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David Fuller and Eoin Treacy's Free (Abbreviated)
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July 09 2020

Commentary by Eoin Treacy

Video commentary for July 9th 2020

Eoin Treacy's view

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: megacap tech extends uptrend, China extends breakouts, industrials resources firm but energy eases, agricultural commodities steadying at previous support, Dollar steadies, Europe eases. US regional banks weak.

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July 09 2020

Commentary by Eoin Treacy

Email of the day on China's ascendency:

Your excellent piece today focusing on the China question arrived at the same time as an interesting counter-narrative to the "China-supreme argument". From the Telegraph. If correct, China's is not going to have it all its own way. Here is a section:

"The Huawei saga has exposed just much the country still lags, a surprise to some who have bought into the media narrative of Chinese hi-tech ascendancy. China is not yet capable of making the advanced semiconductor chips used for telecommunications or for FGPA circuits that can be programmed.

Nor has it mastered the electronic design automation needed for circuit design. It lacks the critical raw material needed to sustain its ambitions for global dominance of G5 mobile and the coming “internet of things”.

The Centre for Strategic and International Studies estimates that China has yet to crack the materials science that goes into the latest microscopic chips, despite hurling money at the challenge in successive programmes, the latest one commanding more than $20bn. Its high-end chip industry is ten years behind, but in ten years the infrastructure of global cyber dominance will already be in place.  

In short, the US controls the world’s semiconductor ecosystem, working tightly with Japan, Korea, and Taiwan. All Washington had to do in late May was to flick its fingers and Taiwan’s TCMS instantly cut off chip supplies to Huawei, dooming the company’s G5 global quest at a stroke."

Eoin Treacy's view

Thank you for your kind words and this article which I’m sure will be of interest to the Collective. The significant investment China is making in its domestic semiconductor industry will need to be long-term and ongoing in nature to achieve the level of sophistication currently available to other countries. By some accounts they have sunk $20 billion into the project so far and it may take recurring investments of at least that much to develop the tools required to achieve technological superiority over coming decades.

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July 09 2020

Commentary by Eoin Treacy

The Gold-Oil Ratio Revisited

Thanks to a subscriber for this article from Goehring & Rozencwajg which may be of interest. Here is a section:

However, looking only when the gold-oil ratio has exceeded 30:1 (i.e., oil is cheap relative to gold), crude has returned 32% on average over the next twelve months (over four times its long-term average), while gold has returned 4% on average. Oil was lower only 13% of the time (70% less often). On average, oil outperformed gold by 28% during these periods compared with 2% normally.

At the other extreme, when the gold-oil ratio was less than 10:1 (i.e., oil was expensive relative to gold), crude lost 7% on average over the next twelve months and was negative nearly 60% of the time. Gold returned 18% on average during these periods, outperforming oil by 25%. Since 80% of all observations occur when the ratio is between 10 and 30 you should expect the relative returns of both gold and oil to be like their long-run averages and that is exactly what occurred. When the ratio was between 10 and 30, oil returned 5% on average in the following 12 months, and was lower 41% of the time while gold returned 4% and was lower 33% of the time, roughly in line with long-term averages.

We last used this analysis in early 2016 to justify our investments in oil-related securities. At that point, the gold-oil ratio hit a then-record 47:1. We argued that oil prices were set to surge and invested in oil-weighted E&P securities as a result. Over the next 30-months, oil rallied by 191% from $26 per barrel to $76 per barrel by October 2018. Gold on the other hand fell by 4% over the same period. Oil stocks (as measured by the XLE ETF) advanced by 56%, well in excess of gold stocks (as measured by the GDX) which rose only 3% but lagging the S&P 500 which advanced 69%.

Eoin Treacy's view

The gold/oil ratio spent much of the last couple of decades ranging mostly between 10 and 30. On the small number of occasions is veered outside of those bands the move was quickly reversed. It has therefore been reliable indicator of where value was present on repeated occasions. However, the current reading questions that conclusion. 

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July 09 2020

Commentary by Eoin Treacy

Torrid Heat and Empty Acres to Help Offset Corn's Demand Slump

This article by Michael Hirtzer, Tatiana Freitas and Elizabeth Rembert for Bloomberg may be of interest to subscribers. Here is a section:

In 2012, the last time corn supply dropped that much, the U.S. crop was hit by a combination of heat and drought, sending Chicago futures to their all-time peak of over $8 a bushel. The weather isn’t quite as drastic this year and grain prices are starting from a much lower level. But U.S. Department of Agriculture data last week made things more interesting, showing American farmers planted 3 million fewer acres with corn than expected.

The surprise drop in acreage makes any decline in yields due to record-high temperatures this week more acute -- and a potential turning point in a corn market that has suffered from a massive glut. The USDA in a monthly report on Friday is expected to shave off 600 million bushels from its supply
forecast, the biggest change since 2012, according to analysts polled by Bloomberg.

“One of the things we’ve talked about for a number of years is that supply has overtaken demand,” said Stephen Nicholson, senior grains and oilseeds analyst at agriculture lender Rabobank. “To rectify that imbalance, we have two things: some sort of weather event or produce less.”

Eoin Treacy's view

The knock-on effects of the lockdowns and reduced economic activity has yet to be full seen. Whether that is in less demand for fuel additives, greater demand for snack foods, fewer acres planted or inclement weather affecting yields. The one thing we know for certain is that commodity prices are low. Therefore, supply disruptions have the capacity to shift the balance in favour of the bulls.

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July 09 2020

Commentary by Eoin Treacy

Eoin's personal portfolio: stock market index long initiated July 6th 2020

Eoin Treacy's view

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.

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