Harvey Endangered World's Most Important Chemical

gasoline prices spiking, crude values falling. But there's another chemical that is big produced, big production in Texas, and uh it possibly could be more important. I'm talking about ethylene, and I want to bring in Jack Caskey, who highlighted this in a recent Bloomberg News story. He's our chemical company's reporter and he is based in Houston. Also, I want to bring in Jason Minor, senior global chemical analyst for Bloomberg Intelligence based in Princeton, New Jersey. Jack, let's

start with you. Can you give us a sense of the importance of this chemical that you highlighted, ethylene, and why the production of this chemical in Texas could be a bigger impact on what we consume every day than even gas prices. Yeah, lista UM ethylene is the world most produced petrochemical. Uh. It's in everything. It's in plastics or food packaging, your toys, it's entires and diapers and pretty much anything I thinks they don't even think about.

You know, rubber, Uh contains athletes anthetic rubber. UM. The list is hundreds, if not thousands of products long. Uh, it's converted into you know, vinyls um. It's it's likely said plastics. I'm not going to go to the whole list, but it is the core of the petrochemical industry. Right. If it's the core of the petro chemical industry, Jason, I would like you to come in and comment on this. How long, what kind of time frame, and what are some of the specific challenges that are going to be

faced by the industry to get it up and running. Yeah, they're there. Thanks. There's a couple of effects here actually UM two waves perhaps so in the near term. The estimates range between sort of forty and six of golf ethylene being down. That's maybe a fifth the u S maybe a fifth of the world's athlete supply. So the numbers sound big, of course, depends how long the adages are and remember, um, we haven't starved this industry for Capex, There's been a lot of spending which is operating in

our favor. The second wave that might be more impactful is logistics. Um, we did have a massive wave, so ethylene first and biggest step it turns into plastic polyethylene. That's that's where it becomes kind of the face of petro chemicals. We use it every day. We had a massive wave of expansion in the US coming in plastic this year, and with that sort of coming over the next twenty four months, you know, it's it's as much as a quarter of additional capacity if those plants get

back online fast. The next wave would be that that those pellets create sort of a local glut. They need to be exported. And clearly if you look at on the terminal, we have a nice map, real time map of the ships in the gulf. There it's a big parking lot, a lot of ships waiting, and the rail washouts could be pretty significant as well. Jason, I'd love to get your sense of why so much of the

production of ethylene is based in Texas. Energy energy, energy, back to oil and then more recently shale gas and and uh the wave of expansion. Really, the US because of gale gas, has become the world's plastic and ethylene hub. I mean, we're at a moment where since two thousand, about a hundred and seventy nine billion of capex new projects have been announced and it's all driven by our

very low cost position. And that's because of shale gas. So, uh, the supplies right there, and then you can ship, of course in good times from there quite effectively the rest of the world jack the companies that are specifically involved. We've seen pictures of the Archema plant and so on

owned by out non US uh enterprises. What what kind of sort of new manufacturing or news you know, equipment is going to be necessary because I mean, if the motors of the electric motors are out, aren't they going to require rewiring? Yeah, that can happen. I mean it's really not going to be clear until they get in there and trying start these plants up what the problems are at any Yeah, electoral problems historically have been at the laid plants startups for months in past storms. You know,

not commonly, but it does happen. Um. But yeah, water who knows where the water gets when it's a flood situation. So, um, there's I mean, and it's contaminated water. Correct, Well, brackish water is corrosive if it's uh you know if on these plants around the coast, so the water would be brackish. I don't know that it's contaminated. It just has salt

in it, which is not good for metal. Jason, I'd love to get your sense and whether there's a precedent for this type of disruption in the ethylene production industry, going back to Trina Rita were really the the big precedent and um, you go back to two thousand and five. Now what's interesting is these companies and let's remember doubt you pot merged today, so what I'm about to say is even more true. But these are behemoth companies with

