Failing Infrastructure Costs Dozens Their Lives in Italy

Failing Infrastructure Costs Dozens Their Lives in Italy

 

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Successful investing requires distancing oneself from emotion and from political biases, letting the data do the talking while attempting to be as objective as possible in assessing the potential risks versus rewards. This week I am failing miserably at this.

This week my second home since 2012, Genoa, Italy, made headlines around the world for the worst of all possible reasons. At least 39 people died because a bridge I have traveled across countless times crumbled. Many of those who were on the bridge fell 150 feet to their death and those below the bridge when it collapsed, I cannot even imagine what they experienced. When I think of what it will be like to see that pile of rubble when I return, I alternate between wanting to throw up and scream at the top of my lungs at those who I hold responsible. This should never have happened. The loss of life was thankfully less than it could have been given that a good portion of the city’s residents had already fled the heat during the August holiday period.

Today politicians in Italy are doing what politicians all over the world do after a tragedy, engaging in a public covering of their own backsides while angrily pronouncing that those at fault will be discovered and held accountable. The same old song as it were.

Here is the situation as I know it, which I am sharing as it helps to understand the challenges with infrastructure investment, something that the U.S. is failing at as well.

The Morandi bridge was completed in 1967 and along with much of the surrounding toll roads, (the route from the A10 onto the A26 and the first part of the A7) is operated by Autostrade per l’Italia which is 88% owned by Atlantia (ATASF:OTC), a company that also manages highways in India, Brazil, and Chile, airports in France and Italy, and jointly controls a Spanish toll-road operator. Atlantia is in turn effectively controlled by the Benetton family, the largest shareholder at over 30% of the outstanding shares through the SPV (Special Purpose Vehicle) Sintonia. An oddity of the Italian markets is that often you will have a publicly traded company’s traded shares represent only a non-controlling stake in the company, with the control remaining in the hands of one or more of the wealthier families. While the shares are publicly traded, investors have no real say in the public entity’s governance.

It turns out that the bridge’s designer, Riccardo Morandi may have been a brilliant architect, but not so great of a civil engineer. This bridge has had problems from the beginning and has required much more maintenance expenditures than is typical. This is where things get ugly. For years and years many qualified engineers have been warning of the bridge’s imminent collapse. It’s operator, Autostrade per l’Italia, has proposed alternatives to reduce stress, meaning traffic, on what was known to be a faulty bridge. All efforts were to no avail.

Enter the awkward coalition between the 5-Star Movement, (Movimento 5 Stelle) and Lega. Two political parties that joined forces to gain a controlling majority in Italy, but whose positions often are at extreme odds. Forza Italia, the Democrats and most importantly Lega have all been in favor of La Gronda. La Gronda is Genovese (Genoa’s regional dialect) for eves, such as you would have on a house. La Gronda was a project that was to connect the port at Voltri directly to the A26. Voltri is the container terminal where those big metal containers you see go to/from ships to/from (mostly) trucks and then get onto the A7. The 5-Star Movement has been vehemently opposed to La Gronda, calling it “La favoletta,” the big fairy tale, with a formal “No Gronda” campaign in 2013. La Gronda was one of the biggest conflicts between the two parties.

Previously policy statements concerning Genoa (Genova in Italian) and La Gronda were on the 5-Star Movement’s website. That was changed quickly immediately following the bridge’s collapse, but thanks to the beauty of the internet being forever, archived versions of those pages can be found. One such copy can be viewed here. There is a lovely video of Beppe Grillo, (the founder of the 5-Star Movement) railing against La Gonda in 2009 on YouTube. The start of this video has a charming little Italian girl carrying one of the “No Gronda” flags. Pretty sure her parents aren’t feeling so great these days. If you enjoy reading from irate Italians, I also recommend searching for #NoGronda on Twitter. Very few nations can do rage quite like Italy. So far Lega is wisely keeping quiet as 5-Star hangs themselves scrambles, yelling and screaming about how they were never really against La Gronda. I’m telling you, this stuff would make Pinocchio squirm.

