David Fuller and Eoin Treacy's Free (Abbreviated)
Comment of the Day

The more detailed Subscriber's Comment of the Day becomes available for public access after 4 months.

Click HERE to see the most recent free Subscriber's Comment from 18 July, 2014

October 20 2014

Commentary by David Fuller

The Best Thing the State Can Do For Growth Is To Go Away

Roger Bootle for The Telegraph, also available in PDF format:

I have never received such a large e-bag in response to one of my articles as I did after last week’s piece on the moral case for low taxation. And I am delighted to say that it was overwhelmingly favourable. So I have decided to follow it with my take on the economic arguments for low taxation.

Taxes drive a wedge between the market value of an activity and the amount received by the producers of it. When taxes are imposed on the returns from work, the risk is that less labour will be supplied. At the margin, as and when they can, people will choose untaxed leisure over taxed work. Some may even choose a life on benefits.

The tax wedge may also substantially affect the use of leisure time. Doubtless there are some people who actually enjoy DIY or washing the car, but for most surely the choice to “do it yourself” is about cost. They could work a bit more to earn more money and use the money to employ a builder/ decorator/car washer but if they do this they will pay tax on their extra income and the workman will pay tax on the money they pay him. By contrast, if they decide to do these jobs themselves no extra tax is due. This represents a gross distortion in the economy. In a world of low tax on incomes, a host of activities which people currently perform themselves outside the money nexus would instead be bought in from outside professionals, thereby freeing up their customers’ time for real leisure or more work.

But the efficiency of the tax system has to be viewed together with the economics of public spending. There are some forms of expenditure which can only reasonably be undertaken at the community level. These are the so-called public goods, of which defence is the most obvious, but they also include law and order and the provision of various sorts of infrastructure. Since these public goods are essential, some loss of economic efficiency from the imposition of the taxes necessary to fund them becomes acceptable.

David Fuller's view

Most readers will be familiar with these arguments but they are worth reviewing ahead of the debate and discussions before your next important election.  Moreover, Roger Bootle knows far more about this subject than most politicians.    

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October 20 2014

Commentary by David Fuller

Email of the day 1

On stock markets: 

“Dear David and Eoin hope you are fine and have a nice weekend i have three subjects i would like you both to have a look at. first and most important is the Dow Industrial index. i feel its need more attention because of its leading role in the stock market. The heavyweights decide really the direction of this index, not Intel or Pfizer. they could correct 20 pct or more but the influence on the index would be small. if Visa or 3m or IBM or GS would correct 20 pct we would notice that. if you use the overlay in the Chart library i noticed something interesting. some shares like Visa/3M//Caterpillar and IBM move in the same direction as the Dow. if you look at Exxon and Chevron they corrected all ready a lot even when the Dow reached the highest point in september so the august rally till mid sept was caused by the other shares . then all shares went down till last week. if Exxon and Chevron would rally from here based on maybe higher brent/wti prices or because like Eoin writes about their low p/e and high dividend yields this market could go higher then expected. in your friday audio you are looking or expecting a lower high and that sounds logical to me. a typical technical rally but the point i am trying to make is we are to my opinion in a extremely dangerous market where high leverage and HFT are causing extreme swings and that scares the ... out of me. the analysis of the heavyweights in the Dow could give us maybe more insight in the direction of the Dow. would appreciate your thoughts. if Ebola is contained and no other black swans appear on the horizon" we could even see a new high for the Dow. so maybe the low we saw this week was just a shot before the bow and we will see the endgame in a few weeks or months time. or will this market 10-20 pct or more correction be here this coming week?. this is the most dangerous stock market since 2008" was an article i read written by Michael Sincere . this dangerous market needs your full attention and focus i think. the long term picture has to be on the background to my opinion. i would also like your opinion on the European banks on their valuations and prospects and technical situation. i don,t like them anyway not their arrogance and high salaries and high bonuses and culture ( sorry for that) the last thing on my mind is how strong are even autonomies like Unilever/Nestle and PG. i notice weakness in companies like Ahold/ Carrefour or Wall-mart. are their margins despite lower raw material costs shrinking because or lower margins caused by Western consumers who all have less to spend? also L'oreal for instance is heading lower despite the growth prospects in EM countries. are they like the oil majors the next group to decline? dear David i enjoy and appreciate the Fuller Treacy Money Service for the excellent service and your knowledge and overview all ready for many years best regards, and sorry for this very long email and so many questions.”

