Professional Documents
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Awkward Beginnings
2015 issue 1
With all due respect
What a way to start the year. The crash in oil prices is no small matter. The previous down sweep in energy prices occurred in the midst of the financial crash
0f 2008 and Great Recession. Oil prices soon reversed afterwards and climbed back to dizzying heights, even as world economic and financial recovery
remained fragile. This time it would be foolish to bet solely on such a similarly quick snapback. The current bear market for oil may actually be the beginning of
a longer and extended period of low commodity prices. First, the price of oil at $100/bl or above had been an absurdity. Second, many nations simply cannot
afford to curtail pumping oil, even at a loss in the short run. Third, global growth is proving to be woefully inadequate and uncertain. Even as growth in the U.S.
economy is becoming more firmly entrenched, the rest of the major economic engines remain mired, as we have argued for some time, in subpar growth
trajectories. The Euro area may be facing another soft patch and remains entangled in both economic and geopolitical crises. The recovery in Japan has
been slower than expected. And China continues to grow well below its previous super- track; and it obviously faces headwinds from a volatile real estate
sector, awkward debt buildups and massive stockpiles of high-priced commodities. Fourth, the shale gas revolution has transformed Americas energy
markets, with profound effects for economic growth, competitiveness, security, and environmental quality. And the extensiveness of the oil rush in America is
also playing a big role in pushing the adjustment on prices. Naturally, the new weakness in commodity prices will bolster the economies of some countries, but
clearly damage others. The strength of the U.S. dollar in the face of a stronger U.S. economy and shift in Fed policy this year, combined with the sharp drop in
commodities could expose severe underlying vulnerabilities in situations with significant currency mismatches. The effects of exchange rate movements for the
developing world may also become more marked if the duration of the upward climb of the U.S. dollar becomes extended even more. The various
repercussions will be extensive; this extremely tense business picture will be detailed herein in 2015. Stay tune
OPECleadervowsnottocutoil
outputevenifpricehits$20
BrentoilhitsnewlowasOPEC
pricewardeepensslump
ABRAHAM GULKOWITZ
abe@gulkowitz.com
917-402-9039
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The PunchLine...
In This Issue
Awkward Beginnings With All Due Respect.
What a way to start the year. The crash in oil prices is no small matter. The
previous down sweep in energy prices occurred in the midst of the financial
crash 0f 2008 and Great Recession. Oil prices soon reversed afterwards and
climbed back to dizzying heights, even as world economic and financial
recovery remained fragile. This time it would be foolish to bet solely on such a
similarly quick snapback. The current bear market for oil may actually be the
beginning of a longer and extended period of low commodity prices. First,
many nations simply cannot afford to curtail pumping oil, even at a loss in the
short run. Second, global growth is proving to be woefully inadequate and
uncertain. Even as growth in the U.S. economy is becoming more firmly
entrenched, the rest of the major economic engines remain mired, as we
have argued for some time, in subpar growth trajectories. The Euro area may
be facing another soft patch and remains entangled in both economic and
geopolitical crises. The recovery in Japan has been slower than expected.
And China continues to grow well below its previous super- track; and it
obviously faces headwinds from a volatile real estate sector, awkward debt
buildups and massive stockpiles of high-priced commodities. Third, the shale
gas revolution has transformed Americas energy markets, with profound
effects for economic growth, competitiveness, security, and environmental
quality. And the extensiveness of the oil rush in America is also playing a big
role in pushing the adjustment on prices. Naturally, the new weakness in
commodity prices will bolster the economies of some countries, but clearly
damage others. The strength of the U.S. dollar in the face of a stronger U.S.
economy and shift in Fed policy this year, combined with the sharp drop in
commodities could expose severe underlying vulnerabilities in situations with
significant currency mismatches. The effects of exchange rate movements for
the developing world may also become more marked if the duration of the
upward climb of the U.S. dollar becomes extended even more. The various
repercussions will be extensive; this extremely tense business picture will be
detailed herein in 2015. Stay tune
(pg 1)
In This Issue
Dislocation, Dislocation
The Return to Normal
Extreme Sports
Go Figure
U.S. Wake Up
The Likelihood of Unlikely Events...