This week Atlantia (the owner of the operating company for the bridge) is handling the situation so poorly that I’m nearly speechless – not an easy task as anyone who knows me can attest. The press releases on the company’s website as of August 16thought to be an utter embarrassment to the management team and the Benetton family and a business school case study in precisely what not to do when tragedy strikes. Alitalia shares fell 22% in Milan on Thursday, their worst-ever decline. The company has lost around $6.2 billion in market cap since the bridge collapsed. This is likely only going to make the recovery process longer and more painful.

Italy, a nation with the eighth largest economy in the world, has had public spending account for around half of the nation’s GDP over the past decade yet its infrastructure spending has been well below that of its neighbors. Take a look at a topographical map of Italy and one of France, then look at the infrastructure spending of the two. Argh! Italy is pretty much all mountains and valleys so roads are all about bridges and tunnels. France is a pancake in comparison yet they spend more on all those flat roads! Taking into account the percent of GDP that the government spends, clearly this isn’t an issue of a government not having enough funds, the question has been where is it spending?

Infographic: Italy Has Notably Cut Investment In Infrastructure | Statista You will find more infographics at Statista

The challenge is that infrastructure is basically the IT department of government. Rarely does anyone from the C suite walk down to the IT department of a company to say, “Good job, no hackers were successful today and all our tech ran smoothly.” Politicians get reelected by making people happy. Maintenance of existing bridges and roads doesn’t make for great photo ops and is often met with resistance by the electorate – NoGronda!

Think this kind of thing can’t happen in the USA? Think again. In August 2007, the I-35W Mississippi River Bridge in Minneapolis collasped, killing 13 and injuring 45. A decade later, things haven’t improved.

Infographic: Thousands Of American Bridges Are Falling Apart | Statista You will find more infographics at Statista

 

What happened in Italy, yes it did happen here and could happen again.

Infographic: Could The Genoa Disaster Happen In The U.S.? | Statista You will find more infographics at Statista

 

It isn’t just our bridges that are endangering the nation. Our airports, dams, schools, sewer treatment facilities, energy grid, waterways, levees, ports, parks, roads, drinking water, and hazardous waste facilities are all in need of investment with the nation’s infrastructure getting a D+ in 2017 from the American Society of Civil Engineers.

Hopefully, the current administration and/or those in Congress will use this tragedy to focus on America’s infrastructure needs. We’ve heard a lot of talk out of the current Administration about just this, and I hope this serves as a catalyst for the country. A weak infrastructure is a significant headwind to the economy while a modern and robust one becomes a tailwind. This is an area of great opportunity for those in D.C. to do what is necessary, for investors when we see this issue get the attention it deserves, which is the basis for our Rebuilding America index, and for Americans who would reap benefits across many aspects of our lives including less time wasted commuting to and from work or in air travel, less wear and tear on our cars, and lower prices for the things we buy thanks to reduced transportation costs.

Personally, it would be really nice to be able to drive around my other home base in San Diego, California without regularly blowing tires and soaking my car seats with coffee thanks to the ubiquitous craterlike potholes.

 

Hurricanes Irma and Harvey make drinking water a Scarce Resource

Hurricanes Irma and Harvey make drinking water a Scarce Resource

 

As time continues to pass since Hurricane Harvey and Irma, we’re hearing more about more disruptions to electricity and water that will call for significant spending to rebuild utility infrastructure. We’ve seen price gouging for bottled water near Houston, and we suspect the same is occurring in parts of Florida as people look for this once again Scarce Resource that is clean drinking water. We’ll be eyeing comments from companies like American Water Works (AWK) and Aqua America (WTR) on how their water treatment capacity has been affected, and what it means for their capital spending plans going forward.

In addition to the billions of dollars of damage from wind and the rain, Hurricanes Harvey and Irma have trashed the wastewater systems in the cities they tore through.

Untreated water has combined with all the flooding from storm surges to fill the cities and surrounding areas, posing health risks for people trying to return to normalcy.In Florida, city pipelines are able to withstand about twice the amount of water than they’re built to filter.