a lot of diversification. Um, when you go back to the third quarterb oh five, um, Dow Chemical had only a two negative impact on their volumes from the Katrina and Arina Rita hurricanes. That just speaks to how hugely

diversity these companies are. But that's really the precedent. Um, and again it kind of mutes what from an investor's perspective, you might see uh, some of the company impacts, although perhaps in chlor al kali maybe at old and UH and maybe some of the industrial gases for the rebuilding into thousand eighteen, the welding gases will see a little bit of improvement in earnings from this. I want to thank you both very much. Sorry, go ahead, Jack, you

got a final comment. Yeah, I was just going to add that. Um. Some analyst Jeffreys in particular, is out with a note this overnight saying, you know, it could be until November until the petro chemical industry is you know, reaches the pre hurricane level. So that's two months from now, so that we could of course, nobody really knows, but it could be a month long process. Here. Thanks very

much for joining us, gentlemen. Jason Miner, senior chemical global chemicals analysts for Bloomberg Intelligence, and A Jackkaski here is our chemical companies reporter for Bloomberg News. They're both reporting from Houston. So it turns out pim fox that algorithms get bored sometimes, uh, And it seems like perhaps in this market where trading volumes are just sagging away, even those computerized systems just can't seem to get their mojo back.

Matt Mainlee joins US now. He's managing director and equity strategist at Miller, tay Back and Company. He is uh speaking with us uh after writing a note earlier today in which you say it's going to be a very boring day in front of the long weekend. Um, you're right, But I think that this is important because it's been boring for a while and there have been these lulls and the market has sort of either drifted along or

gone up. What do you see in your models that is going to break this this sort of uh, this sort of trend and push it in one direction or another. Well, it's well, one thing is we we do have to get past the kind of the late August adul drums that we get every year, whether the Algals long before the Apple were involved the markets that it's going to be listless, uh, you know, late late in August. Uh.

So that's gonna be one thing. But more importantly, we're gonna have to see what's gonna I think people you know, there's gonna be a lot of focus. Of course, what's gonna happen in Washington with the UH dead ceiling and things like that. But we also have, of course, what is the FED going to do on the UH, on on drinking their balance sheet? And will that have an impact? Because a lot of people are saying it's definitely gonna do this, or it's definitely gonna do that, But we

but the most people and the smartest people. I think you're saying, we don't really know what's gonna what had happened with that. I think a lot of people are sitting on our hands because of that. UM. That's an interesting take, Matt, because when do you think that we're actually going to get a sense of what the effect will be? Because even if the FED announces some plan and say September, which is the absolute earliest, and it's more likely October, uh, we are going to see the

real impact for a while. Right, Well, yes, I mean they can they We expect that they will tell us when they're going to start doing. Some people say they could start doing as early September, but I agree it's something that that is probably gonna be October at the earliest. UM. But there will be less liquidity in the system and UH by definition, and people a little worried about that. Now they're gonna go gradually, so that should be positive.

And I do think that the you know that the market has uh, they've kind of signaled, and some of these other global central bankers have been saying that if things get majorlygue disrupted, though, they can step back on the accelerator. But it's still it's been a key driver to the markets in the last eight years. Not the only driver, Bunny and stretch of the imagination. But with with with liquidity going to be less plentiful, people are

worried about Matt. You're joining us from Boston, home to Bloomberg one six one Boston, Newburyport, as well as thirteen thirty metro Western and the South Shore. And I want trick thoughts on the biotech industry, which has a great presence in the area. Bluebird Bio for example, these stocks, you know, you look at them every day. We're Bio up another four and a half percent, Biogen moves higher,

