Author: Rebekah Stovall

Asset Allocation Weekly (April 9, 2020)

Posted on by Rebekah Stovall

by Asset Allocation Committee

One of the more controversial issues of the past bull market was the impact of share buybacks.  The way we like to frame that issue is with the S&P 500 divisor.  The divisor is a number that is used to smooth out the index; when stocks leave the index, through replacement or mergers, or when new stock is issued or purchased, the divisor adjusts to prevent discrete jumps in the index.  Therefore, if companies are buying back stock, the divisor will decline, all else held equal.

This chart shows the divisor and the S&P 500 from 1964.  In general, it would be reasonable to assume that as stock prices rise, but especially if the P/E multiple rises, companies would generally want to issue stock.  Thus, the divisor would be expected to follow the overall movement of the market.  And, from 1964 until 2004, that was generally true.  The two series were positively correlated at the 74.9% level.  However, from 2005 to the present, despite a major bull market from 2009 to 2020, the trend in the divisor was lower.  In fact, the sign of the correlation reversed to negative.

The divisor is used to calculate earnings per share; a falling divisor boosts the earnings per share reading.  If we assume that the divisor had remained at the most recent peak in 2011, the chart below shows the impact on earnings per share.

This chart shows operating earnings on a rolling four-quarter basis.  Using Q4 2019, the latest actual data available,[1] the reported operating earnings per share was $157.12; adjusting for the 2011 peak divisor shows a reading of $143.28.

The extensive policy actions taken by the government and the Federal Reserve to backstop the economy and the financial markets will likely come with the costs of direct regulations and social control.  In other words, taking the government’s money or using the Fed’s balance sheet to simply support shareholders through dividends and buybacks is probably not going to be possible.  If that is the case, it is highly likely that earnings growth will be less than what we have seen in recent years.  Margins are another element we are monitoring; these have been remarkably strong for the past decade.  So far, we have not seen aggressive actions to reduce margins but a retreat from globalization and a return to regulation could bring down margins as well.

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[1] These numbers will appear lower than what is commonly shown because we use data from Standard and Poor’s. The media usually reports data from Thomson/Reuters, the owners of I/B/E/S, the service that collects earnings estimates. Thomson/Reuters earnings tend to be about 7% higher than Standard and Poor’s.

Weekly Energy Update (April 9, 2020)

Posted on by Rebekah Stovall

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

Crude oil inventories rose 15.2 mb compared to the forecast rise of 9.0 mb.

In the details, U.S. crude oil production fell 0.6 mbpd to 12.4 mbpd.  Exports fell 0.3 mbpd, while imports declined 0.2 mbpd.  Refining activity fell 6.7%, well more than the 1.8% decline forecast.  The inventory build was due to a combination of falling exports and a severe decline in refinery operations which offset the decline in production.

(Sources: DOE, CIM)

The above chart shows the annual seasonal pattern for crude oil inventories.  The last two weeks have pushed stockpiles almost “off the charts.”  Although not totally unexpected, this is the first week where the impact of COVID-19 and the oil war has started to affect the weekly data.

Based on our oil inventory/price model, fair value is $45.11; using the euro/price model, fair value is $44.63.  The combined model, a broader analysis of the oil price, generates a fair value of $43.44.  Usually, the fair value from the combined model falls within the values generated by the individual models.  Recent volatility has led to some model instability, so the combined model is generating the lowest forecast price.  As we noted recently, the model output is less relevant unless Russia and the Kingdom of Saudi Arabia (KSA) come to an agreement on supply.  At the same time, it does show that prices in the mid-$20s have discounted a good bit of bad news.  However, there is a non-linearity tied to the loss of storage capacity that cannot be fully captured with these models.  If storage capacity is fully utilized, a catastrophic decline in prices, which we would define as low teens, is possible.

As promised, here are a couple of charts that look at U.S. oil demand.  The chart below shows the four-week average of gasoline supplied to the distribution system.  As the chart shows, shipments have cratered.  Distillate demand is holding up better, reflecting the increases in delivery of goods.

This is a longer-term view of refinery activity.

The last time we saw a drop of this magnitude was during the depths of the Great Financial Crisis.  Over the past two weeks, refineries have reduced their oil consumption by 2.2 mbpd, far exceeding the drop of 0.4 mbpd in production.  The underlying fundamentals for crude oil continue to deteriorate.  The DOE reduced its forecast for U.S. production this year to 11.8 mbpd.  This means that production can be expected to decline further.

