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August 28 2014

Commentary by David Fuller

Russia Masterminding Ukraine Rebel Counteroffensive, NATO Says

Here is the opening from this Bloomberg report:

Russia has masterminded a counteroffensive by Ukrainian rebels, with well over 1,000 Russian troops operating inside Ukraine to man sophisticated weaponry and advise the separatists, according to NATO.

Rebel forces have opened a second front in southern Ukraine, forcing Ukraine’s army to divert some of its firepower, Brigadier General Nico Tak told reporters at the North Atlantic Treaty Organization’s military headquarters in Mons, Belgium. The second front along the northern edge of the Sea of Azov could also be a prelude to establishing a land corridor with Crimea, the NATO officer said.

As Ukrainian President Petro Poroshenko called an emergency security meeting to defend against what he called a “de facto” Russian incursion, Tak cited evidence of Russian troops being killed in direct combat with Ukraine’s forces. Russia is positioning some 20,000 troops on Ukraine’s border, rotating them to keep them battle-ready, he said.

Tak said the fast-moving military developments are part of a Russian strategy to prevent a defeat of separatist forces, a response to military advances made by Ukrainian troops in the eastern strongholds of Donetsk and Luhansk beginning in July. Russia has implemented methods of coercion and subversion in the region in addition to conventional warfare methods, he said.

Russia’s “aim is to freeze this conflict for a long period of time,” Tak said. “It’s likely that the situation will end in a stalemate. The foothold that's been created will be expanded and secured so that the separatists will not suffer a defeat.”

NATO released satellite images today that it says show Russian forces engaged in military operations in Ukraine.

Tak said NATO has “detected large quantities of advanced weapons, including air defense systems, artillery, tanks, and armored personnel carriers being transferred to separatist forces in eastern Ukraine.”

Russia has repeatedly denied allegations that it’s involved in the fighting.

The NATO general, who referred to Russia’s presence as an incursion rather than invasion, said an opening of a second front is “extremely worrying” for Ukraine, placing government forces in a “dire situation” and raising the risk that military supply lines could be cut off.

Russia has brought T-72 tanks into the battle zone, which can inflict more damage than the T-64 tanks used previously, Tak said. A second planned humanitarian aid convoy may be used to resupply Russian troops with items such as food and water.

David Fuller's view

While we may wish otherwise, a point repeated on Fuller Treacy Money is that this problem on the Ukraine border is not going to go away quickly.  The tragedy for all of Europe and not least Russians is that their country could be a positive and entrepreneurial success story under a different regime.  Instead, under Putin’s authoritarian, corrupt and incompetent rule Russia has a failing economy, reflected by its minimal GDP growth and sagging stock market.  

Putin now seeks economic growth and influence through a form of Soviet-lite, by attempting to take over several other countries which were formerly part of the USSR, but are not currently members of NATO or the EU.  To start, Putin needs and obviously wants not just Crimea but all of Ukraine.  Moreover, Russian citizens who approve of Putin expect him to achieve this. 

It will not be easy.  He has the military power but is opposed by most Ukrainians and the entire free world.  These countries are unlikely to send troops, as we have already heard, but they can increase sanctions against Russia.  They can also bolster NATO and support Ukraine with aid, including weaponry. 

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August 28 2014

Commentary by David Fuller

Putin Has Changed the Game in Ukraine

Here is a latter section of this just released column by Leonid Bershidsky for Bloomberg:

As a Russian, I get a sinking feeling when I think about my country winning this war. It is being fought against a peaceful, Russian-speaking people whose only transgression is a desire to be part of the European Union rather than a Russian client state. They even managed to topple a corrupt dictatorship -- a task in which the Russian people have failed. A military victory against Ukraine would bring Russia no glory and cost many lives.

"We can stop this," billionaire and former political prisoner Mikhail Khodorkovsky said today. "It's enough to just take to the streets and threaten a strike. The authorities will deflate immediately, they are cowardly." That may be true, but it's not likely to happen, because most people in Russia believe Putin's propaganda. Unless the death toll mounts so that everyone knows a dead or injured soldier, this is not a war that protests inside Russia are likely to stop.

Putin's decision to escalate signals the failure of Western sanctions. If anything, the sanctions have strengthened Putin's resolve to get his way and consolidated his popularity among conservative, nationalist voters, expanding his support base at home. If Putin ever cared about Western reactions, he no longer does. His continuing denials of Russian involvement are a mocking ritual, a sign of unwillingness to negotiate rather than a nod to international pressure.

"All these sanctions were like poultices for a dead man," a distraught Yatsenyuk said today. "They did not help." He called for the West to freeze Russia's assets and financial transactions to force it to withdraw. The West, however, is unlikely to go that far. The sanctions have already contributed to economic contraction in Germany, and Europe cannot afford much more pain. Military aid is not an option: There is no country in the world where voters would back a war with Russia.

