Hurricane Harvey and Irma, thus hindering the potential for full production.

Industrial production is a measure of output at factories, mines and utilities. According to the Federal Reserve, production rose 0.3% last month. This was in line with economists’ expectations. Officials also revised numbers from previous months to make them more accurate. The revisions included the month of August, where growth was changed from 0.9% to 0.7%; as well as July, where an increase of 0.4% was changed to a decline of 0.1%.

“The continued effects of Hurricane Harvey and Irma combined to hold down the growth in total production in September. However, with industrial output on the rise we will continue to see an increase in economic growth. Thus, resulting in an increase in consumer sentiment, especially as we prepare for the holiday season” said Keith Knutsson of Integrale Advisors.

Overall, industrial production fell at an annual rate of 1.5% during the third quarter. Excluding the effects of the hurricanes, the index would have risen at least 0.5%. While retail sales and headline consumer price inflation have been improved by hurricane related spending, questions still remain over how the rest of the hurricane season and the recovery affects overall third quarter U.S. GDP growth.

October 16, 2017

Steven Mnuchin Takes Stance On Tax Reform

Posted in Keith Knutsson tagged at 2:16 am by Keith Knutsson

On Friday morning, US Treasury Secretary Steven Mnuchin defended the administration’s commitment to implementing American tax reform. Mnuchin declared that he is looking to have a bill for the president to sign by the beginning of December. Any significant restructuring of the tax code is proving difficult. The last major overhaul was in 1986.

Mnuchin’s hope lies in the ability of Senate to advance a budget that sets the parameters for a tax bill and establishes a procedure to approve it by a majority vote. One of the main arguments is that the tax cuts for companies would be an essential part of the plan to help middle-class families.

Some of the reasons for implementing tax reform would be to promote wage and job growth. Mnuchin also highlighted the effect of the existing tax structure, encouraging large corporations to redirect profits offshore. Furthermore, Mnuchin commented on prospects for reform of the financial regulatory framework put in place during the crisis of 2008. Banking-sector reforms could be done on a regulatory basis, without having to pass new legislation.

“The aim is to bring back foreign earnings and invest them domestically, making our system more competitive for American jobs” said Keith Knutsson of Integrale Advisors.

In addition, Steven Mnuchin is currently a strong candidate for the position of Federal Reserve Chair, following the conclusion of Janet Yellen’s term. If he is to be chosen, investors would be looking at another few quarters of profitability backed by a pro-business administration, at least until midterm elections in 2018.

October 9, 2017

Puerto Rico Seeks Critical Hurricane Relief

Posted in Integrale Advisors LLC, Keith Knutsson tagged , at 2:39 am by Keith Knutsson

According to Raúl Maldonado-Gautier, the Treasury Secretary of Puerto Rico, the U.S. territory will need billions of dollars in aid from Washington as it struggles to regain stability in the wake of Hurricane Maria. The Treasury Secretary called upon members of the U.S. Congress to approve additional funding. This would provide necessary relief to jump start reconstruction efforts and bring a dying economy back to life. Hurricane Maria destroyed Puerto Rico’s electric grid, knocked out its communication network, and left as many as 3.4 million residents without clean drinking water.

With an estimated $74 billion in bond debts, the island filed to start a bankruptcy-like process this year in an attempt to cut its liabilities. Mr. Maldonado-Gautier stated that the devastation has interrupted the government’s ability to collect taxes, once again raising questions about the island’s financial future.

The Treasury Secretary also said it was too soon to know the full financial cost from Maria, a category four hurricane that was the strongest to make landfall in the Caribbean in nearly a century. The size and shape of a long-term aid package from Capitol Hill could help determine whether the island’s economy can be salvaged.

Earlier this week, Rick Scott, the governor of Florida, declared a state of emergency to unlock funds to help with an expected influx of Puerto Rican evacuees. The state of Florida has a goal to make sure that any families from Puerto Rico displaced by natural disaster that come to Florida are welcomed and offered every available resource. Political attention in Washington, where Puerto Rico has a non-voting representative in Congress, has so far been focused on the immediate relief effort, whom many believed should have been passed long ago.

Puerto Rican governor Ricardo Rosselló, said on Monday that some progress had been made to restore water and sewerage and to improve distribution of fuel across the island. Federal and local authorities were working to keep 50 hospitals operational and a US Navy hospital ship “Comfort” is scheduled to arrive next week.

“Puerto Rico’s tax relationship with the US could complicate things for Congress. However, a relief bill should be passed with no hesitation as it is crucial to get help to those individuals and families who need it the most” said Keith Knutsson of Integrale Advisors.

October 3, 2017

Tax Cuts Inspire Wall Street Investments

Posted in Keith Knutsson tagged at 1:46 am by Keith Knutsson

Despite investors’ doubts on tax reform, Wall Street has been buying the stocks of companies that would benefit the most from a tax reforms: ones that currently pay the highest effective rates. Key investors believe that tax cuts have been completely discounted in market valuations, leaving options with great growth possibilities and limited risk. Those same ideas are shared by Goldman Sachs and Deutsche Bank who published lists of the stocks paying the highest tax rates and began buying up their shares.

