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 17 January, 2014

April 17 2014

Commentary by David Fuller

Tom Stevenson: There is a lot more air to come out of the tech bubble

Here is the opening from this interesting article published by The Telegraph:

In the long run the market is a weighing machine but in the short run it counts votes. Eventually, fundamentals will determine the right price but eventually can be a long time coming. In the meantime, being right at the wrong time is frustrating, career-threatening and expensive.

This is what Keynes was getting at when he described investment as a beauty contest with a difference. You are not there to judge the most beautiful contestant but to guess who the other judges will rate. The sensible thing might be to temporarily do what you think makes no sense.

The vote-counting always comes to an end at some point but if the authorities are really determined, they can disable the weighing machine for longer than you expect. And while that’s happening markets can do strange things. Fundamentals can simply go out the window.

Last week we saw the fallout from a landslide vote in favour of tech and bio-tech stocks. The weighing machine has been re-activated, perhaps only for a short while, perhaps for longer. If we’re really back to weighing not counting, however, then I suspect this process has further to go. The scales are a long way off balance yet.

There were some pretty punchy corrections in individual technology stocks last week, with the likes of Amazon, Facebook and Google off more than 4pc on Thursday alone. And it’s been a global correction, with internet stocks under the cosh from Shanghai to Silicon Valley and all points in between. With Nasdaq still trading at around twice the average multiple of earnings in the broader S&P 500, however, I think there’s still plenty of air to come out of this bubble.

David Fuller's view

A degree of caution is still warranted over at least the next few months. What does this mean more specifically?

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April 17 2014

Commentary by David Fuller

BMO Mining Equity Outlook Q2/14

My thanks to a subscriber for this comprehensive report; here is a brief sample from the Preferred Stocks section:

Diversified Miners

BHP Billiton: Remains the preferred big cap name, balance sheet strong with debt reduction in 2014 on track, lowered costs and capex, net cash flow increasing, 4% dividend yield with moderate growth rates.

Rio Tinto: A well articulated and coherent strategy on lowering costs and capex, net cash flow increasing with cash return possible late 2014 into 2015, 4% dividend yield but some worries on iron ore price H2/14.

David Fuller's view

Mining shares are generally contra cyclical and often underperform until the latter stages of bull markets.  Often regarded as ‘dull old economy stocks’, especially when the cycle’s highly fashionable shares are outperforming, miners are often ignored for much of the bull market’s duration and consequently range sideways in large developing base formations.  However, when overvalued and overextended momentum plays finally lose form, as we have seen in recent months, re-ratings are usually underway.

The Nasdaq Biotech Index (weekly & daily) is a good example. 

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April 17 2014

Commentary by David Fuller

The Weekly View: Cross Currents

My thanks to Rod Smyth, Bill Ryder and Ken Liu of RiverFront for their ever-interesting timing letter.  Here is a brief sample:

An argument has been made that investors are reacting to better economic news by worrying that better data brings the Fed closer to raising interest rates and fearing that it will mistakenly raise rates too soon.  We think this makes some sense as an explanation, but while we do  see rates rising in 2015, we believe the Yellen Fed will want to see clear signs of persistent economic strength.  Japan’s weakness is also policy related.  The consumption tax was raised on April 1st and investors are clearly worried about the sustainability of the economic and earnings recovery.  We are currently overweight Japan, but we have a risk management plan in place.

David Fuller's view

This week’s headline, ‘Cross Currents’ is certainly appropriate and several are discussed in this issue.

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April 17 2014

Commentary by David Fuller

US financial showdown with Russia is more dangerous than it looks, for both sides

Here is the opening of this informative column by Ambrose Evans-Pritchard for The Telegraph:

The United States has constructed a financial neutron bomb. For the past 12 years an elite cell at the US Treasury has been sharpening the tools of economic warfare, designing ways to bring almost any country to its knees without firing a shot.

The strategy relies on hegemonic control over the global banking system, buttressed by a network of allies and the reluctant acquiescence of neutral states. Let us call this the Manhattan Project of the early 21st century.

"It is a new kind of war, like a creeping financial insurgency, intended to constrict our enemies' financial lifeblood, unprecedented in its reach and effectiveness," says Juan Zarate, the Treasury and White House official who helped spearhead policy after 9/11.

“The new geo-economic game may be more efficient and subtle than past geopolitical competitions, but it is no less ruthless and destructive,” he writes in his book Treasury's War: the Unleashing of a New Era of Financial Warfare.

Bear this in mind as Washington tightens the noose on Vladimir Putin's Russia, slowly shutting off market access for Russian banks, companies and state bodies with $714bn of dollar debt (Sberbank data).

The stealth weapon is a "scarlet letter", devised under Section 311 of the US Patriot Act. Once a bank is tainted in this way - accused of money-laundering or underwriting terrorist activities, a suitably loose offence - it becomes radioactive, caught in the "boa constrictor's lethal embrace", as Mr Zarate puts it.

David Fuller's view

The markets are gradually beginning to reflect what is going on in this potentially dangerous situation created by Putin.  

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April 17 2014

Commentary by David Fuller

April 17 2014

Commentary by David Fuller

Easter Holidays

Please note – This Friday and next Monday are Easter holidays in the UK so Comment of the Day and the Daily Audio will resume on Tuesday.  The Chart Library will continue to update where markets are open.  

April 17 2014

Commentary by Eoin Treacy

Email of the day on the health of the global middle class

“Does the following analysis in the FT raise questions about a central plank our your argument in favour of a long term secular bull market in Autonomies?” 

Eoin Treacy's view

Thank you for this question which others may also have an interest in. Here is a section:

In an interview, Kaushik Basu, the World Bank’s chief economist, warned that many of those people who had emerged from poverty in recent years remained “very vulnerable” to slipping back. He also said the world economy faced risks, including the possibility that China’s growth could slow even more than it has already, something that would have big repercussions for the developing world.

