David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    The Invasion of Ukraine Is a Tragic Sin

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

    I have met Putin, and I have watched him as a journalist since before he became president. My analysis of his actions was always based on the assumption of his rationality. There was always something to gain, a manageable risk of losing. Perhaps I was wrong from the start. Perhaps Putin has changed in recent years as his close circle narrowed and negative selection expelled people with a broader vision from the ranks of his advisors. Quite likely, Ukraine has long constituted an exception from Putin’s rationality, as most of its people time and time again chose the Western path, away from Putin’s vision of the Russian World.

    I left Russia after the Crimea annexation because I couldn’t accept it and felt it was a great historical wrong — both for Ukraine and for Russia. But I ended up returning to that assumption of rationality. I analyzed Putin’s moves from a cost and benefit perspective. I have a lot of rethinking to do.

    The invasion is an irrational move. It makes any further negotiations with Putin and his clique pointless: There is, quite clearly, nothing he won't do, no line he won’t cross, no matter what he says or what deal he makes. From this point on, autarky is the only feasible economic choice for Russia, and a retreat into isolation is the only remaining cultural and political choice. At the same time, Russia's dependence on China, which has grown in recent years, is no longer a matter of choice. Any security benefits from turning Ukraine — and neighboring Belarus, from whose territory Putin also attacked — into a buffer state are illusory since Russia also borders actual NATO member states, which now will arm themselves as heavily as possible. 

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    Stocks Plunge, Oil Prices Surge After Putin Orders Troops Into Eastern Ukraine

    This article from Bloomberg may be of interest. Here is a section:

    Stocks tanked amid rising tensions between Russia and Ukraine: The Dow Jones Industrial Average was down 1.3%, over 400 points, while the S&P 500 lost 1% and the tech-heavy Nasdaq Composite 1.4%.

    Global stock markets took a hit after Russian President Vladimir Putin decided to recognize the separatist states of Donetsk and Luhansk in eastern Ukraine, ordering Russian troops to move into the region in order to “maintain peace.”

    The move was widely condemned by the West, with the European Union and United Kingdom both unveiling economic sanctions against Russia on Tuesday, while the United States will reportedly release a new round of sanctions later in the day.

    Many western officials continued to warn that Russian troops moving into eastern Ukraine to keep the “peace” could be a not so subtle pretext for a full invasion, with U.K. Health Minister Sajid Javid saying on Tuesday that “the invasion of Ukraine has begun.” 

    Oil prices surged on the news, with Brent crude rising to more than $94 per barrel amid concerns that Russia’s energy exports could be disrupted.

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    Lithium Stock Livent Is Soaring. Strong Earnings and Guidance Looked 'Easy

    This article from Barron’s may be of interest to subscribers. Here is a section:

    Looking ahead for 2022, Livent expects to generate about $180 million in Ebitda, short for earnings before interest, taxes, depreciation, and amortization, on about $570 million in sales. Analysts were projecting closer to $160 million in Ebitda on $515 million in sales.

    “Sometimes it’s really that easy,” wrote Evercore ISI analyst Stephen Richardson in a Thursday report. He was referring to the relatively clean quarter Livent just reported.

    Albemarle’s quarter wasn’t as easy to digest. Richardson wrote earlier on Thursday that Albemarle’s volume and earnings guidance was better than he expected, but that the company’s guidance for costs and capital spending would be a drag on 2022 cash flow.

    He is staying positive on both stocks. He rates Albemarle stock at Buy with a $295 price target. He didn’t adjust he price target after the company’s quarterly hiccup. Richardson actually put Albemarle stock on his “tactical outperform list” Friday.

    “The confusion from [Albemarle] investors came largely on the cost line which lead some to believe this was a structural step-up in costs [and] lower margins, and was a new permanent aspect of the business,” wrote the analyst. “We think none of this is indeed true.”

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    OPEC+ Supply Shortfall May Push Oil Price Higher, IEA Warns

    This article from Bloomberg may be of interest to subscribers. Here is a section:  

    “If the persistent gap between OPEC+ output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on price,” the Paris-based agency said in its monthly report.

    Still, the economic shock could be averted if those members of the Organization of Petroleum Exporting Countries that possess extra reserves deploy them.

    “These risks, which have broad economic implications, could be reduced if producers in the Middle East with spare capacity were to compensate for those running out,” the agency said.

    Saudi Arabia, OPEC’s de facto leader, holds the bulk of the group’s spare capacity. It has so far resisted the idea of tapping those reserves more quickly, contending that the individual quotas set by the OPEC+ agreement should be respected. 

    Despite the IEA’s warnings, its forecasts still indicate that world oil markets will tip back into surplus for the rest of this year as supplies outside of OPEC+ pick up. The agency revised up its forecast for U.S. oil supply growth in 2022 by 240,000 barrels a day to 1.2 million barrels a day.

    The agency also made substantial increases to its historic demand estimates for the past few years, with an upgrade of 1 million barrels a day for 2021. The revision helps account for a discrepancy between the IEA’s theoretical estimate of changes in stockpiles and what could be detected.

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    Email of the day - on gold, governance, trading, and uncertainty

    A bad back currently prevents me golfing, walking the dog, or driving the car and, in my opinion justifiably, I am feeling a grumpy.