Engines of Growth
(pg 7)
(pg 8)
Despite a broadening U.S. growth potential, most of the global economy faces
woefully inadequate growth prospects. Risks from the crash in commodity
prices only raises the dangers for many sectors, nations and currencies. Very
obvious financial vulnerabilities, and serious geopolitical concerns are
aggravating the dangers. And lets not forget that many of the challenges are
not fleeting and cannot be resolved easily
(pg 9)
Households
You Cant Handle the Truth
Credit
More Credit
A New Geography of Business
Pumping Iron
The DNA of Business
Real Estate and Construction
More Real Estate
Will Life Ever be the Same?
(pg 10)
(pg 11)
(pg 12)
(pg 13)
(pg 14)
(pg 15)
(pg 16)
(pg 17)
(pg 18)
(pg 19)
(pg 2)
(pg 3)
(pg 3)
(pg 5)
(pg 6)
Contact information:
Abraham Gulkowitz
phone: 917-402-9039
Headlines and data appearing in The Punch Line came from widely available publications including
national and international newspapers, trade journals, economic and industrial bulletins and news websites.
email:abe@gulkowitz.com
The PunchLine...
Mario Draghi,
President of the European Central Bank, said in an interview published
Jan. 2 that he couldnt exclude the risk of deflation in the euro-area,
igniting a selloff in the euro amid prospects hell embark on large-scale
quantitative easing. The euro slid to an almost nine-year low against
the dollar amid prospects the European Central Bank will embark on
large-scale government-bond purchases to ward off deflation. Asian
stocks fell with oil as silver climbed. The euro slid to an almost nineyear low against the dollar amid prospects the European Central Bank
will embark on large-scale government-bond purchases to ward off
deflation. Asian stocks fell with oil as silver climbed.
The PunchLine...
The PunchLine...
Extreme Sports
The PunchLine...
Go Figure
Where Now?
The emerging problem of foreign currency debt
The BIS issues a timely warning about exchange mismatches
It is not so long ago that many emerging economies, especially
those in Latin America, were complaining bitterly about
currency wars. A decade-long commodity price boom,
combined with ultra-loose western monetary policy, flooded the
emerging world with capital and pushed up exchange rates to
wildly overvalued levels.
Those days are over. International tensions with Russia,
concerns about Chinas financial stability, a strengthening US
economy and, most of all, fast-falling commodity prices have
prompted foreign capital to head for the exit. During the past three
months, the JP Morgan index of emerging market currencies has
fallen by almost 8 per cent against the dollar. But that conceals far
sharper falls among some of the weaker currencies. The Brazilian
real is down 17 per cent for instance while the Russian rouble has
slumped by nearly half.
The PunchLine...
The PunchLine...
U.S. Wake Up
Natural gas now produces 27 percent of the
electricity generated in the United States, and the
percentage is rising. The plentiful oil and gas from
the drilling boom has reduced Americas
dependence on foreign oil to levels not seen in
decades, and has contributed to falling oil prices.
PlungingOilPricestoTestTexasEconomy
The downturn in energy prices has triggered debate
over whether Texas simply got lucky in recent
years or whether it hit on an economic playbook
that other states could emulate.
The PunchLine...
Engines of Growth
France'sunemploymentrosetoanewrecord
amidthefragileeconomicactivity,datafrom
theLaborMinistryrevealed
Confidence among Japan's small and mediumsized enterprises decreased in December, survey data
released by the Shoko Chukin Bank showed. The small
business confidence declined to 46.7 in December from
47.7 in November.
Similarly, confidence in the
manufacturing sector fell to 46.1 in December from 47.4
in November.
CHINA PUMPS UP CAP SPENDING AGAIN The government
today distanced itself from a January 6 Bloomberg report that a 7
trillion renminbi (1 trillion dollar) fiscal stimulus package is in the
works, saying that the plan is merely to "guide" private
investment into key projects rather than increase public
spending. Recent developments suggest that policymakers are
happy with slower investment growth, but worry about the
possibility of an abrupt slowdown in lending and the risk that
household consumption will not yet be able to pick up the slack
as investment slows.
WeakIndustrialDataSuggestEurozoneEconomyMayBeFaltering
CurrencyAreaFacesChallengesofPoliticalUncertaintyandFalling
ConsumerPrices
The PunchLine...