David Fuller's view

Many thanks for your important questions, likely to be of interest to many subscribers, and also for your thoughtful greetings.  I had a restful weekend with the family, which was most welcome after last week’s market dramas, and I believe Eoin did as well. 

I feel subscribers were forewarned in recent weeks of this volatility and corrective phase, although that does not necessarily make it any easier to deal with when it occurs.  Volatile gyrations are stressful for everyone, and I attribute them mainly to the high levels of leverage (margin trading) on Wall Street, which this service has documented with the help of Doug Short. 

Hedge funds and investment banks will increase their use of leverage when the market is trending.  Moreover, this short to medium-term influence actually increases the consistency and persistence of a trend, at least for a while.  Eventually and inevitably, something changes the self-feeding trend.  It could become overbought and clearly overextended relative to its 200-day moving average, and it could be near psychological resistance levels.  A trend can also lose its consistency because investors become concerned about GDP growth and corporate profits, as a monetary policy such as QE is ending.  They might be unnerved by the appearance of black swans such as Isil, Russia’s aggression leading to sanctions, or Ebola.  In fact, all of these factors have been apparent recently, and they have weighed on sentiment, eventually leading to the churning chaos that we saw last week.   

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October 20 2014

Commentary by David Fuller

Email of the day 2

On “The Oil Card”:

“Hi David, In the 2008 book "The Oil Card" by James Norman the author postulated that that the oil pricing and availability have a long history of being employed as economic weapons by the United States. If this is the case then the price could still have plenty of downside as the effect on Russian, being a major oil exporter, is probably greater than the sanctions being applied.”

David Fuller's view

I have not read the book, but thanks for mentioning it. 

However, from what you say I believe the author is correct, except that the US lost that power for a number of years, when conventional production declined and before the fracking of shale oil and gas became possible on a commercial basis.  For that we can be grateful to the genius and persistence of George P Mitchell, the ‘Father of Fracking’, who I have mentioned before.

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October 20 2014

Commentary by David Fuller

Modi State Election Wins Pave Way for India Overhaul

Here is the opening of this informative article from Bloomberg:

It’s been a good weekend for India’s Prime Minister Narendra Modi.

Two days ago he took his biggest step yet toward boosting the economy with a shift to more market-based energy pricing. Then yesterday his Bharatiya Janata Party came first in two state elections, building on his landslide victory in May.

Modi now has a stronger hand to push ahead with tougher steps to overhaul Asia’s third-biggest economy. Those include passing a goods-and-services tax, further opening up to foreign investment and making subsidies for fertilizer, cooking gas and food more targeted toward the poor.

“The decision to scrap fuel subsidies and raise gas prices is a potential game-changer in the realm of investor perceptions of Mr. Modi’s commitment to undertake major fiscal and structural reforms,” Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy, said by e-mail. “The stronger the BJP is at the state level, the more scope there is for Mr. Modi to undertake meaningful reforms. Now the stars seem to be aligning for Mr. Modi.”

Thus the victories could make it easier to push through a six-year-old bill proposing to allow foreign investors ownership of as much as 49 percent of a local insurance company and also reach agreements to replace more than a dozen types of tax that increase incentives for corruption. Passing the tax law would require votes in both houses of parliament, plus the support of 15 of the 29 states to amend the constitution.

Formation of a single internal market offers the $1.9 trillion economy a significant boost, according to the National Council of Applied Economic Research in New Delhi.

“The prospects are very good of Modi being able to carry out other tough reforms,”Akshay Mathur, head of research at Mumbai-based Gateway House, said by phone. “GST requires a certain consensus and given his leadership and the kind of euphoria over his victory, chances are that he will push the GST through.”