The Trump administration’s new plan has three key elements: A corporate tax reduction from 35% to 20%, a one-time repatriation tax to facilitate the transfer of cash from abroad to the US, and a change in depreciable investments through immediate write-offs.

Goldman Sachs’ David Kostin argues that every one percentage point fall in the corporate tax rate adds a dollar to expected earnings per share for the S&P 500. The proposed tax cut would be expected to grow the S&P 500’s EPS by 11.5%.

Keith Knutsson of Integrale Advisors mentioned, “major financial institutions still remain skeptical about a successful tax reform, but in terms of risk-adjusted returns the situation could prove itself as an exceptional hedge.”

Additionally, a tax cut could create further shifts in industry and market-cap performance. The tax gap between the top and bottom S&P 500 companies lies at 21% – more than twice as large as in 2002 and the biggest since the last major tax reform in 1986. Industries such as technology (taxed at ~23%) have in the past benefitted from a much lower tax rate, while industries such as energy have experienced a tax rate of 38%.

September 27, 2017

The Technology of Food

Posted in Keith Knutsson, Uncategorized tagged at 1:46 pm by Keith Knutsson

American consumers spent $1.4 trillion on food products in 2016, representing 25% of all U.S. consumer spending. Technology has changed the way we shop for goods. Some of these new technologies are also changing how we prepare and consume those goods.

Currently, many consumers are making the switch from their regular shopping habits to that of the online sphere. Roughly 10% of consumers are using online takeout and 2% for online grocery shopping. Consumers between the ages of 18-29 are the primary drivers of this movement because they are more willing to enter the online food space.

Online food technologies are considered more efficient in areas of high population density, given the challenges of food delivery in the rural marketspace. Online food shopping is becoming especially prevalent in highly dense cities in countries such as South Korea, Japan, the United Kingdom and the United States.

Online Grocery

When shopping online, the consumer is usually charged a service fee and loses the ability to physically inspect the food. However, it does save you a trip to the grocery store, ultimately saving you time. Younger consumers are looking past some of the issues with shopping online and are more willing to continue with it. Success in this segment will come with companies such as Amazon, disrupting the traditional grocery market. In addition, technology and delivery companies that partner with traditional grocery stores, such as Instacart are also to benefit.

Online Takeout

Takeout marketplaces, including companies such as UberEats and Grubhub take advantage of network effects and a fragmented supplier base to dominate the market. These companies use a transaction-based payment model, with service rates ranging from 10%-15%. In a recent survey, 64% of participants ages 18-29 preferred online takeout to ordering by means of a phone call.

Meal Delivery

Meal-kit services such as Blue Apron provide fresh, pre-portioned ingredients delivered directly to the home of the consumer. The package includes thorough instructions on how to prepare the food. These services offer convenience and the potential to eat a healthier, more balanced meal. Furthermore, the ingredients provided are measured precisely, limiting food waste. Growth in this market has been strong, despite the increasing number of competitors.

September 16, 2017

Automation: Significant Global Impact in an Interconnected World

Posted in Integrale Advisors LLC, Keith Knutsson tagged at 1:41 am by Keith Knutsson

With a rapidly developing world in automation and advanced manufacturing, the perception of scope in regards to the automation process in the manufacturing sector can be limited. One of the leading consulting firms, McKinsey & Company, studied manufacturing work in 46 countries in both the developed and developing worlds, covering about 80 percent of the global workforce.

The findings suggested that, even though manufacturing is one of the most highly automated industries globally, there is still remarkable automation potential within manufacturing sites, as well as in related functional areas such as supply chain and procurement.

Keith Knutsson of Integrale Advisors commented, “usually the concerns behind automation are limited to the scopes of everyday life. There is an even more tremendous change approaching in the developing world.”

Technical automation potential doesn’t vary much globally; the world’s prevalent supply of automatable manufacturing hours and automatable labor occur in the third world, with 81 percent and 49 percent respectively. This indicates that a foreseen upswing in automation in the third world would have extraordinary global impact.

Indian automotive suppliers have found that through the introduction of minimal automation on its production line, a process that reduced staffing levels from 17 to 8, their costs have become equivalent to those for a Japanese company running the same type of line with a higher degree of automation and a staffing level of two.

The question remains as to which machines are acceptable given the setting – especially ones that will interact with humans. The markets for which automation takes hold reveal a connection among labor supply and demand, implementation costs, feasibility and marginal value provided. Potential for the implementation of automation depends on the levels of those factors and their respective trade-offs.

August 25, 2017

BRICS: A Now Disappointing Reality Overshadows Exuberance.

Posted in Keith Knutsson, Real Estate tagged , , at 1:58 am by Keith Knutsson

The BRICS (an economic grouping of Brazil, Russia, India, China, South Africa) were regarded as the leading opportunities for financial investment and symbolized a shift away from the traditional affluent countries. While enormous growth has taken place, the present outlook has dimmed the light for these countries to dominate worldwide trade.