Oil prices have held up rather well because of hope of a broad deal between OPEC+others to reduce production.  President Trump is threatening all sorts of actions, including tariffs and anti-dumping legislation.  There is a risk to all this—such actions will raise gasoline prices over time.  However, that isn’t a problem in the near term.  As the above chart shows, people aren’t driving all that much.  Still, we think the president doesn’t really want to directly intervene, but merely threaten Russia and the KSA into agreeing to cut output.  Russia has reportedly agreed to cut 1.6 mbpd, which is boosting prices this morning.

We remain highly skeptical that a deal can be fashioned among the wide number of participants, but we would be surprised if no deal is announced.  But, announcing is one thing, while actually cutting is another matter.  Another point to consider—oil futures prices are running well above cash barrels as speculators hoping for a deal are buying in the futures market.  At some point, these physical barrel holders are going to rush to sell their actual oil into the futures market to capture the spread.  Don’t be surprised to see a “buy rumor, sell fact” trade post-agreement.

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Weekly Geopolitical Report – Could the Coronavirus Pandemic Break Up the EU? – Part II (April 6, 2020)

Posted on by Rebekah Stovall

by Patrick Fearon-Hernandez, CFA

(Note: Due to the Easter holiday, our next report will be published on April 20.)

In Part I of this report we examined the history of the European Union (EU), how it works, and the political, economic, and social fissures that had already rendered it unstable when the COVID-19 pandemic took hold.  This week, we look at several recent policy moves that various EU countries have taken in response to the pandemic, and we explain why those policy moves could potentially push the EU over the tipping point toward disintegration if they are carried too far.  As always, we’ll wrap up with a discussion of the possible economic consequences of a break-up and the ramifications for investors.

The Temptation to Barricade
As we discussed in Part I, the founders of the EU believed that preventing another major war on European soil could be accomplished, in part, by an “ever-closer union among the peoples of Europe.”  The EU is often seen mostly as an economic arrangement (i.e., a customs union coupled with a free-trade area), but its founding principles are broader than that.  The EU aspires to the free movement of virtually all people, goods, services, and capital.  Unfortunately, the COVID-19 pandemic has tempted EU leaders to erect barriers in these areas.

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Asset Allocation Weekly (April 3, 2020)

Posted on by Rebekah Stovall

by Asset Allocation Committee

Earlier this year and late last year we recorded a series of podcast episodes that examined the issue of making decisions under conditions of uncertainty.  Episode #5 discussed the issue in broad terms, offering a general framework for examining such decisions.  In the end, the key to making these decisions comes down to process.  Without a sound process, decision makers can swing wildly on new information or take unconsidered risks.  In Episode #6, Mark Keller discussed this topic with a specific focus on how we make decisions in equity portfolio management.  In Episode #9, Greg Ellston did the same for asset allocation.

Recently, the Asset Allocation Committee met to make portfolio adjustments.  In the nearly two decades of being involved in such procedures, the current environment is perhaps the most unique for all members of the committee.  Simply put, we are in an area of substantial uncertainty.  The term “uncertainty” is not used lightly; we view the word in the sense analyzed by Frank Knight in his seminal work, Risk, Uncertainty and Profit.  Risk is where known probabilities can be assigned; games of chance such as roulette fall into the category.  Uncertainty occurs when probabilities cannot be accurately assigned.  That is the world in which most portfolio management decisions are made.

In our recent reallocation, which is detailed in the Asset Allocation Quarterly, our general position is that the economy is almost certainly in recession, but financial markets have already discounted much of the damage of a downturn.  Unlike most recessions, which occur due to policy error, geopolitical event, or inflation, this one is caused by a pandemic, which has almost no modern historical parallels.  We have seen extreme and severe market moves already; the decline in equities is one of the fastest on record.  New low yields have been established for long-duration Treasuries.  Credit spreads have widened to levels not seen since the Great Financial Crisis.  The key issue the committee had to determine was the likelihood that conditions would worsen beyond what the financial markets had already discounted.  Our determination was that the odds that market conditions could get worse is possible but less likely than the prospect that much of the bad news is already factored into asset prices.  That doesn’t mean that some element of caution isn’t appropriate but establishing the best positions to reduce portfolio risk is critical.

