Updated: Oct 9
While the US avoided a potentially catastrophic government shutdown, challenges remain for a fragile global economy. A civil trial started for our 45th president, a Speaker was removed, a trial has begun for what many believe is one of the largest scams in history and Taylor Swift is now the most important person in the NFL. This is your week in news....
An extremely strong jobs report released on Friday sent stocks lower and bond yields higher. Not only does this eliminate the possibility of an interest rate cut at the next Federal Reserve meeting, it also could result in further rate hikes. This news is particularly painful for a large subset of the economy most notably anyone with variable rate debt (credit cards etc.) or those looking to roll over debt.
This is not welcome news for the commercial real estate market which is facing high vacancy rates and a mountain of debt coming due. Morgan Stanley has estimated that there is $1.5 trillion in debt due by end of 2025. Chicago recently set a record with a vacancy rate of 23.7%. Two commercial properties in Downtown Boston sold for $4.1 million this week after being purchased seven years ago for $16 million. The Bay Area is among other areas facing record vacancy rates.
As many opportunity zone projects are real estate focused, it is extremely important for investors to scrutinize the investment models for these projects. Overly aggressive interest rate and cap rate assumptions are common within the industry. Common sense would dictate a sensitivity analysis to evaluate the worthiness of a project under many different assumptions.
Oil prices have recently began to drop on demand concerns. Oil prices have dropped nearly 20% since September despite output cuts from many OPEC nations. While the price drop is welcome for consumers, prices are still 20% above June levels.
It is not a major secret that the US government is divided. The Senate has a razor thin Democratic margin while the house has a similar margin in Republican favor. As we discussed in last weeks blog, Former Speaker McCarthy was in a no-win situation. If he did not negotiate with House Democrats, he would have caused a shutdown of the US government as hardliners within his party wanted spending cuts that would never pass in the Senate. If he did break bread with House Democrats to get a deal done, he would potentially lose his speakership which happened this week.
President Trump has advocated for representative Jim Jordan from Ohio to become the next speaker, although there are multiple candidates with support amongst the chamber. Until a new Speaker is voted in, the House is essentially shut down from moving new legislation forward. This will delay any movement on the the Opportunity Zones Transparency, Extension, and Improvement Act.
Jimmy Atkinson of Opportunity DB had an insightful podcast with members of Novogradac this week that provides a useful overview of the new bill which is widely expected to pass in 2023.
Clean Energy - Hydrogen
"Green" Hydrogen could be the solution to the clean energy arms race. This could be used to replace fossil fuels in all vehicles. It has zero emissions but more importantly would enable vehicles to travel long distances which is not possible with battery power.
Most hydrogen today comes from coal or natural gas although there is significant amounts of CO2 emitted during this process. A Natick, Massachusetts company has recently raised over $350 million in capital at a valuation over $1 billion for a new process that would remove hydrogen from water and only emit oxygen into the air. While this new process currently uses natural gas to power their "electrolyzers" the ultimate goal would be to use solar or wind to power the plants to make this a truly zero emission product. The hope is enough green hydrogen can be made to power cars, trucks and planes.
As we have reported in the past, many clean energy companies have struggled to produce power at affordable levels and left early investors with large losses. These newer technologies should be considered speculative investments although the reward for investments in the right area with the right company could lead to a windfall. Consider, an investor who put $10,000 into Tesla ten years ago would be sitting on a $2.3 million gain at todays prices. If you put that same money in Sun Edison you would have zero.
The Swift Effect
While unrelated to Opportunity Zones or private equity investing, the power of Taylor Swift is remarkable. After news broke that she was dating Kansas City Chief TE Travis Kelce, already robust NFL ratings have spiked. On Sunday night, the Jets Chiefs game she attended had 27 million viewers and the number of teenage girls watching rose 53%. That is 4.2 million more than the opening Sunday Night Football game which is often the most watched Monday night game. Kelce's jersey sales have risen 400% in the last two weeks to rank in the Top 5 of all players. NFL players received 67% of their jersey sales according to the NFLPA - a nice little windfall for Mr. Kelce.