Most Recent Audio: 13 December 2017

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

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December 13 2017

Commentary by Eoin Treacy

Video commentary for December 13th 2017

Eoin Treacy's view

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

Some of the topics discussed include: stock markets steady, Fed hikes, corporate profits improving, Pound steady following mutiny in UK parliament, Dollar weakens, precious metals rebound from short-term oversold conditions. discussion of mania in cryptocurrencies. Japanese Banks breakout

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December 13 2017

Commentary by Eoin Treacy

Email of the day on cryptocurrencies

I believe I read somewhere that some of the big holders and speculators in Bitcoin are in China, as they want to get cash out of the country to avoid the controls in place. Have you heard the same? If so, the next big win could be to figure where they will invest once they sell bitcoin. Any ideas? 

Also, I am watching CME Group closely, and may buy. Since they trade futures, and make profits based on volume of transactions, they will do well both as Bitcoin gains and crashes as trading volume will be high. I guess they will get into other cryptocurrencies too.

Interesting opportunities are opening up as one studies this space. For the more cautious investor like me, just like the California gold-rush, the winning strategy may be to invest in the picks and shovels (Nvidia and other semi-conductor manufacturers for chips, CME Group for futures etc).

Best wishes

Eoin Treacy's view

Thank you for this email which may be of interest to subscribers. Yes, Chinese retail investors are a major buyer of cryptocurrencies but the practise of using bitcoin to funnel money overseas has been clamped down on over the last six months, not least when bitcoin exchanges were raided back in September. In the meantime, Japan and South Korea have become significant sources of demand. For example, South Koreans are currently paying a 23% premium to buy bitcoin. 

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December 13 2017

Commentary by Eoin Treacy

A $4 Trillion Reason for China's Smaller Banks to Worry

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

But two things look clear: The WMP market's years of torrid growth have ended; and in an environment of higher risk, investors will prefer products sold by large state-owned lenders that are seen to be safer and of better quality. 

That will put pressure on smaller banks, which have limited scope to increase lending. Minsheng, China CITIC Bank Corp., Ping An Bank Co. and China Everbright Bank Co. all had loan-to- deposit ratios exceeding 90 percent as of the third quarter, according to Francis Chan of Bloomberg Intelligence -- much higher than their bigger rivals. Shares of Minsheng and CITIC Bank have fallen in Hong Kong this year, while ICBC has jumped 27 percent.  

A reckoning is approaching. As with all measures to rein in China's debt, the WMP clampdown is likely to be a stop-go process. But smaller banks will need to start looking for another source of growth, and fast.

Eoin Treacy's view

Many of the smaller banks which have been most profligate in the use of wealth management products (WMP) are not listed. That represents a challenge in monitoring any issues they encounter using conventional stock market analysis of relative strength and leadership. 

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December 13 2017

Commentary by Eoin Treacy

Mean Reversion and other Misconceptions about Profit Margins

Thanks to a subscriber for this interesting report from the The Jerome Levy Forecasting Center on the contributing factors behind the relationship between profits, margins and profit sources. Here is a section:

When it comes to conventional wisdom about macroeconomic profit margins, investors beware.

First of all, do not expect margins to “revert to the mean”. A profit margin is not a random variable. Its behavior is complex and sometimes hard to predict, but that does not make it random. Throughout history, when the aggregate profit margin has been unusually far from its historical mean, it would have been unwise to expect it to revert. One would often have ended up waiting for many years, and sometimes for decades.

Second, looking to the future, each step of the way profit margins will depend on profits, which will depend on the profit sources. Global structural financial issues, public policy, business trends, technology, demographics, sociology, and other influences on the profit sources – and not a simple probability distribution – will determine what happens to profits and profit margins.

Third, interpreting profit margins depends a great deal on context. For example, recent years’ wide margins have accompanied by a low ratio of profits-to-equity, which is what ultimately matters to shareholders.

Fourth remember that the influences on aggregate profits margins are different from influences on the margins of individual firms. Competition can certainly compress margins within a firm or industry, but aggregate profit margins are not “competed away” in the business sector as a whole. Rather, changes in the profit sources are what increase or decrease aggregate profit margins. 

Eoin Treacy's view

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

There has been considerable debate about the elevated level of US Corporate Profits over the last few years with some analysts predicting what would be a cataclysmic mean reversion while others have been more sanguine. This is the first report I’ve seen attempting to look through the figures to identify the factors behind corporate profits that are contributing to this condition and I commend it to subscribers. 

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December 13 2017

Commentary by Eoin Treacy