There were three themes that we applied to the asset allocation portfolio changes:

  1. The sharp decline in long-duration Treasury yields reduces the utility of this asset class in reducing portfolio risk. Our earlier position in this asset class has served our asset allocation portfolios well, but the utility was deemed to be near exhaustion.  There were two reasons for this determination.  First, the expansion of the Federal Reserve’s balance sheet will tend to raise inflation fears and thus slow further declines in long-dated Treasury yields.  Second, the Fed’s actions to narrow credit spreads will offer better opportunities in investment-grade credit.  To that end, we shortened duration and increased corporate bond exposure.
  2. The massive expansion of liquidity should favor precious metals. Although the dollar has been very strong due to the global scramble for dollars to service foreign-issued, dollar-denominated debt, the Fed has opened swap lines and other programs to improve global dollar liquidity.  We expect these actions to temper the dollar eventually.  The importance of gold as a portfolio hedge remains in place.  An allocation to silver was introduced in the Growth and Aggressive Growth strategies.
  3. We adjusted the portfolios regarding risk tolerance. Historically, steep declines in equities coupled with policy support have generally led to eventual recoveries in equities.  There was an increase in equity exposure across all the strategies with the largest increases seen in the Growth and Aggressive Growth strategies.  In these higher risk-tolerance portfolios, we added an allocation to emerging markets, which have fallen precipitously in this downturn.

Our CIO (and CEO) Mark Keller is fond of saying “we are not soothsayers, but oddsmakers.”  We are not predicting with certainty that the bottom in equities is in place or that credit won’t deteriorate further.  But, what we have seen from policymakers and our own analysis of how we believe the COVID-19 virus and the response will evolve over time leads us to the conclusion that the aforementioned three points are reasonable responses to current conditions.

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Weekly Energy Update (April 2, 2020)

Posted on by Rebekah Stovall

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

Crude oil inventories rose 13.0 mb compared to the forecast rise of 3.5 mb.

In the details, U.S. crude oil production was unchanged at 13.0 mbpd.  Exports fell 0.7 mbpd, while imports declined 0.1 mbpd.  Refining activity fell 5.0%, well more than the 0.1% decline forecast.  The inventory build was due to a combination of falling exports and a severe decline in refinery operations.

(Sources: DOE, CIM)

The above chart shows the annual seasonal pattern for crude oil inventories.  This week’s report has lifted stockpiles well above seasonal norms.  Although not totally unexpected, this is the first week where the impact of COVID-19 and the oil war has started to affect the weekly data.

Based on our oil inventory/price model, fair value is $50.98; using the euro/price model, fair value is $48.95.  The combined model, a broader analysis of the oil price, generates a fair value of $48.59.  Usually, the fair value from the combined model falls within the values generated by the individual models.  Recent volatility has led to some model instability, so the combined model is generating the lowest forecast price.  As we noted recently, the model output is less relevant unless Russia and the Kingdom of Saudi Arabia (KSA) come to an agreement on supply.

In the coming weeks, there are two key factors we will be monitoring.  First, we will start looking at the impact of the virus on demand.  This week, we are seeing the first signs that the virus has affected product demand.  The chart below shows the four-week average of gasoline supplied to the distribution system.  As the chart shows, shipments have cratered.  Distillate demand is holding up better, reflecting the increases in delivery of goods.

We also note that refinery activity is rolling over.

This sort of decline is usually seen during severe weather events, such as hurricanes.  The COVID-19 crisis will almost certainly last longer and thus will negatively impact crude oil consumption.

Second, estimated primary U.S. commercial crude oil storage is around 510.0 mb.  An additional 110.0 mb is available at refineries and in pipelines.  The total capacity of the Strategic Petroleum Reserve (SPR) is 713.5 mb, of which 635 mb is already being utilized, meaning there is an additional 77.5 mb.  Once primary storage is filled, secondary storage will be utilized.  However, it tends to have a higher cost and is less accessible than primary storage.  Producers fund storage costs via the calendar spreads in crude oil.  When the spread is positive, they produce oil today to sell in the future.  Currently, producers can earn $4 per barrel by producing oil now and selling it six months into the future.  The chart below shows the rolling six-month crude oil calendar spread.

