David Fuller and Eoin Treacy's Free (Abbreviated)
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October 29 2014

Commentary by David Fuller

Fed Cites Improved Labor Market While Ending QE as Planned

Here is the opening of Bloomberg’s report on the Fed’s policies now that it has ended QE3

The Federal Reserve said it sees further improvement in the labor market while confirming it will end an asset-purchase program that has added $1.66 trillion to its balance sheet.

“Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” theFederal Open Market Committeesaid today in a statement inWashington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that referred to “significant underutilization” of labor resources.

Policy makers maintained a pledge to keep interest rates low for a “considerable time.”

While saying inflation in the near term will probably be held down by lower energy prices, they repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”

Stocks extended losses after the Fed announcement. The Standard & Poor’s 500 Index fell 0.8 percent to 1,969.29 as of 2:17 p.m. in New York. The benchmark 10-year Treasury note yielded 2.35 percent, up 5 basis points from yesterday.

Chair Janet Yellen is completing two years of bond purchases that started under her predecessor, Ben S. Bernanke, as the Fed nears its goal for full employment. She must now chart a course toward the first interest-rate increase since 2006 while confronting risks from a slowing global economy and declining inflation. The FOMC repeated it will consider a wide range of information in deciding when to raise the federal funds rate, which has been held near zero since December 2008. Most Fed officials expect to raise the rate next year, according to projections released last month.

The Fed said it will continue reinvesting proceeds from a balance sheet that swelled to a record $4.48 trillion in the course of three rounds of so-called quantitative easing that started in November 2008 during the longest and deepest recession since the 1930s.

David Fuller's view

To the Fed’s credit, it has been totally transparent in its assessments of economic data, and carefully signalled every step in its policy of gradually phasing out QE3, to ensure that their have been no sudden surprises for consumers, businesses or the financial markets.

Sensibly, it has left its options open by not providing a detailed assessment of developments that would either hasten or delay the eventual increases in short-term interest rates which we can expect as the economy gradually recovers.  However, the Fed has reaffirmed its policy of keeping rates low for a “considerable time.”  It has also indicated that it will not end the reinvest of maturing instruments in its balance sheet until it has raised the benchmark interest rate.

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October 29 2014

Commentary by David Fuller

Greenspan Sees Turmoil as QE Boost to Markets Unwinds

Here is the opening of this topical assessment, reported by Bloomberg:

Former Federal Reserve Chairman Alan Greenspan said he doesn’t think the Fed can unwind years of extraordinary stimulus without causing turmoil in financial markets.

“I don’t think it’s possible,” Greenspan said during an event today at the Council on Foreign Relations in New York, responding to a question about the likely market impact of the Fed’s exit.

While the Fed’s bond-buying program has been a “terrific success” in boosting asset prices, it hasn’t galvanized effective demand in the real economy, Greenspan said.

The Fed’s bond purchases have had a “major effect” on price-to-earnings ratios, capitalization rates in real estate, and all income-earning assets broadly by “getting the real rate of return on long-term assets down,” Greenspan said.

David Fuller's view

An occasional degree of turmoil in financial markets is an occupational hazard, but also an opportunity.  However, I don’t think Alan Greenspan will be on Janet Yellen’s Christmas card list this year.      

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October 29 2014

Commentary by David Fuller

Sanofi Investors Dismayed at Ouster of CEO Viehbacher

Sanofi (SAN) investors reacted with dismay to the dismissal of Chief Executive Officer Chris Viehbacher, saying he paid the price for trying too aggressively to internationalize the French drugmaker.

Sanofi’s board voted unanimously to fire Viehbacher today after almost six years as CEO during which he focused expansion outside of France and recently moved to the Boston area for personal reasons. His relocation came as French government officials voiced concern that corporate decision-making has been leaving the country. The stock set a record less than a month ago.

“It’s a setback and very unfortunate,” said Josep Aymami, chief investment officer of equities at Merchbanc in Barcelona, which holds Sanofi shares. “He’s done a good job as CEO, and you want stability and continuity in management.”

Before this week, Sanofi shares returned 153 percent since Viehbacher’s appointment in December 2008, more than double the gain in France’s CAC40 Index, including dividends. The Canadian-German dual citizen expanded the French drugmaker into biotechnology and rare diseases with the purchase of Cambridge, Massachusetts-based Genzyme Corp. for $20.1 billion and a stake in Boston-based Alnylam Pharmaceuticals Inc.

