Wednesday, April 1, 2020

US Shale Oil: Black Gold, Red Ink


Energy prices will continue to fall to historically low levels as countries recover from Covid-19 yet fear a resurgence until a vaccine is developed.

With almost zero global demand even an amenable OPEC+ is powerless to firm oil prices.

In a world drowning in oil, US shale oil is drowning in red ink as bankruptcies accelerate.

By late 2020 intrepid investors should consider energy investments which will be bargains prior to a 2Q2021 uptick, albeit tepid, in global economic activity.

To access the particulars of this article please click on the following link:

US Shale Oil: Black Gold, Red Ink

Trucking Operations Paramount to Food Security


Please note that you must click on the links to visually access the charts.


During any potentially long-term crisis, particularly something as onerous as an “invisible enemy” like a lethal pandemic, our primal survival instincts come to the forefront such as the priority of food & water. For this reason food security, even in the USA which is the world’s breadbasket, can come under pressure because of nationwide lockdowns and compromised supply chains.

Global & Domestic Food Security

The following chart The State of Global Food Security provided by the Economist Intelligence Unit and presented by Statista 23 March 2020, an online German statistical service, is based on the December 2019 model with the USA ranked # 3 overall and safety and within the top 10 in the categories of availability, affordability and quality & safety. A comprehensive USA-specific breakdown can be accessed through the country details section. The regions with the highest level of food security are in North America, Northern Europe and Australia.


From a global macro-perspective the USA looks as if it’s in great shape. However upon examining the micro-economic reality, the socio-economic inequity is apparent. Additionally, the figures fail to capture the millions of households that struggle to put food on the table despite the 11-year bull market. With furloughs and layoffs these households with limited, if any savings, will be unable to buy food even if the shelves are well stocked.

The following chart provided by Statista, a German online statistical service, 29 August 2018 is from a study of 7,600 adults by The Urban Institute entitled A High Share of Americans Face Food Insecurity, that lifts the hood from the total American food production of the many households facing food insecurity.


Strains in the food supply chain are emerging to provide for the under-served population in NYC according to the 26 March 2020 article in The Daily News Help Us Feed the Hungry Now: NYC Food Aid During Coronavirus resulting in delivery shortages.

Logistical Challenges & Roadblocks

Despite cheap & plentiful fuel, high-demand business to deliver medical & foodstuffs on empty roads the burden on the trucking industry is enormous and could face nasty disruptions. The Financial Times article 25 March 2020 entitled How Coronavirus is Affecting Pasta’s Complex Supply Chain discusses the sometimes delicate linkages between food sources and final deliveries. To paraphrases them:

1.    Wheat production is highly mechanized vs fruits & vegetables which are labor intensive. Labor is impacted by migration restrictions thus potential labor shortages.
2.    Though the USA is self-sufficient it still imports more than 50% of fresh fruit. An example is avocados and other exotic fruits which may be short supply.
3.    Potential disruptions at chokepoints such as ports, production/distribution staff shortages due to illness, closed borders.

THE TRUCKING INDUSTRY

The following list taken from the article 11 Incredible Facts About the $700 Billion US Trucking Industry, in Markets Insider, 3 June 2019, provides a comprehensive perspective as to the criticality of truckers’ role in America’s economy and security.

1.    In 2017, the US trucking industry posted revenues greater than the GDP of more than 150 nations.
2.    Approximately 5.8% of fulltime jobs are related to trucking.
3.    Walmart alone employs 8,600 truckers.
4.    In 2017, truckers moved 10.8 billion tons of freight.
5.    Trucks move more than 70% of goods transported around the USA.
6.    More than 40% of all trucking jobs are held by minorities, 6% by women.
7.    Not one of the regulators charged with overseeing the trucking industry was ever a trucker.
8.    Most grocery stores would run out of food in three days if there was no long-haul truckers stopped driving.
9.    Many experts believe that the trucking industry needs to hire 900,000 more drivers.
10. Most truck drivers earn less than most Americans in annual income.
11. The average professional long-haul driver logs more than 100,000 miles per year (vs the average American motorist who travels 13,500 miles annually)

According to the American Trucking Associations (ADA) there are 3.5 million truck drivers of which 9% are owner-operators, all of whom have an average age of 55.

