David Ross

What I think I learned last week #37

Big problem at the World Cup: Beer supply running low in Moscow.  Apparently there is a carbon dioxide shortage, which not only affects beer and soda supply, but also affects pig welfare.

Speaking of the World Cup, people in France always ask me why Americans don’t like football. I quickly correct them by saying we love football, it’s soccer we can’t stand. It is a cultural thing. As pointed out in this article: “America likes to invent things — electricity, the telephone, the internet — and then make sure everyone knows that we invented them. But we didn’t think of soccer, the Europeans did. Why would we support something we can’t use to show the world how great we are?

Mario Draghi talked down the euro by reiterating that interest rates would rise only slowly from September next year.

European Central Bank governing council member Ewald Nowotny, of Austria, further pressured the euro by saying he sees the euro depreciating against the dollar.

France’s economy slowed down in the first quarter, growing only 0.2% as it slowed from the 4th quarter of 2017, which had a growth rate of 0.7%.

Germany is not immune from Europe’s malaise as its manufacturing purchasing managers index was worse than the expected 56.2 by dropping to 55.9, which was also down from May’s reading of 56.9.

Illustrating the problem for German business, Daimler issued a profit warning, blaming the trade wars. Look for tariffs to be this year’s “weather” as being the cause behind companies not meeting earnings expectations.

Ocado shares jumped as a broker called it the “Microsoft of Retail.” Personally, I thought Microsoft was the Microsoft of Retail since it has been reported that Microsoft has shown samples to retailers of its technology to eliminate cashiers and checkout lines at stores.

There is a good reason that European tech companies might become over-hyped. They are difficult to find, so when you come across one, it gets all of the attention. The MSCI Europe index, which captures large and mid cap representation across 15 Developed Markets in Europe, with 443 constituents, has only a 5.36% weight in the technology sector compared to the MSCI USA index technology weight of 26.34%.

This rarity of European technology companies is unlikely to change. Looking at a list compiled by CB Insights on the next generation of companies (privately held start-ups) finds that of the top 50 most valuable start-ups, only 4 are European. In fact, the first European company to make the list comes in at #19, the UK’s Global Switch.

This is in contrast to the dominance of US tech. Facebook, Amazon, Apple, Microsoft, Netflix, Nvidia and Google have seen their combined market caps rise by $772 billion while the market cap of the rest of the S&P 500 has fallen by about $100 billion this year, according to the Financial Times’ John Authers.

Facebook shares continued their rebound, hitting record highs above $200, putting Zuckerberg in a virtual tie with Warren Buffett for third place on the world’s richest person list. Driving the stock upwards was the news that Facebook-owned Instagram hit 1 billion monthly active users, up 25% from last September’s update. It was also announced that Instagram will compete directly with YouTube, allowing users to upload videos of an hour’s length, from what was previously a one minute limit.

Facebook’s Instagram, according to Bloomberg Intelligence, would be worth more than $100 billion if it were a stand-alone company. This would be a 100 bagger for Facebook, which purchased it for $1 billion in 2012.

Housing starts in the US jumped 5% sequentially to hit an annualized rate of 1.35 million, reaching the highest level in almost eleven years. The last time the number was this high was July 2007, just before the onset of the bursting of the housing bubble and the financial crisis.

Changing of the guard? General Electric has been demoted. An original member of the Dow Jones Industrial Average in 1896 and a member continuously since 1907, GE is being removed from the index on June 26.

Coincidentally, the Dow Jones Industrial Average had its worst week since March and suffered through an eight day slide. At the same time, emerging markets continue to get battered. China’s Shanghai Composite Index is down by more than 19% from its January peak.

It’s not just stocks as Bitcoin fell to a four-month low. After soaring 1300% last year, Bitcoin is now down 56% this year.

Least known headline that everyone should have known about: The Biggest U.S. Oil Patch Is Near Its LimitScott Sheffield, the chairman of Pioneer Natural Resources, one of the largest producers in the Permian basin, said the “region will have to shut wells within four months because there aren’t enough pipelines to get the oil to customers.”

Additional oil production problems are coming from Venezuela. The state-run oil company PDVSA saw its oil exports fall 32% in the first half of June compared with May as the decline in production accelerates downwards. Venezuela’s oil production available to world markets dropped by 368,000 barrels per day compared to last month. Venezuela’s most important customer, China, expects to receive half the normal levels in July based upon what is being loaded onto ships this month. In fact, PDVSA this month notified 11 international customers that it would not be able to meet its crude oil supply commitments. t is contractually obliged to supply 1.495 million barrels per day to these customers in June, but only has 694,000 barrels per day available.

More oil: US crude inventories fell 5.9 million barrels last week, the largest one-week decline since January.

OPEC had a meeting, but nobody really knows what they agreed to. Oil prices skyrocketed by the most in two years on Friday when OPEC promised a nominal production increase of one million barrels per day, which initially was interpreted as a real increase of 600,000 barrels per day. Then Iran said, no, it was an increase of 500,000 barrels per day that they agreed to. Saudi Arabia said that OPEC and non-OPEC allies agreed to pump roughly an extra million barrels per day, with Saudi Arabia increasing output by an unspecified number of hundreds of thousands of barrels. Russia said they would pump an extra 200,000 barrels. Iraq, meanwhile, said the real increase will be around 770,000 barrels per day, because several countries will not be able to reach their full production quotas. This is the first time I have ever seen a no-agreement agreement.


And that’s what I think I learned last week…..