    So here are a few gripes for you:

    First gold:
    For several years you taught us that the gold price follows an approximate 35-year cycle between highs, although the gold price could outpace stock indexes for short periods in between those highs. We’ve not heard too much about the 35-year cycle for a while, the message now being that it is not unusual for gold to trade in a boring range for up to 18 months or so before breaking out conclusively up or down. You believe it will break to the upside taking out previous highs (which runs contrary to your 35-year cycle theory). I hold a fair chunk of gold and silver miners in ETFs but regard the holding as a hedge rather than representing a belief that gold will imminently break to the upside. It might and it would be nice if it did but I doubt it. As David said, investment options are similar to a beauty parade and for the foreseeable future, many options are likely to look superior to gold.

    Second India v China:
    You are very hard on China and its political system. Having lived most of my life in Asia I take a less severe view. Like most observers I was disappointed to see that XI, the reformer, had no intention of political reform but on reflection, I think he’s probably right to opt for political stability at a time when China is still struggling to bring modernity to all its people and regions; when lightening-speed technological change is taking place across the globe and when it finds itself in an inevitable struggle to assert what it regards as its rightful influence on global institutions and practices. On a smaller scale in Singapore Lee Kuan Yew did much the same thing and while there is now a little more political tolerance in Singapore than there was, the Government – and most of its people – believe that full-throated democracy would lead to economic and societal break-down. That would be Xi’s worst nightmare.

    My grouse is not so much with your view on China but with your uncritical view of India. I agree with you that India should do well given its demographic advantage and talents of its people. However, I think the Modi government is quite repugnant in its covert – and not so covert – support of extremist Hindu nationalism represented by terrorisation of the Muslim and Christian communities, and by its appalling failure to do much about the abuse of women, also fuelled by Hindu extremists. In the medium term, I fear this, together with over-dependence on coal, will limit India’s investment appeal and therefore its economic potential.

    To declare my investment positions, I have reduced my exposure to India and wait for an opportunity to reinvest in China. My favourite Asian market currently is Vietnam.

    Third, the purpose of your ‘service’:
    Under David’s direction, Fuller Money provided objective macro oversights together with some trading suggestions/recommendations and some investment suggestions/recommendations. He often put his money where his mouth was and invested in his recommendations. Towards the end of his career, he stopped publishing his investment portfolio which I regarded as a pity. Under your direction, Fuller-Treacy Money continues to provide objective (if sometimes convoluted and long-winded) macro oversights, but I find it difficult to work out whether beyond that you are offering trading hints or investment hints. I use the word ‘hints’ rather than ‘suggestions’ because in this aspect you are far more non-committal on specifics than was David. The details you provide of your own investment activities suggest that you are a trader with long(ish) term investments in gold bullion, gold miners and Rolls Royce. I made several profitable purchases based on David’s recommendations but so far have identified none under your watch.

    Fourth Daily Audio and Video:
    From emails you have referred to from other subscribers, I am confident that I am not alone in being irritated by several of your constant refrains. Three which particularly annoy me are ‘The big question is ….’ (to which we never get an answer); ‘[Gold (for example) has a lot of work to do’ (which is a nonsense, better to identify factors which might influence buying/selling decisions) and; ‘I can’t talk and chew gum at the same time’ (which sounds quite catchy heard for the first time, but grates increasingly after many repetitions).

    So, getting that off my chest makes me feel slightly less out of sorts. I shall be renewing my subscription in March. It’s been part of my routine for too long.

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    ECB Is Said to Prepare for Potential March Policy Recalibration

    This article from Bloomberg may be of interest to subscribers. Here is a section: 

    European Central Bank policy makers can envisage recalibrating their outlined policy path in March, according to officials familiar with their thinking.

    The Governing Council agreed on Thursday that it’s sensible not to exclude the possibility of an interest-rate hike this year, said the people, who asked not to be identified because their discussions are private. 

    An end of bond-buying under the ECB’s regular program, the APP, is possible as early as the third quarter, the officials said. No decisions have been taken. 

    An ECB spokesman declined to comment. ECB President Christine Lagarde refused to repeat at her press conference that a rate increase was very unlikely this year, highlighting more persistent-than-expected inflation pressures in the 19-nation bloc. Investors brought forward bets on a liftoff while she spoke.

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    Brazil Analysts See Inflation Further Above Central Bank Target

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Brazil analysts raised their 2022 inflation expectations further above target for the third week in a row as the central bank prepares to lift its interest rate into double digits at Wednesday’s policy meeting.
    Inflation will hit 5.38% in December, above the prior estimate of 5.15%, according to a weekly central bank survey published on Monday. Analysts also lifted their 2023 year-end consumer price forecast to 3.50% from 3.40%. 

    Policy makers led by Roberto Campos Neto are expected to deliver their third consecutive 150-basis point rate hike this week, lifting the benchmark Selic to 10.75%. Inflation slowed less than expected in mid-January, as factors including global supply-chain disruptions pressured prices of transportation and
    durable goods. Analysts see borrowing costs at 11.75% in December. 

    The central bank risks missing this year’s inflation target of 3.5%, which has a tolerance of plus or minus 1.5 percentage points.

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    Email of the day on the green revolution

    Thanks for the great service pulling the noise out of market trends for us. We especially enjoy what my wife affectionately calls the “Big Picture Long-Winded” Friday recordings. Regarding the possible rotation into the renewable/green economy do you have any ideas on Industries/companies that could benefit from the build out? Or would the safer play be directly in the commodities needed for the grid, vehicles, batteries, and such? Hoping to get to another Chart Seminar before too long.

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    The Sell-off

    Thanks to subscriber for this chartbook from Goldman Sachs which may be of interest.