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 31 July, 2014

October 31 2014

Commentary by David Fuller

Kuroda Surprises With Stimulus Boost as Japan Struggles

Here is the opening on this bold move, reported by Bloomberg:

Bank of Japan Governor Haruhiko Kuroda led a divided board to expand what was already an unprecedentedly large monetary-stimulus program, boosting stocks and sending the yen tumbling.

Kuroda, 70, and four of his eight fellow board members voted to raise the BOJ’s annual target for enlarging the monetary base to 80 trillion yen ($724 billion), up from 60 to 70 trillion yen, the central bank said. An increase was foreseen by just three of 32 analysts surveyed by Bloomberg News. The BOJ also cut its forecasts for inflation and growth in Japan, the world’s third-biggest economy.

Facing projections for failure to reach the BOJ’s 2 percent inflation target in about two years, and with the pressure from a higher sales tax, enlarging the stimulus at some point had been anticipated by analysts for months. Kuroda opted not to telegraph his intentions in recent weeks, leaving today’s move a surprise -- sending the Nikkei 225 Stock Average to the highest level since 2007.

“It was great timing for Kuroda,” said Takeshi Minami, Tokyo-based chief economist at Norinchukin Research Institute, one of two who correctly forecast today’s easing. Minami noted that it follows the Federal Reserve’s ending of quantitative easing, helping highlight the differing paths for the U.S. and Japan, which has the heaviest debt burden of any country. The yen sank 2.1 percent against the dollar to 111.55 as of 6:02 p.m. in Tokyo.

Today’s decision comes almost 19 months after Kuroda unleashed his initial asset-purchase plan, with the intention of doubling the monetary base. That move similarly drove up stocks and undercut the yen. Since then, a more competitive exchange rate has triggered higher corporate earnings, and asset-price gains have expanded Japanese households’ net worth.

David Fuller's view

Inevitably, some commentators will carp about this move.  Sure, there are risks with almost any policy but I credit Kuroda and Japan with a very bold move.  Japan has endured over two decades of disinflation and deflation, and the latter was certainly doing far more to erode rather than help Japan’s economy.  Japan’s stock market performance since the bubble burst in yearend 1989 painted the picture for all to see.  

This item continues in the Subscriber’s Area.

This section continues in the Subscriber's Area. Back to top
October 31 2014

Commentary by David Fuller

Abenomics Revived as BOJ, Pension Fund Spur Global Stock Rally

Here is the opening on this bold, surprise move, reported by Bloomberg:

Japan’s central bank and its $1.1 trillion pension fund landed a pair of blows for Abenomics today, with policy changes pushing Tokyo stocks to the biggest gain in a year and igniting a worldwide rally.

The Government Pension Investment Fund will put half its holdings in local and foreign stocks, more than double its previous target, officials said today. Just hours earlier, the Bank of Japan unexpectedly added to what was already unprecedented monetary easing. The Topix index soared 4.3 percent, while Standard & Poor’s 500 Index futures rallied 1.2 percent as of 10:23 a.m. in London and the yen slumped to the weakest since January 2008 against the dollar.

The overseers of Japan’s pension savings and central bank emerged again as allies to both global equity investors and Prime Minister Shinzo Abe as he seeks to spur an economic revival that would boost stocks and weaken the currency. The Topix slid 1.8 percent this year through yesterday, before erasing that loss today, as investors weighed the progress of Abe’s growth policies after the economy was dented by a sales-tax increase. The equity gauge jumped 51 percent in 2013.

“Investors, especially ones outside Japan, are using stocks as a measure to gauge the seriousness of Abenomics,” said Koichi Kurose, Tokyo-based chief market strategist at Resona Bank Ltd., before today’s announcement. “The understanding is that stocks rising equals legitimate growth strategies.”

The pension fund set allocation targets of 25 percent each for Japanese and overseas equities, up from 12 percent each, it said at a briefing today in Tokyo. GPIF will reduce domestic bonds to 35 percent of assets from 60 percent. The new figures don’t include an allocation to short-term assets, while the previous targets did. Analysts surveyed by Bloomberg this month had anticipated levels of 24 percent for local stocks, 15 percent for global shares and 40 percent for Japanese bonds, taking short-term holdings into account.

David Fuller's view

Borrowing from the Fed’s success in boosting Wall Street and improving sentiment, Japan’s Government Pension Investment Fund will put many more $billions into not only its own stock market but also global equities.  Before that happens, this announcement has already squeezed short sellers, while encouraging both Japanese and international investors to increase their holdings of equities.  The bottom line: monetary policy remains exceptionally accommodative.   

This section continues in the Subscriber's Area. Back to top
October 31 2014

Commentary by David Fuller

QE Central Bankers Deserve a Medal for Saving Society

Here is the opening from this informative and also controversial column by Ambrose Evans-Pritchard for The Telegraph:

The final word on quantitative easing will have to wait for historians. As the US Federal Reserve winds down QE3 we can at least conclude that the experiment was a huge success for those countries that acted quickly and with decisive force.

Yet that is not the ultimate test. The sophisticated critique - to be distinguished from hyperinflation warnings and "hard money" bluster - is that QE contaminated the rest of the world in complicated ways and may have stored up a greater crisis for the future.

What we can conclude is that extreme QE enabled the US to weather the most drastic fiscal tightening since demobilisation after the Korean War, without falling back into recession. Much the same was true for Britain.

The Fed's $3.7 trillion of bond purchases did not drive up debt ratios, as often claimed. It reduced them.

Flow of Funds data show that total non-financial debt has dropped from a peak near 260pc of GDP in 2009 and since stabilised at 237pc of GDP. Public debt did jump, matched by falls in household and corporate debt ratios.