Weak Again !
Sales of new single-family houses in November
2014 were at a seasonally adjusted annual rate
of 438,000, according to estimates released
jointly today by the U.S. Census Bureau and
the Department of Housing and Urban
Development. This is 1.6 percent below the
revised October rate of 445,000 and is 1.6
percent below the November 2013 estimate of
445,000.
For all the actual tightening in the 2014 job market,
what is perhaps the most important indicator from the
perspective of working families wage growth
has hardly budged. Though commentators made a big
deal out of the bump in pay from the last jobs report,
the yearly trend in nominal hourly wage growth
remains at about 2 percent, where it has been since
2010.
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Yet another fracas over timing of CEOC 2nd-lien debt default erupts
Debt of Caesars Entertainment Operating Co. was mixed today in the
wake of several disclosures that could potentially throw a monkey wrench
into the timing of an eventual Chapter 11 filing by the company and, by
implication, the tactical leverage in an eventual proceeding held by the
companys respective creditor classes.
CEOCs 10% second-lien exchange notes due 2018 are down three quarters
of a point today, at 17, according to trade data. Elsewhere in the capital
structure, the 11.25% first-lien notes due 2017 are up a point, at 72.635.
CEOC said in an 8-K filed this morning with the Securities and Exchange
Commission that on Dec. 12, it made a $17.6 million payment to secondlien debt holders to redeem that amount of principal of certain 10% secondpriority senior secured notes due 2015 and 10% second-priority senior
secured notes due 2018, which were issued in December 2008.
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The PunchLine...
More Credit
Impact of retention, leverage rules
on credit market
The implementation of the Dodd-Frank risk
retention rules will likely affect broadly
syndicated loan origination and trading
liquidity, resulting in increased corporate
credit financing costs. There may also be
fewer collateral managers, as many will
either not be able to compete or may choose
alternative uses of their capital that are more
economical for them.
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The PunchLine...
Latvia joined the euro club at the start of this past year, taking the
number of members following the currency to 18. On January 1,
2015, Lithuania became the newest member to adopt the euro.
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The PunchLine...
Pumping Iron
The Old Economy Revisited
Natural Gas Futures Drop to Lowest Point in Over a Year
Uncertainty Over Russias Export Policy Raises Concerns About World Wheat Supply
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The PunchLine...
Wireless Telecom
The level of competition in the industry has been steadily increasing over
the past couple quarters primarily spearheaded by the Un-carrier T-Mobile
who has clearly changed the way the wireless carriers do business but more
recently by Sprint who senses the desperation of needing to turn the
business before it is too late. With various new types of contracts,
optionality around handsets and financing, more flexible data plans, and
overall cheaper service the current winner is the consumer who will receive
more for less for the first time in a long time.
Calling plans, discounts, incentives, bundling and data increases
are the sizzle of wireless. At stake, though, is the network that
runs it all. As more of our things continue connecting to the
Internet and many of them continue to do so wirelessly, we see
no end in sight of continued increasing needs for spectrum.
Dish Network, a satellite television provider, on January 5
announced plans for a web streaming package that will include the
popular sports network ESPN. Live sports is the most profitable part
of the television industry. Its place as part of cable TV packages has
prevented many US households from switching to lower-cost
internet-only subscriptions. In the United States, internet
infrastructure -- the physical cables connecting homes and
businesses -- is almost all built and maintained by cable companies
and telcos that provide internet and TV. Thus, alternate
entertainment delivery mechanisms and political debates about
cable monopolies determine the technology underpinning the US
economy.
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The PunchLine...
Hotels: Occupancy Rate Finishing 2014 Strong, Best Year since 2000
Self Storage
Its lucrative because these buildings
cash flow like crazy and deliver a high yield. Theres
high year-over-year growth in rent because there are
only so many places to store things. Average asking
monthly rent in 2013 for an average 10-foot-by-10-foot
unit in the US was $115 a month. Now, some of our
clients are getting 6% to 15% higher than that. Also,
several years ago occupancy was 70% to 80%. Now the
public REITs are seeing 80% to 90% occupancy. The
growing economy, increased consumer spending and
the increasingly mobile population are all macro
drivers of this space. Also, life issues such as death and
divorce play into storage needs.
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