The past two hurricanes have completely overwhelmed these systems, and pipes have overflowed with millions of gallons of untreated water into streets, homes, and along the coasts of the state.

Texas water treatment centers haven’t fared too well either; the US Environmental Protection Agency (EPA) says that at least 40 of the 1,219 wastewater treatment centers in the area surrounding Houston are temporarily out of commission in the aftermath of Hurricane Harvey.

Without proper treatment, wastewater can carry all sorts of bacteria that can lead to illnesses. According to an independent report conducted by the New York Times (paywall), Houston is experiencing an outbreak of E. Coli, a type of bacteria typically found in human waste that can cause gastrointestinal illnesses if accidentally consumed.

In addition to E. Coli, flood waters also likely contain other infectious bacteria that cause stomach flus or, like the microbe that causes tetanus, infect open wounds.

Source: Hurricanes Irma and Harvey overwhelmed wastewater treatment centers in Florida and Texas — Quartz

Something more than Harvey and Irma have Goldman Sach’s CEO “unnerved” about the current stock market?

Something more than Harvey and Irma have Goldman Sach’s CEO “unnerved” about the current stock market?

As we witnessed over the weekend, the Caribean and Florida took a beating from Hurricane Irma, and its impact is going to be a major source of weakness in the economy for the current quarter. Paired with the impact of Hurricane Harvey, we’re looking at one-two punch to the GDP gut and we expect existing GDP forecasts for 3Q 2017 will be revised sharply lower in the coming days. That’s enough to rattle the market, but there are other reasons investors should be increasingly cautious. Last week, when speaking at a conference in Germany, Goldman Sachs (GS) CEO Lloyd Blankfein shared that he was “unnerved” by things going on in the stock market. As we’ve been analyzing the economic data and watching the political landscape in Washington, we here at Tematica have been talking about a growing sense of unease in the market over the last several months. Yet, the market has at least thus far managed to shrug these mounting concerns off its proverbial shoulders.

In today’s increasing frenetic society, short attention span filled society sometimes it takes a “voice from on high” to catch people’s attention and wake them up. All it took was a short comment from Blankfein during the question and answer session of his presentation at a conference in Germany:

“Things have been going up for too long,” he told attendees at a Handelsblatt business conference in Frankfurt. “When yields on corporate bonds are lower than dividends on stocks? That unnerves me.”

 

We certainly share Mr. Blankfein’s concerns and have been hammering the points home weekly in our Monday Morning Kickoff report and the Cocktail Investing Podcast.  To fully understand the source of Mr. Blankfein’s current unease let’s explore his statement:

 

#1: “Things have been going up for too long.”

While there have been modest pullbacks in the market, like the ones in late 2014 and the second half of 2015, a longer view shows the major averages have moved sharply higher over the last five years, with the S&P 500 in the upper range of its long-term upward trend. Before factoring in dividends, the S&P 500, a key benchmark of institutional investors, is up more than 70% since September 2012.

More recently, the S&P 500 has gone more than 300 trading days without a 5% or more pullback, the longest such streak since July 19, 1929. For those wondering, the record still sits at 369 trading days per Dow Jones data. Historically speaking periods of suppressed volatility tend to be followed by periods of heightened volatility, as market volatility reverts back to its mean. Given the extended period of low volatility, the probability of entering a period of heightened volatility moves higher.

As the stock market has moved higher, so too has its valuation. As we write this, the S&P 500 is trading at 18.7x expected 2017 earnings versus the 5 and 10 year average multiples of 15.5x and 14.1x, respectively. In 2015 and 2016, we saw earnings expectation revised lower during each year until annual EPS growth was nil. With economic data that is once again leading the Atlanta Fed to reduces it GDP forecast, we’re seeing downward earnings revisions to EPS expectations in the back half of 2017. We at Tematica classify that as “unnerving.”