On cue, federal debt is now falling as well. The deficit is down to 2.8pc of GDP, low enough to erode the debt ratio in a growing economy through the magic of the denominator effect.

This is not a "pure" economic experiment, of course. There are other variables: the shale boom and the manufacturing renaissance in chemicals and plastics that it has spawned; quick action by the US authorities to clean up the banking system. Yet it is indicative.

By contrast, the eurozone carried out its fiscal austerity without monetary stimulus to cushion the shock, lurching from crisis to crisis as a result. The region has yet to reclaim it former levels of output, a worse outcome than during the Great Depression by a wide margin. Not even the 1840s were this bad. You have to go back to the Thirty Years War in the 17th century to trump the economic devastation of EMU.

The eurozone's public debt ratios have rocketed, yet unlike America there has no been no drop in private debt to compensate.

David Fuller's view

This is an accurate description, in my opinion, and Germany deserves part of the blame (or credit, if you will) for restraining the ECB’s hand under Mario Draghi.  However, please read on because Ambrose Evans-Pritchard explains the many risks that the global economy still faces.  There are always risks, of course, unless one believes in a Panglossian economy.  Nevertheless, AEP’s summary is comprehensive and appropriate for Halloween.

This item continues in the Subscribers’ Area, where a PDF of the above article is also posted for your convenience.

This section continues in the Subscriber's Area. Back to top
October 31 2014

Commentary by David Fuller

Interesting charts of the day

Theories abound but price action is a reality check.

David Fuller's view

Hong Kong’s Index remains exceptionally cheap with a p/e of 10.40 and dividend yield of 3.75%, according to Bloomberg, and is recovering from the political demonstrations against Chinese rule.  A close beneath 22,500 would be required to offset the outlook for further gains.  China’s Shanghai A-Share Index is also cheap at a p/e of 11.45 and yield of 2.78%.  A close beneath 2380 would be needed to delay higher scope over the lengthy medium term.

This item continues in the Subscriber’s Area.

This section continues in the Subscriber's Area. Back to top
October 31 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.  

This section continues in the Subscriber's Area. Back to top
October 31 2014

Commentary by Eoin Treacy

Gold Prices Seen Falling to $1,000 for SocGen on Oil Drop

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

Bullion erased its gains for the year yesterday after the government reported the U.S. grew at a faster pace than analysts forecast in the third quarter. A stronger economy is validating optimism that prompted the Federal Reserve to say this week that it will stop buying debt, further diminishing the appeal of precious metals as an inflation hedge. Gold fell today after the Bank of Japan expanded stimulus, spurring gains in the dollar.

Crude oil tumbled 23 percent since the end of June through yesterday, touching a two-year low this week. The fuel’s slump into a bear market is “going to have an effect on the cost of production of other commodities, which means downward pressure on costs, which is a good thing,” Haigh said. “The U.S. growth story is the other headwind” for bullion, he said.

Eoin Treacy's view

Investment demand for gold, at least in the West, as measured by total ETF holdings remains on a downward trajectory. This represents a headwind, not least as ETF holdings were such an important source of demand during gold’s advance. 

This section continues in the Subscriber's Area. Back to top
October 31 2014

Commentary by Eoin Treacy

Email of the day on Norwegian oil service shares

Interestingly, oil services was a hot topic in one of today’s financial newspapers in Norway. A former oil service analyst (seven times oil service analyst of the year in Norway), now asset manager, sold his last oil service stocks a year ago. He believe the trouble for oil service stocks is far from over. Big fundamental problems will take many years to be solved. He says we might see short term rallies but prices will come further down and he won’t consider buying for the next five years. Current oil price drop, and downward pressure on costs from technological development and increased efficiency of shale production are cited as reasons.

Skagen (asset manager) says they are not looking to buy at these levels…

So it may not be over yet…

Eoin Treacy's view

Thank you for this additional intelligence which highlights how well understood the bearish case is. Considering the depth of the declines posted to date, this is to be expected and it is true that the issues affecting oil and gas services in a declining oil price environment are non-trivial.

 

This section continues in the Subscriber's Area. Back to top
October 31 2014

Commentary by Eoin Treacy

Email of the day on the Bank of England Balance Sheet

October 31 2014

Commentary by Eoin Treacy

Insights in 140 Words October 31st 2014

Thanks to a subscriber for this edition of Deutsche Bank’s weekly missive. Here is a section on Facebook:

Facebook - Leave aside Mark Zuckerberg's dystopian goal of "connecting the whole world". Before then investors must think about the eight per cent drop in Facebook's share price since Wednesday. To understand why jitters surround a company that is growing sales and earnings 60 and 90 per cent respectively, look through a DuPont analysis lens. Multiply the current ebit margin of about 40 per cent by an asset-turn of 0.6 times and a leverage ratio of 1.2. That spits out a return on equity of 17 per cent, adjusted for tax. Given that asset-turn and leverage are unlikely to change much, shareholder returns become a margin game. Hence the reaction when Facebook said spending would increase 50 to 70 per cent in 2015. The rise equates to almost half of current ebit or the entire projected increase in gross profits next year.

Eoin Treacy's view

The full note is posted in the Subscriber's Area.

Facebook will reinvest next year’s expected profits in expanding its business which for a company with a lower P/E would be welcomed by investors. However with the leverage Facebook has in its business, reinvesting everything means it has no choice but to meet or exceed sales targets if investors are to be placated. 

 

This section continues in the Subscriber's Area. Back to top
October 31 2014

Commentary by Eoin Treacy

Weekend Reading October 31st 2014

Thanks to a subscriber for this list of mostly academic reports which we can reasonably assume constitute at least some of the reading of decision makers. 

October 31 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.

 

This section continues in the Subscriber's Area. Back to top