The Western world will probably wiggle out of its moral dilemma by blaming Poroshenko for being deaf to Russia's legitimate concerns about preserving Ukraine's status as a buffer state. No matter how unfair that sounds, Ukraine is now faced with the necessity of making concessions to Putin. It will take some time to sink in, but help of the kind Kiev really needs is probably not coming. Unless Poroshenko finds it in himself to bargain, eastern Ukraine may well end up a Russian-controlled no man's land like Abkhazia, South Ossetia and Transnistria. There is no face-saving solution for anyone anymore.

David Fuller's view

These are interesting comments by Russians who live outside of the country and are therefore free to speak.  However, it is way too soon to talk about the “failure of Western sanctions.”  They are not a short-term measure and Putin’s response is predictable.  He is gambling against the West with a weaker financial hand, namely a $2bn economy compared to the combined $40bn economies of all the countries participating in sanctions against Russia, including Australia and Japan. 

I think and sincerely hope that Bershidsky is way too pessimistic in his concluding paragraph above, notably the opening sentence:

“The Western world will probably wiggle out of its moral dilemma by blaming Poroshenko for being deaf to Russia's legitimate concerns about preserving Ukraine's status as a buffer state.”

I know some people feel that Ukraine should not be supported by the West.  However, that would be a huge mistake in my opinion, traumatising new allies in the region and emboldening Putin to increase aggressions against other countries on its borders.  It would also increase global political tensions by signalling the West’s timidity to other countries elsewhere.   

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August 28 2014

Commentary by David Fuller

Email of the day

In response to Wednesday’s Email of the day 2:

“It makes no sense to me why anyone would ignore the service. I myself lived through the bugs just fine. The charts are important but not as important as the Daily Comment & Audio. Capturing perspective on a daily basis is one of the hardest things to do in this world which is why we find so many analysts on the wrong side of trades stay wrong. Considering the very small investment in time the service is a Big Bang for the buck.”

David Fuller's view

Thank you so much for this thoughtful email, which is especially gratifying to receive from an experienced investor.  

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August 28 2014

Commentary by David Fuller

Deepak Lalwani: Government officials are sending positive signals on the economy

My thanks to the author for his informative India Report.  Here is the opening:

Momentum seems to be building up after the longest period of sub-5% growth in over 25 years. Growth rates of less than 5% p.a. for the last 2 years have been too low to create new jobs for the large numbers entering India's labour force. However, recent economic data suggest a turnaround may be occurring. Industrial production is in its best spell since last September, infrastructure output growth is at a 9-month high and manufacturing activity is growing at its fastest for 17 months. Car sales, a proxy for consumer demand, are also up. According to Finance Secretary Arvind Mayaram, growth is now on a recovery path to reach an annual rate of c5.8% by year-end March 2015, up from 4.7% in the previous (fiscal) year. He indicated that "green shoots of recovery" are beginning to appear in the economy. We feel the momentum will increase once interest rates are cut.

David Fuller's view

The Reserve Bank of India needs to curb inflation so it may take longer for interest rates to decline, given food inflation partly attributable to the weak monsoon.  Meanwhile, investors appear to be taking a longer-term view of India’s economic potential and they are encouraged by the recent improvement in corporate profits.

(See also my comments on India posted on Wednesday.)

The India Report is posted in the Subscriber's Area.

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August 28 2014

Commentary by David Fuller

August 28 2014

Commentary by David Fuller

The Markets Now

8th September 2014, at the East India Club

David Fuller's view

I look forward to seeing more subscribers and friends at this forthcoming Markets Now event, and please do not hesitate to bring anyone along who you think might also enjoy the evening.  We have another interesting guest speaker - Jonathan Neill, CIO of FPP Asset Management, specialising in Emerging Markets. 

Iain Little and I enjoy these informal gatherings and discussions, not least in the Club’s bar following the three presentations. If you have not previously attended a Markets Now event, I can assure you that there is never any of the marketing hype that one can encounter at too many financial seminars.  Instead, these are an extension of small Markets Now discussions that I held in my office some years ago.  Today, they are in a much nicer venue, with more speakers, experienced participants and often lively, interactive presentations.   

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August 28 2014

Commentary by Eoin Treacy

BOK Cut Room Seen in Inflation-Linked Debt Slump

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

So-called linkers due June 2023 lost 1.8 percent this month, data compiled by Bloomberg show. Notes maturing in 2021 indicate inflation of 1.56 percent over their lifetime, less than the Bank of Korea’s target of 2.5 percent to 3.5 percent through 2015. Governor Lee Ju Yeol lowered the benchmark rate to 2.25 percent from 2.5 percent on Aug. 14 and said price pressures are “not high.”