 

#2: The Current “Recovery” is Now Over 100 Months

If we look back to when the stock market bottomed out during the Great Recession, the timeframe for the current “recovery” has been over 100 months. By comparison, the average economic expansion over the 1945-2009 period spanned 58.4 months. In other words, the current expansion is rather long in the tooth and a variety of data points ranging from slowing growth in employment to peak housing and auto to a flattening yield curve support this assessment. While the length of expansion has likely been affected by the Fed’s aggressive monetary policy, the bottom line is at some point

While the length of expansion has likely been affected by the Fed’s aggressive monetary policy, the bottom line is at some point it will come to an end. As the Fed looks to unwind its balance sheet and gets interest rates closer to normalized levels, we’re reminded that the Fed has a track record of boosting interest rates as the economy heads into a recession. Let’s not forget that every new presidential administration coming in after a two-termer going all the way back to 1900 has experienced a recession within the first twelve months. Yep, we color that as “unnerving.”

 

#3: The Market’s Post-Election Euphoria Has Worn Off

Coming into 2017 there was a wave of euphoria surrounding newly elected President Trump with high hopes concerning what his administration would accomplish. Over the last few months, a number of executive orders have been administered, but we have yet to see any progress on tax reform or infrastructure spending. The risk is that expectations for these initiatives are once again getting pushed out with tax reform that was slated for August now being expected (don’t hold your breath) near the end of 2017. The risk is the underlying economic assumptions that powered revenue and EPS expectations in the second half need to be reset, which will mean those lofty valuations are even loftier.

 

#4: Precious Metals Are Gaining Strength

Since August 1, Gold, Silver and the Utilities sector have significantly outperformed financials and consumer discretionary stocks – never a positive sign. The KBW index of regional banks has fallen below is 50-day, 100-day and 200-day moving averages and is down over 18% from its March 1st

 

#5: The Breadth of Current Rally Isn’t Looking So Hot

The median Dow stock is down more than 4% from its 52-week high and the median S&P 500 stock has dropped nearly 7.5%. Only 44% of Nasdaq members are trading above their 50-day moving average.

 

#6: Another Contra-Indicator Has Reared its Head — Individual Investor Confidence

TD Ameritrade’s (AMTD) Investor Movement Index (IMX) has continued its month-over-month rise. For those unfamiliar with this, it’s a behavior-based index created by TD Ameritrade that aggregates Main Street investor positions and activity to measure what investors are actually doing and how they are positioned in the markets. The higher the reading, the more bullish retail investors are. In August, the IMX hit 7.45, up from 7.09 in July, to hit an all-time high.

Why is that unnerving you ask?

While TD Ameritrade opted to put a rosy spin on the data, saying, “Our clients’ decision to continue buying reflects the resiliency of the markets.” Institutional investors, however, see this continued surge higher as a warning sign. Here’s why: Historically speaking, retail investors have been late to the stock market party. Not fashionably late, but really late, which means they tend to enter at or near the point at which things start to go seriously awry.

Complicating things a bit further, over the last month CNNMoney’s Fear & Greed Index has slumped from a Neutral reading (52) to Fear (38). Taking stock (pun intended) of these two indicators together at face value sends a mixed message on investor sentiment. Not a hardcore piece of data like the monthly ISM data, but one institutional investors and Wall Street traders are likely to consider as they roll up their sleeves and revisit the last few weeks of data.

 

How to Know What’s Next

These are just some of the points that could be unnerving Blankfein. Generally speaking, the stock market abhors uncertainty and anyone of those points on their own would be a cause for concern. Taken together they are reasons to be cautious as we move deeper into September, which is historically one of the most tumultuous months for stocks.

Whether you’re a subscriber to Tematica Investing or not, we would recommend you subscribe to both our Monday Morning Kickoff and Cocktail Investing Podcast to get our latest thoughts on the economy, the stock market as well as thematic signals that power our 17 investing themes.

 

Dow on Track for Longest Losing Streak Since 2011 as Trump Trade Stalls

Dow on Track for Longest Losing Streak Since 2011 as Trump Trade Stalls

We are shocked, shocked and just shocked I tell you. President Trump has not been able to effortlessly end the gridlock in D.C. and push through his agenda. Hmmm, something so new and novel for a resident of the White House.