Vertex Pharmaceuticals. What is the biotech industry tell you about the market, Well, it's it's it's certainly a bullish, uh bullish move in this group. I mean, we turned a positive on the group back in the in the spring, back in March, uh, and it kind of moved sideways for a while, but it broke out very nicely. And

on a technical basis, it's had this great move. Uh. It made a double bottom in two thousand and sixteen, and then this year, after a little bit of rally, it's sold back off but held its two under day moving average, and since then it's been making It's made three higher high sense then, so it's very very bullish on a technical basis. And one of the things though, and I think it's gonna be very important because some of the innovations there on the fundamental side, things look

very very good. But people a little bit worried. Geez, will we get a repeat of what happened in two thousand and fifteen when the group has been rolling very very strongly, Hillary Clinton came out and made comments about drug prices and the group basically crashed if it felt three the differences. There's a much different set up this time. In two thousand and fifteen, the group had rallied eighty percent over the previous fifteen months and wildly outperformed the SMP,

which is only up about seventeen percent. Over that time frame. So what it is that gave so many people a huge amount of conference confidence to add leverage to their to their positions. So when the group rolled over, Uh, it became much worse than otherwise there should have have because the fundamentals hadn't really changed, but people had to unwind their leverage. There was forced selling, you know, margin

calls and things like that. Right now, this rally has been very good, but it hasn't been anything more than the the SMP has been. It's had percent rally along with a percent rally and the SMP, so we don't shouldn't have the same kind of leverage. So there's no guarantee the stock of the group can't go down, especially if the broader market corrects. But we don't have that leverage in there, So I don't I strongly believe that people don't have to worry about the same kind of

disaster taking place at this time around. Uh, if the market sells off a little bit that took place at night and in two thousand fifteen, Matt, what a specific sector do you think is most at risk of a sell off? Well, I mean, you know, it's funny because the one thing that the people keep pointing to is in the energy stocks and and and how oil could dip back down and it took forty two and tests

forty two again or even drop into the thirties. But that group is, you know, it is pretty washed out and and and so I would not look for that group. The one group that that I do get a little bit worried about. Of course, as a technology sector, the facts have just had this great amount of uh I'm sorry, obviously the great run this year, but the stock semiconductor endixes things stalling out a little bit lately, and that's

been a great leadership group within the technology sector. So if we see a you know, a rolling over of the tech stocks or the semiconductor stocks, uh, and then of course the thank stocks lose any kind of momentum again uh, that could lead to the kind of at least minor unwinding of leverage that some people have added to their portfolios recently. And again I'm not saying we'll see a complete crash in the group like we saw this in the biotechs a couple of years ago, but

it could, you know, could leave the group vulnerable. If so, keep an eye on those semiconductor stocks more so than the fang. As we move forward, Matt, we keep hearing all about the valuation, in other words, how expensive stocks are, at least on a relative basis. Does that make any sense in a market like this, Well, on a long term basis, you know, evaluations do matter. I mean, it's funny,

how uh you know? I guess my My key point is that if you've you've got a lot in the stock market, you've had a great run here, that's great. But the one thing is that people say they're afraid they're gonna move miss the next move. I mean, there's a lot of fear. And I can understand that with institutional investors because they get measured on you know, every

quarter every year. But the individuals, it's like, hey, I've had this great run since two thousand and nine, uh, and do I really do I really have to worry about missing the next five percent move? I guess. My point is that on a long term basis, the market should be fine, but most people do much better when they're buying more when the market is inexpensive and cheap and and oversold than they do when the market is

overbought and expensive, Like it is now. I mean there's a reason that that the Warren Buffett has got his biggest cast position ever he became a billionaire. But buying cheap, I'm not saying it out of the stock market many stretch of imagination, but you have a little bit. There's nothing wrong with taking a few chips off the table, so you have something if and when the market does correct, Matt,

real quick, the dollar. Do you think this is the year's biggest pain trade, that we're going to see a strengthening against all of the current short positions. The potential is definitely there. We have with the d s I, which is a daily sentiment index, with UH which is a sentiment indicator that's very low only temper cent bulls. And then plus, as you mentioned, the positioning everybody short.