Since mid-2013, the correlation between the six-month calendar spread and oil inventories has been at 74.6%, with the spread leading inventories by two months.  The current spread suggests that oil inventories will rise at least another 10 mb over the next two months.

Adding to inventory pressure are two other factors.  First, rising U.S. crude oil exports have been a key factor in reducing U.S. crude oil inventories.  As OPEC+Russia boost output and exports, it will be difficult for exports to be maintained.  If exports decline, that crude oil will need to be stored.

On the international front, so far, the U.S. has had little success in getting either Russia or the KSA to back away from their adversarial positions.  The KSA is poised to dramatically ramp up output.  The U.S. is considering easing Iranian sanctions due to COVID-19.

On the domestic front, the White House is considering restricting oil imports in a bid to protect domestic producers.  Texas regulators are reopening the debate on having the Texas Railroad Commission return to its role of regulating oil production.  Although Congress did not include funding for SPR purchases, the White House is considering a program to allow firms to lease the SPR for additional storage.

In conclusion, the current market fundamentals are about as bearish as we have ever seen.  It will take significant government and OPEC intervention to stop the downdraft.  History suggests that such actions rarely occur until prices reach unfathomable levels.  Although we are friendly to a number of different asset classes, oil isn’t one of them.  Somewhere between now and Labor Day, some sort of resolution is likely, but it probably gets much worse before it improves.

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IDEA Dividend Update (March 31, 2020)

Posted on by Rebekah Stovall

A Report from the Value Equities Investment Committee | PDF

Growing dividends are at the core of Confluence’s Increasing Dividend Equity Account (IDEA) strategy. Given the unprecedented nature of a national economic shutdown to combat COVID-19, it is likely that many companies, including some that may be held in the IDEA portfolio, will choose to not grow their dividends and some may even choose to temporarily suspend or decrease their dividends during the economic shutdown. With this possibility in mind we thought it would be helpful to proactively discuss the situation and our planned response prior to any changes companies might make with their dividends.

Why are growing dividends beneficial?

First, it would probably be helpful to review why owning companies with growing dividends is a good investment strategy. When you purchase a stock, you are buying a fractional portion of a company with the expectation of receiving a share of its ongoing cash flow. Each year a company’s earnings (cash flow) may be used to reinvest to grow the company, repurchase shares, pay dividends to the owners, or possibly do all three.

Over the long term, a stock’s total return will be determined by the cash flow growth and dividends paid out to the owners. As a result, a company with a history of consistent and growing dividends indicates a company with consistent and growing cash flow – a recipe for good long-term investment returns.

The team at Confluence has a long track record of identifying and investing in companies that not only have histories of growing dividends but also have solid prospects that those dividends should continue to grow well into the future.

Why would a company temporarily suspend or decrease its dividend in the current environment?

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Asset Allocation Quarterly (Second Quarter 2020)

Posted on by Rebekah Stovall
  • The prospect of a recession in the U.S. is nearly a foregone conclusion. The depth will likely be severe, but the duration could be brief.
  • Actions over the past two weeks by the U.S. Federal Reserve should help mitigate the economic crisis, potentially avoiding problems faced in past downturns.
  • The stimulus package signed into law on March 27 offers further assistance for lessening the duration of the contraction.
  • Our three-year forecast is for a recovery and even the potential for expansion toward the end of the forecast period.
  • Risk assets, especially U.S. equities and even corporate bonds, are at attractive valuations in our view.
  • Each strategy now has elevated exposure to equities with a tilt toward growth over value.
  • Though long-term Treasuries have likely run their course, the use of gold as a stabilizer for the strategies remains appropriate.

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ECONOMIC VIEWPOINTS

The COVID-19 virus has plunged the U.S. and global economies into a recession faster and more violently than anyone had forecasted even a month ago. Sheltering at home has ground economic activity to a near-standstill and has resulted in an astounding increase in unemployment claims and consequent business inactivity. Nearly simultaneously, the price of oil has collapsed, owing to the market share battle waged between the Kingdom of Saudi Arabia [KSA] and Russia. A third concern, that of increasing financial stress, has been addressed and potentially allayed by the recent actions of the Fed. Since the beginning of March, the Fed has responded with the following, among other measures:

  • Cutting fed funds by 1.50% to 0.00%-0.25%;
  • Expanding its repo operations, effectively offering an unlimited amount;
  • Resuming Quantitative Easing as open-ended, announcing thee intention to buy $375 billion in Treasuries and $250 billion in mortgage-backed securities for the week of March 23 alone;
  • Supporting money market funds through the Money Market Mutual Fund Liquidity Facility, allowing banks to pledge collateral they purchase from prime money market funds.
  • Resurrecting the Primary Dealer Credit Facility, offering rates as low as 25 basis points to primary dealers with investment-grade debt, including municipals, and equities being used as collateral;
  • Encouraging bank lending by lowering the discount window rate to 25 basis points and extending the term to 90 days from overnight;
  • Relaxing regulatory capital requirements and liquidity buffers in an effort to stimulate lending;
  • Establishing two new facilities to support high-grade U.S. corporations: the Primary Market Corporate Credit Facility – allowing the Fed to buy new corporate bond issues and extending loans; and the Secondary Market Corporate Credit Facility – allowing purchases of not only existing corporate bonds, but also ETFs holding investment-grade rated bonds.

These historic measures by the Fed have the potential to avoid the issues associated with most prior recessions where the financial system exacerbated the problems.

Despite the Fed’s actions, the magnitude of the impact of COVID-19 on the economy remains to be seen. Due to the lag in data reporting, many indicators won’t turn decidedly negative until reports are released in April and May. However, we have noted a sudden decline in financial conditions as measured by the Bloomberg Financial Conditions Index for the U.S., which is compiled daily and comprises eight variables.[1] The more negative the reading, the greater the level of financial stress. It clearly indicates a substantial impact from the economic inactivity inflicted by the disease.

Our forecast is for a dramatic decline in U.S. GDP recorded for the second quarter of this year, with the potential to stretch into the third and fourth quarters should a second wave of the virus assert itself in autumn. However, over the full three-year forecast period, we anticipate that a U-shaped recovery will engage, accompanied by an unleashing of pent-up demand from businesses and households awash in liquidity.

[1] The eight variables contained in the index are the TED spread, LIBOR/OIS spread, commercial paper/T-bill spread, Baa/10-Year T-Note spread, Muni/10-Year T-Note spread, swap volatility, S&P 500 and VIX.

STOCK MARKET OUTLOOK

Although our near-term view is that domestic and overseas equity markets will be in search of new footing, we believe that in the absence of a policy mistake equity markets should recover over the course of our three-year forecast period. That is not to imply that in the interim all will be roses and buttercups for corporations and equity investors. The combination of the pandemic, the “oil war” between Russia and the KSA, and the global recession will naturally cripple corporate earnings. Our updated EPS estimate for the S&P 500 is $127 for 2020. A resurgence of the virus in autumn and/or a policy mistake, such as a failure to follow the $2 trillion stimulus bill with additional legislation in the event of a more severe and durable economic contraction, could plunge equity prices even lower. However, the policy responses thus far have been heartening.

The downturn may provide an opportunity for companies to write down some inflated assets, such as intangibles, and revise compensation structures to appease governance-focused institutional investors. In addition, share repurchase programs are likely to be curtailed, reducing this form of demand for shares, and in the near term, dividends may be suspended by a number of firms as they address the business impact over the next several months. However, over our forecast period, dividends are likely to become the preferred means by which to reward shareholders, thereby replacing share repurchases. Over the course of the next three years we anticipate that pent-up demand, the realignment of supply chains, and builds in corporate inventories will lead to a recovery in equity prices from today’s attractive valuations.

In summary, current pressures associated with COVID-19 and the oil war may continue to build over the next several months, placing more downward pressure on equities. However, we find valuations to be enticing, even factoring in a temporary plunge in EPS for this year. Accordingly, over our forecast period we believe that stocks hold remarkable appeal and will be viewed as such when we look in the rearview mirror in 2023.

Among U.S. equities, a tilt now exists in favor of growth over value and we increase the allocation to the quality factor focusing on profitability, earnings quality, and lower leverage. Within large cap sectors, we established an overweight to Consumer Discretionary, given expectations for performance once constrained demand from COVID-19 is revived, while maintaining the overweight to Technology and Communication Services.