 

This morning the Wall Street Journal reported that,

Stocks around the world fell Monday, putting the Dow Jones Industrial Average on track for its longest losing streak since 2011 as doubts percolated about the Trump administration’s ability to push through on campaign promises.

You don’t say. Doubts? Why on earth? Apparently, others are starting to wonder just how easy this is all going to be for the new administration,

“There is some real concern about whether [President Donald Trump] is going to be able to get these policies through,” said Dianne Lob, managing director for equities at AB. “I think the theme for the year will be uncertainty.”

“Markets are questioning the high expectations built over the past few months,” said Jeremy Gatto, investment manager at Unigestion. “[Mr. Trump] did promise a phenomenal tax reform package, and the market would be disappointed if we got something smaller than expected or nothing at all.”

What is surprising, we must admit, is that President Trump spent all of 17 days trying to push the ACA repeal/replace through. Let that sink in for a moment.

Donald the “I am the best dealmaker” candidate, who pledged that the first thing he’d do would be to repeal and replace the “disaster” of Obamacare, spent all of 17 days before calling it quits. Whether you think the ACA is a disaster or divine, on face value that doesn’t exactly look like solid effort. In comparison, it took Reagan about five years to reduce the top marginal tax rate from 70 percent down to 28 percent, but then Reagan enjoyed a higher approval rating at the time, which gave him more firepower. What we’ve seen here is that enough Republicans, never mind the Democrats, are unafraid of Trump to thwart his efforts.

That’s not a good sign for the markets that have had quite the run-up based on the assumption that this time things are different and with Trump in the White House, sky-high valuations make sense and economic realities, such as an aging population, are no anchor.

Never fear, though! Those financial talking heads are spinning this as a positive because now, (thank God!) Trump can focus on tax reform, which will be the first attempt at major reform since 1986 no less! I’m sure that’s going to go much more smoothly given the consensus in Washington around spending, the national debt, and income inequality. Remember too that the Ryan plan for health care would have reduced the budget by $1 trillion, so any reform is already in the hole $1 trillion, but I’m sure this won’t be a problem – eye roll.

Then there is that resolution that’ll need to be passed in April to keep the government funded and then we get to experience yet another debt ceiling debate this summer. Get that popcorn ready, we are in for a show, which means more rocking and rolling in the markets as investors get their arms around just what are reasonable expectations for the new administration.

Up next for the Trump team, tax reform, deregulation, and infrastructure. Regardless of whether you love Trump and his plans or hate them, today the probability of success on any of those items is lower today than it was just a few weeks ago. Their successful implementation was expected to usher in accelerating growth, which would lead to inflation, but when we look at the yield on the 10-year Treasury today, we see it is still well within its multi-decade long-term downtrend. (Pulled from YCharts)

 

If the bond market was buying into this great acceleration story, would the 10-year yield really be at 2.4 percent? Mr. Bond market remains skeptical.

Keep in mind that over the past few months, the year-over-year data for commodity prices has been off of extremely low levels as the sector experienced quite the downturn this time last year, making small changes, on a percent basis look unusually large. If, as I suspect, we are not actually seeing a sustained acceleration in the economy, these increases should begin to moderate over the coming months. Stay tuned…

Since the beginning of March, all the major U.S. equity indices are down, from the small cap Russell 2000, down 4.2 percent to the S&P 500, down 2.2 percent to the Dow Jones Industrials down 2.5 percent. U.S. bank stocks have fallen around 8 percent from their recent highs, that’s a bit wobbly for what could be the first earnings season to toss cold water on those sky-high growth expectations under the new administration.

Bottom Line: The market’s “This time it’s different” fairy tale is fading. With earnings season right around the corner, we will be getting some hard data on just what is actually happening versus the optimism. We’ll keep you posted!

Source: Dow Poised for Longest Losing Streak Since 2011 – WSJ