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David Fuller and Eoin Treacy's Comment of the Day
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    How Low Will Retail Go? Look at the Railroad

    This article by Stephen Mihm for Bloomberg may be of interest to subscribers

    And that is the likely fate of conventional retail. Like the railroad, there’s an extraordinarily surfeit of retail space built with little consideration of what the market will actually sustain; recent declines in the retail revenue per square foot in brick-and-mortar stores suggests that things are getting worse, fast. And like the railroad, there’s a new way of doing business on the block, except that instead of changing how we move people and goods, online retailing promises a new way of delivering them to the end consumer. 

    If the per capita retail footprint declined as much as the railroads did, it would fall all the way down to 2.82 square feet per capita. That’s a lot of empty malls and defunct big box stores, but retail won’t disappear any more than the railroads have gone extinct.

    In fact, in 2014, the inflation-adjusted revenue that railroads earn per mile of track is 2.7 times what it was a century ago. More startling still, the so-called “ton miles” of freight carried on the nation’s railroads (a ton mile is one ton of freight carried one mile) has tripled since 1960, even as the total size of the operational railroad system has declined dramatically.

    That points to the likely future of conventional retail: a drastic reduction in the per capita footprint, with the remaining stores capable of earning far more money per square foot. It’s not the brightest of futures. But it’s also not the end of the world.

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    Fiscal impulse update: Uncle Sam goes on a spending spree

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

    Cover title, initial cap only, goes

    Thanks to a subscriber for this report from White & Case, focusing on the European leveraged debt market which may be of interest. Here is a section: 

    The EU's Real Rule-of-Law Crisis

    This article by Simon Nixon for the Wall Street Journal may be of interest to subscribers. Here is a section:

    Northern European countries will argue that the key to making the EU more resilient is to ensure that existing rules are more effectively enforced. For example, the German, Dutch and Finnish governments have called for changes to the way the EU budget is administered to make future EU funds conditional on member states undertaking reforms that would boost economic convergence.

    That will put them on a collision course with countries in Eastern Europe who fear that the EU budget will be turned into another tool to allow Brussels to interfere in their domestic politics.

    It will also put them on a collision course with the French government, which believes that simply relying on stricter enforcement of rules to rebuild trust isn’t sufficient.

    French officials argue that the answer is deeper political integration based less on rules and more on institutions. They point to the creation of the European Central Bank as an example of a significant pooling of sovereignty that was greeted with suspicion at first but has won broad public trust by operating independently and decisively. They say that a similar leap is needed now.

    But to succeed, France will need to convince skeptical partners that any new institutions can be trusted to apply EU rules consistently and ensure member states respect their obligations—rather than deepen what has become the EU’s true rule-of-law crisis.

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    Tesla Faces Several 'Irreversible Negative Catalysts

    This note by Esha Dey for Bloomberg may be of interest to subscribers. Here is a section:

    Tesla now faces a steady stream of severe and largely irreversible negative catalysts, including tax- credit expiration, broad competitive entry and platform quality issues, Hedgeye writes in a note.

    Says TSLA’s demand is at risk; while the bull story is that "people want these cars," delays, competition and reliability are likely to jeopardize this assumption

    Notes battery degradation, quality issues; says aging platforms are likely to become an increasing issue for would-be buyers

    TSLA shares have dropped 11% since reporting 4Q results on Feb. 7 post-market vs the S&P 500 Index (SPX) falling 2.9% over the same period.

    TSLA short interest 21.6% of free float vs year-low of 18.8% in Oct., high of 29.2% in April: Markit data

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    The Key to Tesla's First-Quarter Output Goal Is Still in Germany

    This article by Dana Hull for Bloomberg may be of interest to subscribers. Here is a section:

    Tesla Inc. has all the tools to meet its planned Model 3 production rate in the first quarter. The only problem is they’re still in Germany.

    The electric-car maker -- which is still targeting about 2,500 of the cars a week by the end of March -- has designed a new automated system for module production for its battery factory near Reno, Nevada. The line’s already working at its German Grohmann unit but it needs to be shipped to the U.S. next month before it can go into use, Chief Executive Officer Elon Musk said.

    “That’s got to be disassembled, brought over to the Gigafactory, and re-assembled and then brought into operation at the Gigafactory. It’s not a question of whether it works or not. It’s just a question of disassembly, transport and reassembly,” he said on a conference call Wednesday. Once that milestone’s completed, Tesla will next need to fix material handling constraints at its Fremont, California, assembly plant before it can reach its 5,000-a-week goal by the end of June.

    Tesla -- which has pushed back its Model 3 production targets several times -- is banking on the more affordable model to propel it from niche electric-car maker to mass-market manufacturer. The slower ramp means less money is coming in the door from customers taking delivery, and Wall Street is watching closely for any signs the targets could slip again.

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    Gilts Tumble as Bank of England Signals Faster Hiking Pace

    This article by Charlotte Ryan and John Ainger for Bloomberg may be of interest to subscribers. Here is a section: 

    The central bank left its rate at 0.5 percent as expected and raised growth and inflation forecasts. While the pound was boosted by the central bank’s tone, sterling could see gains tempered by the fact the BOE’s policy path remains closely tied to progress in the Brexit talks, according to Viraj Patel, a currency strategist at ING Groep NV.

    In a press conference, Governor Mark Carney said that while the bank sees more tightening than it did in November, this was a “crucial” year for the Brexit negotiations and everyone would be better informed next year, which would have an effect on the central bank’s thinking. Rises will be gradual and the bank is not tied to a specific rate path, he said.

    It was a “Brexit-contingent hawkish signal,” said Patel, among the most bullish forecasters on the pound. The greater prospect of a rate increase in coming months “reinforces our $1.45 target for cable in the first quarter of 2018.”

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    Treasury Market's Long-Dormant Term Premium Is Finally Reviving

    This article by Liz Capo McCormick and Luke Kawa for Bloomberg may be of interest. Here is a section:

     

    “We remain of the view that the U.S. term premium is still too low when conditioned against the macro outlook, and the uncertainty around it,” Francesco Garzarelli and his fellow strategists wrote in a note Tuesday. “We recommend preserving a short duration exposure and expect the rebuild of the term premium to lead to a steeper” U.S. yield curve.

    Goldman Sachs issued a short recommendation for 10-year Treasuries in November, which the strategists maintain. The firm’s model for fair value -- given economic fundamental and the expected pace of Fed tightening -- has the note at 3.09 percent, compared with about 2.8 percent now.

    The term premium is the extra compensation that buyers demand to hold longer-maturity debt instead of a succession of short-term securities year after year. A widely used valuation tool, it tumbled across world markets in the wake of the financial crisis as the Fed and its counterparts bought debt as part of stimulus measures.

    The 10-year Treasury term premium is negative 0.29 percentage point, up from a record low of negative 0.84 percentage point in 2016. As the name implies, it’s normally positive.

    Its increase in 2018 marks a departure from its typical downward trend during Fed tightening cycles. But much is different this time around -- namely, the central bank’s balance-sheet tapering.

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