In contrast, overseas developed markets hold lesser appeal, given the current and anticipated continued strength of the U.S. dollar. Until a durable catalyst for weakening the U.S. dollar becomes evident, the strategies will continue to exclude non-U.S. developed market exposure. For the more aggressive strategies, however, we find that emerging markets have largely discounted the effects of a strong dollar, COVID-19, and the oil war. Emerging markets ex-China are trading one-third lower than they were at the end of last year. Accordingly, we have introduced exposure to emerging markets in the higher risk strategies, Growth and Aggressive Growth.

BOND MARKET OUTLOOK

The extraordinary measures employed by the Fed have helped to ratchet down yields across the curve and thus far have effectively rescued the commercial paper and investment-grade corporate bond market. While these measures excluded the high-yield bond market, the stimulus package passed by Congress on March 27 provides the potential for remedy. Within the package is a tax carryback provision allowing companies to use losses incurred from 2018-2020 to offset profits from prior years. This may provide continued life support for a number of high-yield entities. As the chart shows, spreads for both investment-grade and high-yield corporate bonds rapidly widened over the course of the past month yet have declined over the past week due to both Fed intervention and anticipated assistance from the stimulus package.

While the Asset Allocation strategies benefited from employing long-term Treasuries as stabilizers through last quarter’s equity market turbulence, we find continued upside to be limited as there is a risk that the U.S. encounters a lift in inflation this summer from surging demand, which would pressure the long-end of the curve. The potential for an increase in rates over the full three-year forecast period encourages our substantial reduction of long-term bonds in the income-oriented strategies and their elimination from the Growth and Aggressive Growth strategies.

OTHER MARKETS

The combination of our forecast for rates and the significantly attractive pricing caused by the market decline leads to the continued exposure to REITs in the more conservative Income with Growth strategy. Although the office/retail segment will obviously struggle this year, the more diversified pool of REIT enterprises including data storage, cell towers, and timber lessens the impact retail and office formerly held.

We retain the prior elevated allocation to gold given its ability to offer a potential hedge against geopolitical risk. In the more risk-seeking strategies of Growth and Aggressive Growth, gold is complemented by small positions in silver, which we find can magnify the advantages of gold. Another potential advantage of silver is that roughly half of its demand is from industrial uses, which can be supportive of its price during an economic recovery.

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Weekly Geopolitical Report – Could the Coronavirus Pandemic Break Up the EU? – Part I (March 30, 2020)

Posted on by Rebekah Stovall

by Patrick Fearon-Hernandez, CFA

In times of crisis, the future is a luxury.  Or, at least, thinking about the future can seem like a luxury, especially if you’re reeling from the death of a loved one, the loss of a job, the devastation of a retirement portfolio, or just the boredom and isolation of a quarantine.  Many people are overwhelmed with those challenges in the midst of the COVID-19 pandemic.  And yet the pandemic is changing the future course of the world in ways that we’ll all need to understand and respond to eventually.  Those future changes extend to politics and geopolitical relations.

In this report, we explore the recent signs suggesting the COVID-19 pandemic could potentially lead to a break-up of the European Union (EU).  In Part I, we examine the history of the EU, how it works, and the political and social fissures that undermine its stability.  In Part II next week, we will look at the recent policy moves by various EU countries that could lead to disintegration if carried too far.  We’ll wrap up with a discussion of the possible economic consequences of a break-up and the ramifications for investors.

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2020 Outlook Update #2: Storm Warning (March 27, 2020)

Posted on by Rebekah Stovall

by Bill O’Grady & Mark Keller | PDF

We have been updating our 2020 Outlook to keep you informed of our thoughts as conditions evolve. We have refreshed some of the charts from our update last week and added new comments, included below in bold.

Update #2: March 27, 2020 | Update #1: March 16, 2020

Summary—High Probability of Recession:

  1. The economy is facing three simultaneous problems:
    1. A public health crisis—COVID-19 and the economic impact of containing it;
    2. An oil price war and a regional economic slump;
    3. Rapidly rising financial stress caused by (a) and (b) along with underlying unresolved issues.
  2. Although we are weeks away from data confirming that we are in a recession, the qualitative evidence leads us to say that a recession is a near certainty.
    1. We are now working from the standpoint that a recession is underway.
  3. The content of this report:
    1. An overview of how recessions look compared to expansions;
    2. A discussion of the three threats the expansion faces;
    3. The market impact of these three threats.

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