Brazil played a vital role in the enthusiasm behind the BRICS when the country secured the rights to host he football world cup and the Olympic Games. Additionally, Brazil’s democracy brought some comfort to the success of the BRIC acronym, showing virtues of western style capitalism. The outlook took a twist as the country finds itself in a recession through wasteful spending, and political instability. With the country’s top corporations (e.g. Petrobas) and political figures engulfed in scandals, Brazil is far away from the financial utopia it was once envisioned as.

Russia’s opportunities laid in reform to become a major, market led, economic power. While economic fortunes did initially improve under the leadership of Vladimir Putin, these gains have since stagnated. The average Russian has become poorer over the years. The lack of diversification in its markets leave Russia dependent upon the oil and gas industries for political and economic power while system-wide corruption fiddles with the overall efficiency of the country. Without widespread reform, Russia will not be able to shake its problems.

India has been developing rapidly since its independence in 1947, but the performance in key areas has slowed. The substantial population leads the government to cater for the basic needs of many individuals. Underwhelming performance on financial and economic predictions of­ India’s economy and standard of living have left it with large debt at large interest rates and with a bad credit rating. Tax revenues are being used to pay debt instead of investing in key sectors. Meanwhile many state-owned-enterprises struggle and others have already gone defunct, leaving India in an uncomfortable position. ­

China is the world’s second largest economy and the world’s most populous country. Unprecedented growth pushed expectations for China to lead the world in terms of GDP within the century. The slow down experienced in China and the government’s push to try and maintain high levels of growth is demonstrating itself as an increasingly uphill struggle. Policy making has growth-focus and Chinese money has been flooding into any global investment opportunities that are open to it, from real estate to government bonds to infrastructure projects.

South Africa has dropped into recession over two consecutive quarters in 2017. The country has several concerning issues moving forward: a lack of trust from investors further compounded by recent downgrades from the ratings agencies. Allegations of corruption and a chronically bad unemployment rate leaves the country in bad shape. Commodity prices are currently dictating the progress while the manufacturing, technology and services sectors lack in development.

Keith Knutsson of Integrale Advisors stated, “investors are naturally eager to find additional opportunities in untapped regions, but it’s important to focus on a market’s fundamentals before putting exuberant prices on its developments.”

 

 

 

August 21, 2017

Eurozone Outlook Improves, Helped by Dutch and Italian Economies

Posted in Integrale Advisors LLC, Keith Knutsson tagged , at 1:10 am by Keith Knutsson

The eurozone’s recovery is happening quicker than predicted in the three months to June as a pickup that started in Germany and Spain has spread to other parts of the Euro area, fueling a vital comeback of the global economy.

On Wednesday, the EU’s statistics agency raised its measure of eurozone economic growth during the second quarter to 2.5% annually from a previous estimate of 2.3%, bringing it closer to that of the U.S., estimated to be 2.6%. This is an opportune moment for the Eurozone economy, especially since the U.S. is growing at a slower pace than expected as well as the setback already seen in the Chinese economy.

On the other hand, aiding the Eurozone rally is the Dutch economy, surging during the last fiscal period as exports jumped. In addition, Italy recorded its strongest six months since the second half of 2010.

“The eurozone recovery continues, and the economy seems to be expanding at a steady rate,” said Keith Knutsson of Integrale Advisors.

The Euro bloc’s strength during the first fiscal half of 2017 was a surprise to most economists, who had expected growth to slow in response to rising commodity prices and increased political uncertainty as citizens of France, Germany, and the Netherlands chose new governments. Nevertheless, the rise in energy prices didn’t last long and elections in the Netherlands and France displayed wins for pro-euro centrists, reducing the threat of a breakup of the Eurozone and easing the minds of investors.

Netherlands

The Netherlands, and the efforts of its newly formed government resulted in an economic surge in the second quarter. According to the Dutch statistics agency, GDP was 1.5% higher than in the past three months, averaging 3.8% over the time period. This was largely the result of a jump in exports. On Wednesday, the Netherlands Bureau for Economic Policy Analysis announced it now expects the economy to grow by more than 3% in 2017 as a whole, the first year in which it will have done so since the financial crisis of 2008.

Italy

The eurozone’s economic acceleration has also been supported by stronger growth in Italy. The peninsular nation recorded a third straight quarter in which GDP rose by 0.4%, signaling the fastest rate of expansion since the first three months of 2011. Nevertheless, Italy’s economy is still 6.5% smaller than it was before the financial crisis.

Overview

With countries such as Italy and the Netherlands strengthening their economic positions, the primary drivers of growth remain Germany and Spain. The strength of the eurozone has prompted economists to raise their forecasts. According to Consensus Economic, the average growth rate in the Eurozone for this year is projected to be 2%, up from the 1.4% expected in December. In addition, there are signs that the eurozone’s prosperity will aid other parts of Europe, closely connected by trade and financial interdependence.

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