The optimism follows on the heels of Modi’s Oct. 18 move to scrap controls on diesel prices and increase natural gas tariffs. These were his biggest steps toward curbing subsidies that have contributed to one of Asia’s widest budget deficits.

David Fuller's view

For a country previously considered to be ungovernable, two elections have created one of the world’s strongest democracies, led by an economically savvy Prime Minister who inspires confidence, not least among ex-pat Indians living all over the world.

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October 20 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.

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October 20 2014

Commentary by Eoin Treacy

ECB Said to Start Purchase Program With French, Spanish Debt

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

An ECB spokesman confirmed that purchases under the bank’s third covered-bond program started today. Officials at SocGen and BNP weren’t immediately available to comment on the transactions.

The 250-year-old covered bond market helps fund Europe’s mortgage industry and the notes have historically been attractive to investors because they’re guaranteed by the issuer and backed by a pool of assets. Europe’s market for covered bonds shrank for the first time in at least a decade last year and will decline further in 2014 and 2015, according to the European Covered Bond Council.

Covered-bond purchases are the latest addition to the ECB’s medley of unconventional tools that also includes targeted long- term loans to banks and a negative deposit rate. The central bank will also start buying asset-backed securities before the end of the year.

The ECB is probably making its first purchases from the existing stock of covered securities because there are no new issues currently being marketed that meet its criteria, said Michael Spies, a covered bond strategist at Citigroup Inc. in Frankfurt, who spoke before the purchases took place today.

“The pipeline for primary market deals is not really full and those issuers which plan to tap the market in the nearer term are non-euro area banks,” said Spies.

This will be the third time the ECB has created a program to buy covered bonds, with previous purchases starting in July 2009 and November 2011. The bank’s first foray into the market was designed to improve financing after the collapse of Lehman Brothers Holdings Inc. and the second was to support lenders during Europe’s sovereign debt crisis.

 

Eoin Treacy's view

The ECB’s purchases of asset backed/covered bonds represent an additional foray into quantitative easing. This should help counteract the deflationary impact of its shrinking balance sheet over the last two years provided the policy is sustained. Since the market is illiquid, it is only a matter of time before enterprising origination desks within the Eurozone’s financial sector securitise additional loans so they can be sold to the ECB. This should also help to encourage lending to SMEs since the ECB will provide a ready market for the sale of loans.  Easing of monetary policy by the ECB should act as a medium-term tailwind for asset prices

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October 20 2014

Commentary by Eoin Treacy

Joko Widodo sworn in as Indonesia's president

This article from the Los Angeles Times may be of interest to subscribers. Here is a section: 

But Widodo’s reform efforts -- including plans to reduce a popular fuel subsidy that eats up around one-fifth of the national budget -- are likely to face opposition in a hostile parliament where the opposition, led by his election rival Subianto, holds 63% of seats. Subianto refused to accept his election defeat and has threatened to block Widodo’s agenda.

“While he has attracted plenty of plaudits for his clean style of government, he is untested at the national level and could struggle to push through critical reforms,” reported Capital Economic, a London research group.

Last month, Subianto won a vote to end Indonesia’s system of direct elections for local officials, which helped Widodo get his start in politics in Solo nine years ago. The change has raised concerns about the future of democracy in a country usually lauded as a successful example of transition from dictatorship.

Analysts say Widodo may have to cut deals with the opposition and possibly offer Cabinet positions to members of Subianto’s coalition. That could disappoint some supporters but also weaken resistance to his reforms, said professor Tim Lindsey, who directs the Center for Indonesian Law, Islam and Society at the University of Melbourne in Australia.

“Jokowi is a canny operator, and has shown the ability to broker deals while leading minority governments as mayor of Solo and as governor of Jakarta,” Lindsey said.

Widodo visited Subianto last week, their first meeting since the election, and mentioned him by name during his inauguration address. Subianto stood and gave Widodo a military salute -- a sign, according to experts, that he was offering his rival at least temporary support.