Trucking Heavy Lifters – Investment Considerations

This is a short list of the largest American trucking firms:

·         Knight-Swift Transportation (NYSE:KNX)
·         JB Hunt Transport Services, Inc. (NASDQ:JBHT)
·         YRC Freight (NASDQ: YRCW)
·         XPO Logistics (formerly Conway Freight) (NYSE:XPO)
·         Schneider National (NYSE:SNDR)

For an industry-wide investment consider Dow Jones Trucking Index (DJUSTK).

Truckers’ Demographic Dilemma

According to the figures, truckers represent a demographic who are most at risk for becoming seriously ill from Covid-19. The trucker’s average age (55) is a major factor with respect to resilience particularly in a profession that doesn’t have a healthy lifestyle and general stress that aggravates underlying health conditions. Nationwide the available first responders, medical staff and law enforcement have been reduced because of Covid-19 exposure and subsequent self-quarantine.

According to the article published by MSN Money 12 March 20202 How Coronavirus Could Hit America’s 1.8 Million Truck Drivers 38% of truck drivers lack health insurance with unhealthy lifestyles which are considerably higher than the average population encompassing obesity, morbid obesity, cigarette smoking and diabetes. Additionally because of the nature of their work maintaining social distancing is difficult.

The shortage of qualified truck drivers has persisted for many years as articulated in the NPR article Trucking Industry Struggles with Growing Driver Shortage, 9 January 2018. A major food distributor executive stated in Crain’s New York Business 27 March 2020 article Meat Piles Up In Warehouses as Frightened Truckers Stay Home, Supply isn’t the problem. Warehouses are full of beef and other forms of protein. There just aren’t enough truckers to bring the food into stores.” Another major food distributor executive stated, “Up to 60% of his drivers are no longer showing up for work because they fear that making deliveries could expose them to the coronavirus.”

The irony is that truckers represent the white knights to deliver the antidote while at the same time are the potential carriers of Covid-19.

Spare Parts

Because the global supply chain is compromised with a slow and uneven ramp-up from China, it’s increasingly difficult for truck fleets to acquire spare parts for their vehicles from normal wear & tear. This may force trucking companies to resort to cannibalizing parts from other trucks which exacerbates the domestic supply chain.

The following chart provided by UN Comtrade Database and presented by Statista US Car Industry Most Reliant on Chinese Parts underscores America’s reliance on China for spare vehicular parts.


Danger of Social Unrest

Another dark and rarely mentioned downside is that despite plentiful available food in stores, there’s a growing societal powder keg. Millions of households struggled to purchase food during good economic times are more vulnerable than ever because of the sudden layoffs. Most of these households live paycheck-to-paycheck and have minimal savings, if any. Should the crisis go sideways, law enforcement will be unable to protect food sources and contain a starving, desperate citizenry.

The visually dramatic jobless claims can be viewed on the following chart entitled Initial Jobless Claims Are (Quite Literally) Off the Charts, by the US Department of Labor and provided by Statista, a German online statistical service.


In order to survive, the mostly law-abiding citizenry will utilize any means necessary to feed their families including looting of food stores and hijacking of commercial vehicles. If this becomes commonplace, truck drivers will refuse to drive which will worsening an already deteriorating supply chain. To keep America from devolving into civil unrest, supply chains must be maintained because “failure is not an option.” Nonetheless I’m bullish on the trucking industry as an investment.

Recommendation

Truckers are the logistical linchpin of our security. As we progress from the depths of this pandemic to a recovery, albeit uneven, truckers will remain the critical element. For this reason I’m bullish on the trucking industry as an investment whether specific companies or via the Dow Jones Trucking Index.

Copyright 2020 Indo-Brazilian Associates LLC


Wednesday, March 25, 2020

USA: A Brutal Post-Coronavirus Economic Reset


Image result for teleconferecing holograms

After a severe pummeling, post-Covid 19 US industries will recover cautiously in ‘safe mode’ and begin retooling their business model. The emerging industry titans will be in biotech, telecommunications, health care supply and security who are risk-takers with vision and a strong corporate will to carry it out. Game changing technology in teleconferencing such as holograms will change business culture.

Please access the particulars are discussed in detail in the article USA: A Brutal Post-Coronavirus Economic Reset.