“He committed the mortal sins of being insufficiently conservatively French and a bit too entrepreneurial,” Erik Gordon, an assistant professor at the University of Michigan Ross School of Business, said by e-mail. “The board will have trouble attracting a world-class drug company CEO. It is unappealing to work for that board and to try to compete globally while being sure to stay French enough for their tastes.”

And from an earlier version of this article:

The move came after French government officials said they were concerned that corporate decision-making was leaving the country, illustrated most recently by General Electric Co.’s effort to buy Alstom SA.

Viehbacher’s plan to cut research jobs in Toulouse and Montpellier in 2012 drew condemnation from then-Industry Minister Arnaud Montebourg, who said it was “abusive” because Sanofi earned 8.8 billion euros in profit the previous year.

David Fuller's view

I am trying not to overreact in commenting on this but it is not easy.  Sanofi is, or was, an attractive multinational Autonomy, which Bloomberg describes as: … “a global pharmaceutical company that researches, develops and manufactures prescription pharmaceuticals and vaccines.  The Company develops cardiovascular, thrombosis, metabolic disorder, central nervous system, internal medicine and oncology drugs, and vaccines.” 

This site (FTM) is known for saying: Governance Is Everything.  Sanofi certainly appeared to have good governance, at least in terms of the CEO, judging from its earnings, international diversification and share performance.  It also has an estimated p/e of 13.74 and yields 3.93%, according to Bloomberg. 

However, Chris Viehbacher was looking after Sanofi and its shareholders.  The French Government and Sanofi’s Board appear to feel that the Company should be looking after France as its first priority.  A number of Sanofi’s international shareholders are clearly having second thoughts.      

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October 29 2014

Commentary by David Fuller

The Markets Now

Monday 10th November, 5:30 to 8:30pm

David Fuller's view

Here is the latest brochure, and I am pleased to say that we have a new guest speaker who will be familiar to many subscribers: Tim Price of PFP Wealth Management.  So, if you are going to be anywhere near   London   on Monday November 10th, why not join us for a lively discussion of interesting markets?  Once again, this meeting will be held at the East India Club,   16 St. James Square  ,   London     SW1Y 4LH  .  After the presentations, you are welcome to join us for a drink in the Club’s American Bar. I saw Tim Price’s presentation last week.  It is very interesting and educational, and I think delegates will love it.    

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October 29 2014

Commentary by Eoin Treacy

Oil Market Outlook

Thanks to a subscriber for this report from DNB which may be of interest to subscribers. Here is a section: 

We have been tracking IEA´s monthly oil reports for the past 38 months to see how they have forecasted the growth in US oil production. The graph above to the left represents 38 monthly oil market reports from the IEA. When these lines are rising it means upward revisions to production growth. During the past 38 months we have seen 35 upwards revisions. This means that in almost every monthly oil market report issued by the IEA during the past three years the agency has revised its estimated growth in US oil production higher. That is quite remarkable. Something like that has probably never happened before. The forecasted growth for 2014, which was issued last summer (in other words several years into the shale revolution) started at 700 kbd. Now the last IEA estimate is that US oil production will grow 1.4 million b/d in 2014. This is in other words a forecasting error of 100% and at the time of the initial forecast, the agency had already witnessed growth of oil production of about 1 million b/d for both 2012 and 2013. This is not to criticise the IEA. They have not been alone in being too conservative to the US shale oil industry.

The large growth in US oil production has meant that non-OPEC production has been growing faster than 1.5 million b/d for more than a year now. The key growth is as mentioned coming from the US, but also Canada and Brazil are growing their output quickly. In Canada the growth is coming from oil sands production, mainly in-situ projects, but we also see growth in shale oil output from Canada. According to PIRA Energy, Canadian shale oil production has reached about 0.5 million b/d. We expect continued start-up of new projects in Canada in 2015. These will be projects that are not sensitive to today’s oil prices, as the investments have been taken several years ago. Going forward however, the investments in Canadian oil sands are set to suffer on a lower oil price but that will only lead to lower production growth as we approach 2020. Also in Brazil there will be no negative impact on production in the next couple of years due to lower prices. The country continues to ramp up its production from the pre-salt fields in the Santos and Campos basin. Pre-salt production reached a record 532 kbd in September which is 62% higher than the year before. We do however expect larger production growth from Brazil in 2016 than in 2015 as 900 kbd of platform capacity is then set to come on line. This could of course slip into 2017 but it will be coming to the market no matter what happens to oil prices in the coming two years.