 

Eoin Treacy's view

The election of a non-elitist to power in Indonesia is a major achievement and reflects the power of a democracy to deliver on improving standards of governance when needs must. Widodo will need skill and luck in order to push through his reform agenda and with an opposition led parliament this will not be easy. Indonesia became a net oil importer by 2004 yet the hefty oil subsidy it pays to keep the domestic price of fuel low is still intact. Any progress that can be made in reducing this burden will be seen as a win and would free up capital for more productive uses. 

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October 20 2014

Commentary by Eoin Treacy

Email of the day on yields and P/Es for Autonomies and Dividend Aristocrats

“Fantastic commentary and impeccable timing as always. Thank you both so much.

“I have been looking through the Autonomies and Aristocrats following your various commentaries. I wonder if it is possible (and easy) to provide us with an updated list and table on their current EY and DY, possibly including ranking and comparison over say 3 years, i.e. price and EY and DY for each period. Obviously price action is paramount but it would be good to be able to assess possible opportunities for topping up in the market and possible best fade fundamental returns. Thanks once again for a superb service.”

 

Eoin Treacy's view

Thank you for your kind words and I agree that this represents an interesting time to monitor the Autonomies and Dividend Aristocrats. When I reviewed the Autonomies last week approximately half were in various stages of mean reversion while the uptrend consistency of the other half had deteriorated, some markedly so. 

I’ve created sections in the International Equity Library for the US, Canadian, European and Asian Dividend Aristocrats as well as US Dividend Champions and Contenders. Links to all of these lists can be found at the top of the left column here. 

A table with Earnings Yield, 12-month Gross Dividend Yield, Historic P/E and Estimated P/E for next year for the Autonomies and the various S&P Dividend Aristocrats indices which is posted in the Subscriber's Area.

 

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October 20 2014

Commentary by Eoin Treacy

Japan Stocks Surge Most Since June 2013 on GPIF Buying Optimism

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

Japan’s $1.2 trillion Government Pension Investment Fund will increase its allocation target for local shares to about 25 percent from 12 percent, the Nikkei newspaper reported without attribution. GPIF will also boost its holdings of foreign bonds and stocks to about a combined 30 percent from 23 percent, while reducing domestic debt to the 40 percent level from 60 percent, the Nikkei said Oct. 18

“Twenty-five percent is more than the market expected,” said Kenji Shiomura, a Tokyo-based senior strategist at Daiwa Securities Group Inc., Japan’s second-largest brokerage. “They probably can’t buy all the Japanese stocks they need to get to 25 percent by the time they announce it. However, it wouldn’t be a surprise if they’ve already started moving bit-by-bit.” 

 

Eoin Treacy's view

The Dollar unwound much of its short-term overbought condition from early this month and found support last week in the region of the January highs. Some additional steadying in this area is a possibility but a sustained move below the 200-day MA, currently near ¥105 would be required to question medium-term Dollar dominance. 

 

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October 20 2014

Commentary by Eoin Treacy

The Chart Seminar

Eoin Treacy's view

I am delighted to announce that we have a new venue for the Chart Seminar in London.

November 13th and 14th brings me to London and the rarefied East India Club. Founded in the middle of the 19th century, its original members were 'the servants of the East India Company and Commissioned Officers of Her Majesty's Army and Navy' returning from far flung lands.  As our London seminar always attracts delegates from around the world, it seems a fitting venue to conduct The Chart Seminar.

To book your place, please contact Sarah Barnes at sarah@fullertreacymoney.com

The full rate for The Chart Seminar is £950 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires two months ahead of the event start date. Subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

Private Seminars and Partnering Opportunities
We are also available to conduct private seminars and occasionally agree to speaking engagements at investment conferences and professional societies. 

2014 marks a number of changes in how we organise the Chart Seminar.  In order to facilitate more venues we are open to partnering with other groups to market the event. If your organisation would like to arrange a seminar either internally or for your clients please do not hesitate to contact us.

 

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