The first reduction in borrowing costs since May 2013 came after the BOK lowered its living cost estimates and Finance Minister Choi Kyung Hwan unveiled an 11.7 trillion won ($11.5 billion) spending plan to boost the slowest growth in more than a year. While most analysts predict Lee will keep interest rates unchanged, Samsung Asset Management Co. and Eastspring Asset Management Co. see room for a further cut.

“Another rate cut within the year is possible as one isn’t enough to support the government’s growth push,” Jack Kim, who helps manage 700 billion won of fixed-income assets for Eastspring in Seoul, including Korean linkers, said in an Aug.26 phone interview. “Low inflation should make it feasible.”

 

Eoin Treacy's view

Falling interest rates, low inflation, a government flush with cash and keen to promote growth results in South Korea being an interesting prospect right now. The strength of the Won throughout the last year, especially during a time when currency market volatility has been an issue for a number of neighbouring countries is an additional positive consideration from the perspective of foreign investors. 

South Korea’s stable of highly successful world class companies is a logical place to start one’s investigation of the domestic stock market but neither the major electronics companies, at 22% of the Index, nor the Korean automakers are responsible for the recent return to outperformance of the Kospi. 

 

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August 28 2014

Commentary by Eoin Treacy

Zinc, nickel prices to move dramatically higher

This article by Dorothy Kosich for Mineweb may be of interest to subscribers. Here is a section: 

“Firmer potash and sulphur prices and the beginning of a recovery in uranium also contributed to the gain,” she noted. “Spot uranium prices have increased to US$31 per pound in late August alongside stepped-up Chinese buying, after bottoming at a mere US$28 in June.

Meanwhile, Mohr observed that the base metals rally in July was led by zinc with prices remaining firm at US$1.07 in late August, which is normally a time of summer doldrums. “Commodity funds and investors have bid up zinc prices, anticipating tightening supplies over the next three-four years—with mine supplies not keeping the pace with demand growth,” she said.

 

Eoin Treacy's view

The sharp pullbacks currently underway among the major iron-ore miners tend to obscure the fact that the Continuous Commodity Index found support this week in the region of the psychological 500 area. Additional upside follow through next week would suggest at least a reversionary rally back up towards the MA is underway. 

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August 28 2014

Commentary by Eoin Treacy

Pretium Resources Inc.

Thanks to a subscriber for this informative report from GMP following a tour of the mine attended by a number of other analysts. Here is a section:   

An asset like Brucejack is a rarity today – high-grade, manageable capex and in a good location. We believe this will make Pretium of interest to existing mid/large-cap producers. The company also, however, seems to be preparing the way to build the project on its own. Financing would likely include a range of sources including equity, debt, and metal pre-sales and/or streams. We expect this to become clearer by year-end or the end of 1Q15 at the latest.

Where we HAVE changed our opinion is that we are now more comfortable with the geostatistically based approach for resource estimation. This comes from our direct observations of coarse electrum as streaks in narrow veinlets that are not part of the throughgoing structures which we focused on last year. Those structures ARE there and we expect that a large part of the gold to be mined will come from them, and that ultimately a mine plan will encompass both selective mining of such zones AND bulk mining of the type envisaged in the DFS. C$12.50 target price represents 0.66x our NAV10% of $16.97 at $1,350 gold. 

 

Eoin Treacy's view

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

Photos such as that below, kindly forwarded by the same subscriber,  of heavy mineralisation in core samples within a wider high grade gold deposit are what miners’ dream of but it remains an expensive exercise to develop these resources. It will be two years before the mine reaches commercial operation according the above report.

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August 28 2014

Commentary by Eoin Treacy

August 28 2014

Commentary by Eoin Treacy

The Chart Seminar

Eoin Treacy's view

I am delighted to announce that we now have our venues secured for the Chart Seminar in both Chicago and London later this year.

September 29th and 30th will find me presenting The Chart Seminar at The University Club of Chicago. Established in 1887 by university graduates who wanted a special place where they could enjoy intellectual pursuits, the University Club of Chicago will provide the perfect collegiate atmosphere for The Chart Seminar.

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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August 28 2014

Commentary by Eoin Treacy

52nd Annual Contrary Opinion Forum

Eoin Treacy's view

It has been my pleasure to accept an invitation to return to the Basin Harbor Club in Vermont to speak at the 52nd Annual Contrary Opinion Forum hosted by Fraser Asset Management between October 1st and 3rd. The Forum’s convivial atmosphere is something Mrs.Treacy and I look forward to not least because it gives us an opportunity to meet so many subscribers.  

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