Trade Implications of Post-Brexit Economy, Oil Price Slump, and Retail Industry Decline

1. Brexit, Stagnant Oil Prices, Tumbling Retail Industries and a Looming Presidential Election: What Trade Vendors Need To Know Going into the Second Half of 2016 and Beyond J. Michael Issa missa@glassratner.com Ronald A. Clifford Rclifford@BlakeleyLLP.com

2. Brexit • The June 23, 2016 Brexit referendum calls for the U.K.’s exit from the European Union • Exit requires the unpicking of 43 years of treaties and agreements covering thousands of subjects • The withdrawal may take place as early as December 2018, but others in the British government claim that full exit negotiations may not conclude for as many as 6 years.

3. Immediate Effects of Brexit • Immediate dramatic fall in the value of the pound against the dollar (10% value lost, lowest value in more than 30 years) • Britain lost its AAA credit rating • The Bank of England has cut interest rates from .5% to .25% to stimulate the UK economy amid uncertainly over Brexit BBC News

4. Immediate Effects of Brexit

5. Brexit’s Effect on the Global/U.S. Economies • Britain is one of the largest economies in the world, which means that a weaker British economy would effect the billions of pounds of imports each year • Most economists predict that Brexit will have a more meaningful impact on Europe than the U.S. economy. • A Wall Street Journal survey of leading economists “found forecasters making no major changes to their projections for economic growth this year or next due to Brexit.”

6. Longer Term Effects of Brexit? • The Bank of England does not expect Britain to fall into a recession as a result of Brexit • Economic growth for Britain is forecasted to dip over the next 12 months. • Unemployment in Britain is predicted to rise from 4.9% to 5.5% over the next 12 months

7. The Free Fall of Oil • Oil prices have fallen more than 46% to 7-year lows • Oil prices for Bent crude were as high as $115 per barrel in June 2014, and closed just north of $44 per barrel on August 15, 2016 • A gallon of gasoline in the U.S. averaged $3.51 in March 2014, and $2.12 on August 16, 2016

8. Cause and Effect • For the past decade, oil prices have hovered around $100 per barrel. • High oil prices are credited to increased oil consumption in developing countries and conflicts within oil producing countries. • The inability of oil production to meet demand caused a spike in oil prices

9. Cause and Effect

10. Cause and Effect

11. Cause and Effect • Efficiency, and a declining global economy caused a shift in demand for oil over the past year. • The U.S. and Canada began a large-scale extraction of shale and oil sands deposits (oil production in the U.S. and Canada is outstripping Saudi Arabia). • By the end of 2014, a perfect storm presented itself with weakened oil demand and an ever-increasing oil supply (US production has nearly doubled over the last ten years.) • By the end of 2014 the price of oil begins its free-fall

12. Cause and Effect • In a surprising response to rapidly falling oil prices, OPEC members decide not to cut production, precipitating a further decline in oil prices.

13. Effects of Lower Oil Prices • There are short-term and long-term effects of the oil price free-fall: While there are long and short-term effects of the fall in oil prices, the negative effects are largely the short term problem • Short-Term Effects • A decrease in profits for the energy sector (the largest increase in the U.S. economy since the great recession was in the energy sector), which will cause a contraction of spending by energy companies (lower employment spending, lower spending on infrastructure). This may be catastrophic for the service companies. • Volatility in oil producing countries (decline of the Russian ruble, contraction of the Venezuelan and North African economies). • Long-Term Effects • A continued slump in oil prices that erodes earnings and values in the energy sector.

14. Effects of Lower Oil Prices • Long Term The Zero Sum Game As oil prices decline, those economies that are “oil consumers” see economic growth through an “energy savings.” Those economies that are “oil producers” pay the toll for the economic growth of the oil consuming economies. This analysis applies domestically as well. Lower profits in the energy sector because of falling oil prices are accompanied by gains in retail and transportation industries through lower fuel costs. The E&P Companies will hammer their service companies for lower day rates to improve the upstream margins. The service companies are driven to the brink by sharp declines in their utilization rates and day rates. The Unknown In the past, lower oil prices have almost invariably been driven by cyclical economic contractions. The current dip in oil prices is being driven largely by increasing supplies than by dwindling demand.

15. Winners and Losers Certain industries are poised to feel the positive effects of lower oil prices, while others may likely experience the negative effects • The Lucky Ones -Airlines -Processed food manufacturers (savings on freight and an uptick for consumer demand) -Automobile manufacturers (higher demand for higher margin vehicles such as SUVs • Those That Are Bracing • The energy sector (both exploration and production and service companies)

16. Even Carnac Cannot Help Us Here Where do oil prices go from here? But here is an interesting question. Can any commodity sell for less than the cost of producing the commodity long term?

17. Cost To Produce

18. The U.S. Economy

19. Economic Environment Although it is impossible to say with absolute certainty, this history of the 1969-2014 economic cycles might lead one to conclude that the US is likely within a year or two of the next downturn.

20. 2016 Presidential Election

21. Credit Enhancements • Second Pockets for Payment • Credit Cards • Credit Insurance • Letters of Credit • Personal/Corporate Guarantees • Revisiting Credit Scoring • Updating Credit Applications • Repayment Agreements and the Chapter 11 Customer