The thing was just the zact opposite of what we saw at the beginning of the year when everybody was long. Now everybody's short. I think the pain trade in the last four months of the year could be to the upside in the dollar. Thank you very much for being with us, Matt Maine. He is managing director and equity strategist for Miller tay Back, joining us from Boston. He's on site at the Boston Convention and Exhibition Center. Can President Trump get very rapid action from Congress on emergency

funding for Texas? Here to tell us more is our senior White House correspondent, Margaret Talive. She joins us from Washington, and you can follow Margaret on Twitter at Margaret Tala. That's t a l e V. Alright, Margaret, So what are the chances that the build or when Congress comes back, that we get a bill that includes all of this

emergency funding. I think the chances are very good. I mean, with the caveats that anything can happen, and as we've seen time and time again, unexpected drama has become injected in some of these events. But look um, from the White House's perspective, there is a real desire to not have a debt limit crisis at the end of September, to not have a debt limit crisis or a default situation that can affect markets and blow up plans for

a x CUB plan. There is also this parallel request to have a real debate over the government spending bill, including yes, the wall, even if that fight gets deferred, and yes, the possibility of a shutdown, even if it's temporary shutdown that some fiscal conservatives want to be able to decouple those events is something they'd like to do, and everybody across the spectrum within the Republican Party as well as Democrats, understands the need and wants to support

the need UH to cover you know, FEMA's bills in the next few weeks. So the money doesn't right now before the end of the fiscal year. So linking the two UH in theory could be risky if it denied UM the emergency money. But I think the calculation at this point is going to be that this will be an offer that the lawmakers can't refuse, and it gives the ones who have constituencies that would be troubled by the debt failing increased clean um some cover to do it.

So basically, this is shaming the more conservative side of the GOP into passing a bill that they might otherwise feel uncomfortable with because they can't go back to their constituents and say, yeah, I voted against helping all those people who are now homeless, those thousands and thousands of people in shelters. Yeah, you could look at it a shamming. You could look at this as political cover. You also

could look at it as sort of a tacit. Uh promised to let them have the fight over government spending, just not to attach it to paying debts that are already incurred. Margaret, You know, I was looking recently at renderings of the border wall that the president has been speaking about, and uh, this set aside the issue of whether it's a good thing or bad thing for just

a moment. But it struck me that building a wall might is it possible that we could build those kinds of projects to prevent against future catastrophes or at least mitigate against uh, this kind of catastrophic flooding. Oh, you were talking about a two for that would be a border wall construction and as an emergency management preventative tactics gone into politics. Right, this is amazing Well, or at least in other words, I mean to kind of shift

the well seriously, to shift the focus. I maybe because I mean, we're facing the potential of another hurricane that is forming in the Eastern Atlantic, and many experts say that, you know, we should expect more types of this extreme weather. Why not, uh, you know, why not shift the attention. They all right, we're gonna build this, but first we're gonna build you know, these systems and infrastructure to prevent

against future catastrophes. Okay, I'm going to tell you that I have not heard any sort of extensive substance scientific debate about this, but that if we hear that there's funding for an Army Corps of Engineer study to figure out overlays for a border wall and for flood management, calling you, you're gonna get the credit for this one.

But but I will say that President Trump has looked, of course and putting solar panels on his conception for a wall, has looked at a number of different ways to uh both sell it rhetorically and politically, and to try to come up with funding macan isms that could in theory work or at least keep the debate alive. I would say nothing is off the table in this debate. But for now, this administration has decided that the one thing they'd like to take off the table is this

debate over the debt limit, over the debt ceiling. And they think I think that they think, and we'll know, uh perhaps later today that this that the coupling of that with the emergency FEMA and s b A assistance, at least just to patch through the fiscal year is uh,

maybe the smartest way to do it. Margaret, I'd love to you to take a little bit bigger picture of view on the GOP and the mood right now in Washington and just get a sense of as we move beyond the healthcare debate and towards something that is much more comfortable for everybody within the g OP, which is

