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2018.12.16 Penn Wealth Report Vol 6 Issue 06

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16 Dec 2018 Penn Wealth Report volume 6 issue 06 17 Penn Wealth Report Copyright 2018. All Rights Reserved. Weekly Business Report Weekly Business Report Domestic and International Headlines another crack in the Bloc: Qater to leave oPec In the big scheme of things, Qatar is some- what of a blip on the radar screen within OPEC. In fact, you have to go through ten countries—from a production standpoint— until you get to the peninsular Arab nation. at being said, the country's decision to leave OPEC after 57 years (it joined the year after the organization was founded) is another sign of trouble for the once-dominant oil pro- ducing cabal. Why is Qatar leaving? In the first place, it has had a long-running spat with Saudi Arabia, OPEC's titular head, with the Saudis accusing Qatar of being a state sponsor of ter- rorism. Secondly, the country wants to curry favor with the US, and sees this as a way to stick it to Saudi Arabia and cozy up to the US at the same time. Qatar has some leverage: the country's break-even point on oil—the point in the fulcrum at which it can still maintain a bal- anced budget—is $47 per barrel versus $88 for Saudi Arabia. Additionally, the tiny coun- try is the world's largest exporter of liquefied natural gas (LNG), so its reliance on oil is not as high. e move by Qatar, from the US standpoint, is a good one. Not only does it hurt OPEC, it keeps the US/Qatar alliance strong, and weakens the ties between Iran and Qatar. is move should help to keep oil prices near the lower band of their recent channel. arrest of senior huaWei executive senDs chills through markets Huawei (pron. "WAH weigh") Technologies is the pride and joy of China and a symbol of the country's burgeoning tech sector. e company is the world's leading supplier of network gear, and the second largest smart- phone maker. It is also one of the world's chief perpetrators of intellectual property theft— with the government's tacit approval. Under that backdrop, let's consider what happened last Saturday. Unbeknown to investors and perhaps even the respective presidents of the US and China, as trade relations were thawing over a dinner in Argentina, Huawei's CFO—and the daughter of the company's founder— was being arrested in Vancouver on charges of sanctions violations with Iran. Meng Wanzhou now faces possible extradition to the US on the charges. e Dow dropped nearly 800 points on news of the arrest before a massive rebound. Some believe Tuesday's big selloff was the result of insider information of the arrest. It seems almost unfathomable that neither of the two world leaders knew of the arrest before the Saturday dinner. is leads us to believe there is more to the story than is being reported, or is known. e Eurasia Group, a political risk consulting firm, believes this may well derail trade talks. We don't buy it. We look for some "unexpected" news to unfold in the coming days on the arrest. amazon go: cashierless store coming to an airPort near you You may recall us discussing Amazon Go earlier in the year—Amazon's (AMZN $1,151-$1,699-$2,051) cashierless store expe- rience in which you walk in, pick up what you want, and simply walk out. It seems as though the $831 billion retailer has found the perfect venue for launching these futuristic stores: your local airport. Reuters has reported of several meeting requests between Amazon executives and officials at a number of large US airports to discuss the idea. e locations seem ideal: hundreds of millions of time-constrained pas- sengers fly in and out of major US airports each year. e ability to scan a smartphone at a turnstile entrance, pick up what you want, and then simply walk out and head to your gate would be wildly popular. Additionally, the relatively higher-level of security in non- gate areas of airports should help dissuade theft while Amazon continues to test and per- fect the technology behind the concept. Amazon, which has its hands in so many industries now, has taken a novel approach to the retail side of its business—take existing lines and move them into brick-and-mortar stores. is is true not only for their conve- nience stores, but also their book business. e company has, thus far, seventeen Amazon Books physical locations throughout the country, with plans to open many more. As if their online business wasn't a big enough threat to Barnes & Noble (BKS $4-$7-$8), they will now be in direct competition with the $500 million book retailer. e next move for the company? ere is every indication that they are prepared to move into the $400 billion prescription drug market. Amazon's push into so many disparate indus- tries may not be good for stodgy old established companies, but it is great for consumers. is is one reason we have downgraded our inflation outlook—the Amazon Effect. altria is making the moves neeDeD to survive in an anti-cigarette WorlD Yes, there are still plenty of smokers around the world. In fact, over 50% of Chinese men continue to smoke cigarettes (only 2.4% of Chinese women smoke) despite the health risks. Nonetheless, tobacco giant Altria (MO $53-$56-$74) sees the writing on the wall: increased government regulation and a con- tinual stream of public opinion hit jobs done on the 2,000-year-old product will continue to erode sales. Despite owning the Marlboro brand, which holds a 40% market share glob- ally, the $105 billion company has decided it is time to expand their horizons, making two recent moves which make a lot of sense. Last month is was reported that Altria will buy up to a 40% stake in e-cigarette company Juul Labs, by far the fastest growing e-cig on the market. Juul, in fact, now has roughly a 75% market share among all vaping devices, and the company produces some 20 million device pods per month. e second, and most recent move by Altria has enormous growth potential. While cigarettes (even vaping devices) are being demonized, the growth trajectory of can- nabis sales around the world is sky high. To that end, big MO just took a $1.8 billion stake in Canadian marijuana grower Cronos (CRON $3-$13-$15). To put that investment in perspective, at the beginning of November Cronos had a market cap of $1.2 billion. e investment gives Altria 45% ownership of the firm along with warrants which could increase that stake to 55%. Recall that several months ago our favorite booze joint Constellation Brands (STZ) took a $4 billion stake in rival cannabis company Canopy Growth Corp (WEED), with one intent being to make a line of cannabis-infused drinks. Take a look at the chart to get an idea of what the Cronos investment could do for Altria. While MO is down 24% YTD, Cronos and Canopy are up significantly. With its 5% divi- dend and single-digit PE ratio, we are tempted to take a position in MO. We don't like the com- pany's "inherited" 10% stake in BUD, however. MO's ytd growth rate as compared to two major cannabis companies. fooD, Beverages, & toBacco Business & enterPrise gloBal strategy: traDe energy commoDities

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