Even if that risk did not materialise, Mr Basu said, current growth would not be enough to return to the sort of poverty reduction seen in recent decades.

To make up for that, he said, “governments need to do more, much more, in terms of structural reforms in developing countries”.

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April 17 2014

Commentary by Eoin Treacy

Special Report on Ukraine Crisis

Thanks to a subscriber for this balanced report by Pierre Fournier and Angelo Katsoras for National Bank. Here is a section: 

A negotiated settlement on the future of Ukraine will take time to achieve, and uncertainty will continue to affect Russian markets, the ruble and foreign companies operating in Russia. An eventual compromise will require the “military neutrality” (i.e., no membership in NATO) of Ukraine, and economic relations with both the EU and Russia (a status which some have called “Finlandization”). A more decentralized federal system of government in Ukraine, which would empower the regions dominated by ethnic Russians, and perhaps impede the full integration of Ukraine into the EU is also likely. Clearly, a negotiated solution is in the best interests of the West, Russia and Ukraine itself.

An escalation of sanctions and trade embargos would be highly detrimental to Russia and the EU, whose trade relations have increased markedly in the last decade. Europeans, particularly the Germans, have shown little interest in applying sanctions that would hurt their economies and could eventually impact the availability and price of natural gas coming from Russia. Similarly, the Russians - whose economy is weak and vulnerable - will be reluctant to jeopardize natural gas revenues from Europe and their credibility as a reliable long-term supplier. Cutting off supplies to Europe (which gets 33% of its natural gas from Russia) would ultimately prove self-destructive. The loss of Western FDI would also inflict severe damage to the Russian economy.

Russia will, of course, continue to attempt to destabilize Ukraine in the hopes of deterring its former Republic from becoming a close ally of the West. A further military incursion appears unlikely, however. Over the years, Russian actions in Georgia and Moldova have achieved only modest results, and along with the annexation of Crimea, herald the decline of an empire rather than a Russian resurgence. Overall, while the risks of miscalculation should never be underestimated, the path of least resistance remains a negotiated settlement of the crisis.

Eoin Treacy's view

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

The situation in Ukraine has captured a great deal of attention from the media and will of course be of great concern to many Eastern Europeans who remember the era of the Warsaw Pact and who now cherish their national sovereignty.  

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April 17 2014

Commentary by Eoin Treacy

Mining Equity Outlook Q2/14 - Seasonality Buy in June Then Sell in September?

Thanks to a subscriber for this report from BMO which may be of interest. Here is a section on valuations:

BMO Research expects 42% of the 136 stocks in its mining coverage universe to generate free cash flow in 2014E. In 2015E, the percentage is expected to increase to 56% of the entire stock coverage.

BMO Research recommendations tend to reflect a preference for strong free cash flow generation at spot commodity prices.

Iron ore and steel, then aluminum and diversified miners have the strongest FCF for 2014-2015E; coal, diamonds and copper have the weakest using spot.

Price to Net Present Value
BMO Research mining stocks demonstrate a wide range of price to net present value multiples when calculated using a 10% discount rate and spot commodity prices. A number of companies trade at high multiples due to high debt or low project value while others trade at lower multiples reflecting political or execution risk.

Steel, iron ore, diamonds and copper stocks miners have the most attractive valuations using spot prices.

Price to Earnings
BMO Research estimates for 2014E price to earnings at spot prices display a wide range of results. In general, most of the diversified, copper, iron ore, and steel producers tend to cluster around 10-15x EPS, while precious metal producers average around 25-35x EPS.

At spot prices, many coal, uranium, and aluminum producers would not be expected to report meaningful earnings

Enterprise Value to EBITDA
Enterprise Value to EBITDA results appear much more consistent than EPS measures with the distribution of company multiples clustered closer to sector averages.

Diversifieds, iron ore, steel, diamond and larger copper companies tend to trade around 5x 2014E EBITDA at spot prices.

Copper developers, senior gold producers, and silver companies are generally observed at 5-10x EBITDA with relatively few exceptions. Uranium, coal, and PGM stocks appear the most expensive.

Eoin Treacy's view

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

Free cash flow has been the buzz word in the mining sector over the last couple of years as companies have been forced by declining commodity prices to cut back on aggressive expansion programs. The net result has been a tighter supply environment in the industrial metal complex. Nickel has broken out of a six-month base while both zinc and lead are firming from previous areas of support and look primed for additional upside.

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April 17 2014

Commentary by Eoin Treacy

April 17 2014

Commentary by Eoin Treacy

The Chart Seminar and Global Strategy Sessions

Eoin Treacy's view

Following an encouraging start to the year’s speaking engagements I am looking forward to our events later this year. . . 

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

With regard to The Chart Seminar, 2014 marks a number of changes in how we organise the event.  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. .

The remaining dates and venues for 2014 are:
September 22nd & 23rd The Chart Seminar Chicago
November 13th & 14th The Chart Seminar London - Radisson Edwardian Hotel, Leicester Square

If you are interested in any of our remaining venues 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 ¡ê850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

The full rate for the Global Strategy Sessions will be £450 + VAT). The early booking rate of £375 for non-subscribers expires two months ahead of the event start date.

Subscribers are offered a discounted rate of £350. Anyone booking more than one place can also avail of the £350 rate for the second and subsequent delegates.

Delegates who attend both The Chart Seminar and the Global Strategy Session receive a reduced rate of £250 on the Global Strategy Session.

 

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April 17 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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April 17 2014

Commentary by Eoin Treacy

Please note

I will be taking an additional two days off following the Easter break and will return to the office on April 24th.