tax reform. Have have things gotten less acrimonious well over the summer, No, they've gotten more acrimonious, and something that that should be easier than healthcare, tax reform has complexities of its own, which we're going to see emerge. That's part of the reason why the Trump administration is looking for ways again to at least take the death healing fight out of the way and let this be a

fight over government spending. But look, the earlier plans for broad stroke tax reform, you know, have shrunk in terms of ambition, so that the must pass situation now really is a tax cut as far as the Republican Party is concerned. And there are divisions within the Republican Party about those who think that uh, any cuts have to be offset, how are they going to be offset? Uh?

Is the Trump administration and the Congression leadership going to propose tax increases on the very wealthy or no tax cut? Uh for the wealthy? What are the thresholds going to be? What's the size of the middle class tax cut? What's more important? Middle class tax cuts or the corporate tax cut? Can President Trump live with something that's uh, not a

fift cut, but something in the mid twenties. These are all questions that the White House has not answered because they haven't put details to paper, and that um converse hasn't answered because they've been gone for several weeks. All of this will come to the four in the next couple of weeks as lawmakers come back. Margaret Tellivan, thank you so much for joining us, and I really hope that you can have some quality time off over this

long weekend. Shares of General Motors are up more than two and a quarter percent, as other shares of Ford Motor. Chrysler shares are up nearly five percent. What does this tell us about the automobile industry and August auto sales? We'll here to answer that question. Is Jessica Caldwell, executive director of industry analysis for Edmunds dot Com, joining us from Santa Monica, California. Jessica, thank you for being with us.

Give us your view of today's report for August automobile sales. Yeah, I was looking a little disappointing, to be quite honest. We thought August would be the first month in seen that can possibly be a month in in but it does look like that's going to be the case. I think a lot of sales were hampered by the last week with Hurricane Harvey, especially for brands like Ford, who reported a decrease of two point one per cent um. But I think overall it's it's a little all over

the place. But I would say I would sum it up with the word disappointing, Jessica. You know, as PIM was saying, shares her up and I'm wondering how much investors are looking beyond the disappointing numbers, saying, you know what, give them some slack because Texas is a huge market and it was basically all but shut down in the past in the last week of the month, and then looking ahead, you're going to see all of these sales

to people who lost their cars. It's going to actually end up being kind of a lifeline for some of these companies. What do you say to that. Yeah, I mean that's pretty much exactly right. And I would imagine why there is a bit of a rally because we would expect to see replacement demand really fulfill in the rest of sen So I think that that is is certainly going to happen. And it seems as if from what I'm hearing in UM from Houston dealers is that a lot of the inventory is not as effective as

people think it is. So those trucks and those cars will be available for people who may have lost UM during the hurricane. And we saw this with other storms like Hurricanes Andy for instance, we saw a big boost auto cells for the rest of the year. I'm wondering, do you think this will also boost used car sale values? UM? Probably so. UM. I would imagine Texas is a is

a pretty big used car state. They do a high percentage of used vehicles and used it as a bit tricky because there is a lot of demand for you know, pickup trucks, and you know Texas has a lot of pickup trucks. That they're selling UM, So I think that that would probably put more pressure on US prices, particularly for trucks and SUVs, because there is a bit of

a scarcity in those segments. What makes the Texas automobile market different from perhaps the national market, Well, I think that Texas, um, you know, it's it's a it's a big open space. So these people are going to need cars because not as if it's a disaster is hit in a place where public trainsportation is something that people could rely on in the interim. A lot of these folks they're gonna need cars pretty much, you know, right away, to to continue their lives. So I think that that's

probably makes it a little bit different. And they just tend to they tend to buy more trucks, more SUVs, so those profit rich vehicles for for automakers are gonna make a lot more money selling the F one fifty than they would a for Fiesta. So I think that makes it a you know, right market for these these auto companies. Jessica, do you have any sense of how many cars, how many vehicles in general, were destroyed in the flooding and what type of volumes that would mean