Sunday, March 15, 2020

The Russo-Saudi Powerplay Against US Shale Oil

The Saudis and Russians have strong incentives to “neutralize” US shale oil dominance.

The Saudis can stymie US shale oil production by flooding the market with additional output and pushing oil prices far below the breakeven point for US shale oil firms already under financial stress.

With no production quota agreement OPEC exists as a legal entity, not a functioning cartel, which now compels its members to increase production to maintain revenue and market share.

In a classic case of misdirection with respect to a Saudi-Russian rivalry, I believe that the Saudis and Russians are coordinating a two-pronged effort to undermine the US shale oil industry.

Indo-Brazilian Associates LLC provides the particulars on this disturbing and possible dire trend on the following link:

https://seekingalpha.com/article/4332047-russo-saudi-powerplay-against-u-s-shale-oil



Wednesday, March 11, 2020

President Xi’s Leadership at Risk and His Socio-Economic Conundrum



China’s economy is coming in for a hard landing facilitated by Covid-19 provoking a plunge in manufacturing and broken supply chains

Chinese leadership has broken the social contract through crumbling credibility that has provoked open dissent and potential social unrest

Now that the unthinkable has occurred, any subsequent event emerging from this pandemic is plausible making an economic recovery exceptionally difficult

One of these plausible events is the threat of leadership change by restive political rivals in the shadows that represents a quantum leap in business risk and volatility for the global economy





If someone in late October 2019 told you that a potent new virus would emerge in China and spread so rapidly that the government would physically lockdown a country of 1.4 billion inhabitants, you would claim it’s a script from some upcoming dystopian sci-fi movie. Now that the unthinkable has occurred, any subsequent event emerging from this pandemic is plausible such as a leadership change in China.

China is an increasing risk for businesses and investors as Covid-19 inexorably adversely impacts China’s economy by limiting a manufacturing restart and strangling the supply chain to which the global economy is highly dependent.

As the supply chains come under pressure to reestablish themselves, so does the political food chain which Xi is the apex leader on which he and his inner circle are becoming increasingly vulnerable to a palace coup if China enters into a recession.

Crumbling Credibility

In an article in The NY Times article entitled 2019 Is A Sensitive Year for China, Xi is Nervous, on 25 February 2019 – just over a year to the day - reported that President Xi openly warned of black swans and gray rhinos. Well, the black swan has arrived in the form of Covid-19. Because of Xi’s public relations mismanagement with ever changing, hard-to-believe fairy tale narratives with respect to Covid-19’s progression, a societal strain of anger has affected far more Chinese citizens than the virus itself and has unleashed itself directly and openly through social media at “the highest levels” - Xi himself. With the recent constitutional removal of term limits Xi has made himself politically immortal making it almost impossible to blame others.

With respect to cooperation and transparency with foreign governments in this crisis, Xi followed the 2002-2003 SARS playbook in combating Covid-19 instead of the one for the Manchurian Plague of 1910-1911 using 20th century tactics to battle a 21st century crisis. In an eerie parallel the Manchurian Plague was a virus transmitted from marmots [large squirrels] to humans. As articulated in The Diplomat, What History Teaches Us About the Coronavirus, 12 February 2020, the Qing government appointed a Chinese doctor, Dr. Wuh Lien-teh to resolve the epidemic.

He and his colleagues collaborated and were transparent with foreign governments (against the Qing policy but without punishment) and applied quarantine and isolation methods, the wearing of masks by medical personnel and the construction of a special care hospital. This relationship enabled them to stop the epidemic and establish the foundation with foreign governments to contain subsequent epidemics during the 1920s.

Breaking the Social Contract

Since his ascension to the presidency in 2012, Xi has aggressively promoted the concept of a government as all knowing, all powerful while demanding absolute and unquestioned loyalty and in return they’ll protect the people.

For 30 years Chinese citizens have enjoyed a particular “way of life” with minimal hardship in a growing and robust economy. In turn the government’s sometimes heavy-handed surveillance policies & tactics and human rights abuses against political undesirables are tolerated because everyone was making money, a convenient capitalistic economic system within a politically autocratic one.

I quote from the exceptionally prescient article The Dictator’s Last Stand: Why the New Autocrats Are Weaker Than They Look in Foreign Affairs magazine, September/October 219 issue, “Xi has chosen to govern China as a crisis manager.” Additionally The New York Times article China’s Propaganda Machine Loses Credibility in Outbreak, 26 February 2020 describes leaders like Xi as follows, “The legitimacy of populist dictators depends on their ability to maintain the illusion that they speak for the people.”

The populist mask has fallen because Communism’s explicit edict to protect the people has been exposed as a myth and underscored the reality of “every man for himself”.

As articulated in The NY Times article 18 February 2020, China Blocks Alley in Virus Fight: Its Own People local grass-roots groups (civic associations [business groups], nonprofit organizations, charities and churches) have been discouraged by the government from organizing for the purposes of assisting their local communities with medical assistance and supplies that the government can’t fulfill.

The government’s failure to loosen social and political constraints to combat the epidemic has ignited scathing anger. It’s a low simmer but has the potential to boil over if certain ingredients are added. China’s prolonged quarantine is turning into a societal pressure cooker as Xi and the Communist Party have lost the meaning of genuine collectivity.

Open Dissent

Xi has openly worried about China collapsing like the Soviet Union and has done much to prevent such an event. As quoted in the article Party Man: Xi Jinping’s Quest to Dominate China in Foreign Affairs magazine, September/October 2019 issue, ““But Xi took his greatest warning from the fall of the Soviet Union and was horrified at how the Soviet Communist Party had evaporated almost overnight.”

Economic progress and rise in living standards can bring a country just so far. A black swan like Covid-19 can rapidly wipe out those gains and it falls upon government credibility with the citizenry to combat it. According to the Wall Street Journal article published 4 March 2020, China’s Workers Suffer Layoffs, Slashed Pay and Shutdowns, as Coronavirus Batters Businesses, Chinese businesses are suffering with layoffs and furloughing of staff. The article states that China’s urban unemployment is now 5.2% up from 4.8% in January 2018 to which many feel those statistics are understated and that should the epidemic continue, a total loss of 5 million jobs is possible.

The silent invisible elephant in the room is the growing possibility of civil unrest, perhaps not the spectacular ones in Hong Kong throughout last summer and fall rather a low-simmer of defiance. Because of the extreme nature of the crisis, this possibility is closer to reality than anyone cares to admit. There have been increasing challenges by the public against law enforcement article Reports of Society-Police Conflicts in China, as published in The National Bureau of Asian Research, 25 November 2019, a growing trend before the coronavirus outbreak.

It would not be too far-fetched to believe a “We are all Dr. Li Wenliang” movement, the ophthalmologist, the hero, the martyr who reported on the emergence of a deadly new virus and subsequently died from it on 7 February 2020. The nationwide outrage was palpable with seething comments on open social media a place few Chinese dare post their genuine thoughts on government policies.

Additionally the advanced surveillance technology gives Xi a false sense of security because an invasive security apparatus tends to be reactive rather than proactive. A leaderless groundswell of defiance and protests perhaps taught by the “infiltrators” of the Hong Kong protests or those mainlanders living in Hong Kong who witnessed and even marched alongside Hong Kongers – far more than is acknowledged.

How does any government regardless of political practices keep half or more of their population under lockdown and limited movement – 1.4 billion – without serious consequences? Just as importantly, how willing and prepared is the Chinese government if social unrest should develop? The triggers is often an innocuous event like the Arab spring when a Tunisian vegetable vendor set himself on fire. What threshold will be crossed to trigger such an event?

The chart below shows China’s 11 megacities which are defined as urban areas with a population of 10 million or more as provided by China’s Top Megacities, CNN Business Traveler, 5 March 2019. The Hong Kong protests last year may be mere trailers of what could occur 11 times over in mainland China.


Chinese Megacity Population
1 Chongqing 30,750,000
2 Shanghai 24,180,000
3 Beijing 21,710,000
4 Chengdu 16,330,000
5 Harbin 16,330,000
6 Guangzhou 14,490,000
7 Tianjin 15,570,000
8 Shenzhen 11,900,000
9 Wuhan 10,890,000
10 Shijiazhuang 10,870,000
11 Suzhou 10,680,000
Total 183,700,000


Restive Political Rivals

President Xi has many enemies hiding in the shadows notably the wealthy families whose members during his anti-corruption campaign and technocrats who have been politically marginalized. There are elements in government who are both pro-China but are far more willing to work with Western countries who seek greater integration, cooperation, collaboration and transparency with strong sovereignty (aka normal engagement).

Historically autocracies always tighten their grip by escalating violent tactics to control. Yet this very tactic accelerates chaos and fracturing of the structure meant to control the citizenry. With respect to Xi despite his efforts to maintain his lofty leadership position, he may be that man who, as quoted by French poet Jean de la Fontaine, “meets his destiny on the road that he took to avoid it.”

Should there be a successful change in leadership the Communist Party will continue to rule China however as a different version, perhaps like a Sino perestroika; somewhat more open and with less fear of punishment.

Economic Road to Recovery

China’s reign as the world’s manufacturing juggernaut will be greatly diminished as firms will seek alternative supply sources. This trend means less jobs and higher unemployment for Chinese workers as discussed earlier in this article. This could provoke a recession for which central bankers have limited tools.

The development and distribution of a vaccine can mitigate such losses. But according to Dr. Irwin Redlener, Professor of Health Policy and Management and Pediatrics at the Columbia University Medical Center and Director of the National Center for Disaster Preparedness at the Earth Institute, in the 29 February 2020 podcast entitled Understanding the Coronavirus sponsored by Columbia University, Center on Energy Policy, a successful vaccine will not be available for at least 18 months (minute 20-21 of the podcast).

Although not discussed in the podcast, I believe that if there are mutation(s) then different vaccine(s) must be developed, manufactured and delivered. Complicating matters is that each person receiving the vaccine must be tested to ensure that the correct one is administered by already over-worked and understaffed medical professionals.

Recommendation

The additional of potential political risk and uncertainty in China has fueled the urgency for businesses to aggressively seek alternate supply sources outside of China and/or sources that are not dependent on China. Business will initially suffer greatly diminished production and sales but yet enough to generate acceptable income. Because of the increased cost of supply diversification, there’s the inevitable decision with respect to priority: price increases vs market share.

For this reason investors should consider continued short plays in specific sectors and/or a broad-based approach such as the China economic & investment index (MSCI China Index).

Finally seek investment safety in precious metals such as gold (iShares Gold Trust - IAU) and short-term US government securities such as Federate US government securities (FSGIX).


Copyright Indo-Brazilian Associates LLC 2020.




Tuesday, February 25, 2020

How Covid-19 Has Profoundly Infected The Global Supply Chain


Indo-Brazilian Associates LLC CEO presents a deep-dive into the delicate and highly vulnerable complexities of global logistics in his article - "How Covid-19 HasProfoundly Infected The Global Supply Chain".

The critical path elements of the global supply chain, including non-Chinese sources, are blocked leaving few alternatives especially for firms whose critical path is the only path.

Chinese suppliers and foreign buyers face a unique triad of challenges – operations, financial and legal - in restarting operations.

Black Swan II includes a mutation of Covid-19 and civil unrest events that could paralyze the global supply chain.

Firms in the post Covid-19 era will create more robust and diverse alternative supply chains thus Chinese manufacturers will permanently have less business even if their costs are competitive.

Wuhan is China’s manufacturing epicenter in which the world is dependent for automotive parts and technology shipments.

Friday, February 21, 2020

OPEC+ Oil Price Challenge: Catching The Falling Knife


Indo-Brazilian Associates forecasts that although China’s economic engine has seized, world markets have not reacted in proportion to the high medium-to-long term post Covid-19 risks if their post-Lunar New Year economic recovery is far weaker than forecast. Additionally:

The Saudis have gained a pyrrhic victory over US shale with increasing bankruptcies and forecast lower 2020 production.

Oil prices are in contango and far below the Saudis $83/bbl requirement to balance their budget and supertanker rates for crude oil have plummeted 75% since 4Q2019.

Even limited new oil production can grease the skids on oil prices if the Covid-19 crisis becomes a prolonged problem.

Autumn is the high season for Chinese oil demand and represents the critical crossroad that will determine the direction of global oil prices.

These particulars and other important factors can be accessed in the following published article: OPEC+ Oil Price Challenge: Catching The Falling Knife.