 

Eoin Treacy's view

A link to the full report is posted in the Subscriber's Area.

Veteran subscribers will be familiar with our view that oil prices are likely to trend lower in real terms over the next decade. The DNB team have been among a small number of analysts to share this view. Unconventional oil and gas remain game changers for the energy sector and this is likely to remain a significant factor for the foreseeable future. 

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October 29 2014

Commentary by Eoin Treacy

The Link You Just Clicked May Not Be Genuine

This article by Leonid Bershidsky for Bloomberg may be of interest to subscribers. Here is a section: 

Thanks to a new report from cybersecurity firm FireEye, we now know exactly how hackers sponsored by the Russian government have gotten access to sensitive information on computer networks owned by NATO, its member countries and former Soviet nations such as Georgia. The methods are sophisticated but, with just a little vigilance, easily fended off.

The report stands out for its insight into how hackers operate. Some security-company reports on alleged Russian hacking have provided valid technical insights; others have been ominous but weak on detail. Together, they have provided a pretty good idea of what malware hackers have used. And they've reported that the various hacker groups used phishing to gain that access: Someone in the target organization had to open an email attachment or click on a link to allow the malware in.

But until now it hasn't been clear what bait hackers have used to induce those fatal clicks. It's easy to say that anyone who clicks on links or opens attachments in unsolicited emails is a fool, but it would be wrong to assume that there are many fools in bureaucracies such as NATO's. People there, and at major companies, get cybersecurity training. So why are the hackers so often able to trick them?

FireEye, based in Milpitas, California, is a major player in the computer security industry. Research by Mandiant, a company it acquired this year for $1 billion, was behind the U.S. indictment of Chinese military hackers last May. FireEye has the resources and the attention to detail required to study hacker attacks from initial penetration through to data theft. So to anyone sitting on sensitive information that could be of interest to government-sponsored hacker groups -- be they Russian, Chinese or American -- FireEye's report on what it calls Advanced Persistent Threat 28 is required reading.  

 

Eoin Treacy's view

We are accustomed to seeing the major powers perform war games on a relatively regular basis but more recently these operations have been conducted in an unconventional manner where manipulation of the media, cyber warfare and other non-kinetic strategies are being explored. If one military complex is practising these techniques it is reasonable to assume they and others are also actively pursuing such strategies in the background. Offensive cyber strategies remain the preserve of governments, but the corresponding requirement for defensive strategies represents a growth trajectory. 

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October 29 2014

Commentary by Eoin Treacy

The Outlook for Energy: A View to 2040 2014

This report from Exxon Mobil may be of interest to subscribers. Here is a section: 

In 2010, coal was the world’s No. 1 fuel for power generation, accounting for about 45 percent of fuel demand. Though coal use will likely increase by about 55 percent in developing countries by 2040, it continues to lose ground in developed countries – primarily to natural gas and renewables such as wind and solar.

By 2040, demand for natural gas in the power generation sector is expected to rise by close to 80 percent. At that time, natural gas will be approaching coal as the world’s largest energy source for power generation, and coal’s share will have dropped to about 30 percent. Natural gas will actually produce more electricity than coal, reflecting efficiency advantages of gas-fired versus coal-fired power plants.

Increased local natural gas production in North America and elsewhere, along with expanded international trade, is expected to supply the gas for power generation.

By 2040, we expect that the use of nuclear power will approximately double and renewables will increase by about 150 percent, led by wind and hydroelectric power.

 

Eoin Treacy's view

A link to the full report is posted in the Subscriber's Area.

It’s hard to think of a more benighted sector than coal. Beset on all sides by obstacles such as tougher environmental standards, slower growth in major markets like China, excess supply, too much debt and low natural gas prices in the USA,  steaming coal has fallen back to test the 2013 lows. 

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