for companies like Forward. Yeah. I mean it's hard to say, um, because it does seem as if, you know, we did some estimates, Um, but some of the reports that we're hearing is that, you know, the damage to cars was perhaps not as great as as you know, it feared in the beginning of the week or you know, the beginning of the storm and we start to realize, wow,

this is getting really bad. But for someone like Floor, Texas is their their number one market, so getting these uh, you know, these vehicles to dealers is probably going to be, you know, a top priority for the company moving forward. It's you know, it's a it's a big money state for them, Jessica. In today's non farm payroll report, we learned that about thirty six thousand jobs were added to the manufacturing sector, and more than ten thousand of those

jobs were in the automobile industry. Does that indicate that the auto manufacturers will start ramping up production? M Um. I think that's probably still tentative. I mean, inventory numbers look really high, So not only our inventory numbers high, but also the amount of time cars sit on dealership

lots that's been mounting all through seen. Um. I think that there probably is pockets of inventor or of manufacturing that needs to be addressed, especially as it relates to UM, you know, new features like autonomous features, all, you know, all of that sector. UM. But it seems as if inventory for now is is doing okay. But there may be pockets, you know, as we look to replace damaged cars in Texas, Louisiana those areas, there maybe a bit of a ramp up in production, but I'd say that

that's probably pretty tentative at this point. Jessica, I know this may be a sideline, but I'm wondering if electric and hybrid vehicles will be hurt by the publicity related to Hurricane Harvey. Because clearly you might be able to start, you know, a fossil fuel vehicle, but trying to get an electric vehicle started when everything is wet, that's not necessarily going to be an easy challenge. Yeah. Yeah, I

know what you're saying. Definitely, um, probably not. I mean, I think when you look at the you know, the electric vehicle like PEP, you look at pure electric vehicles about her electric they make up blessed in one person in the market about point six percent this year. So I don't think you're necessarily going to see a big hit a fallout from folks that are you know, saying

maybe not. Um. I think people that like electric they're you know, they're fairly either you know, motivated by some of the price or they're you know, they're they're die hard in terms of, you know, that's what they want. So I would imagine that any any effects would be pretty pretty small. The effects of higher gasoline prices, we know that they may be temporary because of the output

constraints from refineries in the Gulf region. What will that do to drivers, uh, sort of driving on the and the sales outlook, Yeah, it's gonna be a bit of a shock for folks because I think that we've been you so used to low gas prices for so long. I don't think it's necessarily going to change the Uh, people that need to buy a car that you know, had planned to buy a car for the rest of

the year. Um, you could possibly see shifts and what people buy, I would imagine, not just because of the shift towards crossovers, but crossovers a lot more fuel efficient than they were than the the SUVs of the past. So I think people are willing to accept that difference

in in fuel economy changes. So I think that it could put it, you know, in terms hamper or made delay some purchases, um you know, depending on how long really the gas price spikes um uh you know is for I think when you see temporary, when people see temporary expected spikes, it doesn't really change the purchasing behavior. I think gas shock will start to change people's purposes

behavior after an extended period like six months. That's kind of what we saw in two thousand and eight when gas prices got you know, really out of control during the spring and summertime. Well, other equipment makers see better times ahead because of all the repairs that will need to be made for these automobiles, likely especially um you know, part suppliers. I think that there could be um you know,

for those vehicles that are able to be salvage. Of course, that's a big question in terms of what can be saved and what cannot be saved. Um. But I think replacement parts um you know, trying to to fix some of these cars, um is you know, could see a boost. I think there's a lot of questions because of all the electric componentry now in cars of how much can really, you know, be saved and if they should be so. I think there probably are a lot of questions around

that right now. Thank you very much. Jessica Caldwell's executive director of industry analysis for Edmunds dot com, joining us from Santa Monica. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio