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

    Good Morning November 8th 2017

    Thanks to a subscriber for this edition of Anthony Peters missive which today discussed Isaiah Berlin’s “Two Concepts of Liberty”. Here is a section:

    Looking at the world around us this morning and the events from Catalonia to Riyadh, from Brexit to quantitative easing, from blockchain to the Paradise Papers many of the issues which are at the centre of the respective debates and actions can and should be held up, looked at and then filtered through the Berlin’s weighing up of positive and negative liberty. In his paper Berlin distilled the essence of socio-political dialectic around the thesis and antithesis of freedom to and freedom from. 

    It might be ironical that I am chewing over Berlin’s seminal paper on the somewhat forgotten, especially in Moscow, 100th anniversary of the October Revolution. I was born less than 40 years after the Bolshevik take-over of Russia and the creation of the Soviet Union and I grew up very much in the shadow of the daily threat of nuclear conflict between NATO and the Warsaw Pact, themselves some form of incarnation of freedom to and freedom from. I mentioned in a recent column a comment which had come out of Poland which, with the UK leaving the EU, becomes the next truculent child. The line had been that Warsaw had not fought to free itself from the diktat of Moscow only to find itself subject to equally stringent controls out of Brussels.

    On September 11th 1990 – eleven years to the day before the attack on the Twin Towers, now known simply as 9/11 – President George Bush Sr gave a speech titled “Towards the new World Order” in which he embraced the polices of Mikhail Gorbachev and the dismantling of the Soviet empire. The dreams of democracy and self-determination for which NATO had stood and which were being pursued by way of the opening of borders across Europe though the structures of the EEC were in the ascendant. Twenty seven years later with the EEC having been replaced by the EU, with membership of 12 having been expanded to 28 and with the first ever member in the process of leaving again, the union looks ossified and in many respects now looks and behaves more like Soviet Moscow than it does like the old EEC. 


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    Musings From The Oil Patch November 7th 2017

    Thanks to a subscriber for this edition of Allen Brooks’ everinteresting report for PPHB which may be of interest. Here is a section: 

    The euphoria that greeted the production cut agreement announcement lifted oil prices above $50 a barrel, a critical threshold for market confidence.  As global oil inventories failed to drop as the market expected, investors turned on the commodity as well as energy stocks, sending their prices lower.  Since the oil price drop in early 2007, prices have largely traded between the low $40s a barrel to now above $54, with a brief excursion as low as $26.  The narrow price range reflected global oil inventories remaining relatively flat, until recently.  As oil inventories started falling a few weeks ago, we are now in a period favorable for higher prices.  

    Today, we are firmly planted in an oil market reflecting positive price momentum.  Better projected oil demand growth seemed to be the initial factor that helped lift the oil market.  The International Energy Agency (IEA) upped its demand growth estimates for the second half of 2017.  About the same time, U.S. shale producers began shedding oil drilling rigs in response to weakening oil prices and as they sensed a need to rebuild investor confidence in their financial health.  Producers had to dispel the image of exploration and production (E&P) companies as destroyers of capital, a label the industry’s record seemed to warrant.  Disciplined capital spending, meaning living within a company’s cash flow in order to not have to borrow money or sell more equity to fund the overspending, appears to be the new mantra for E&P companies.  The latest survey of E&P company spending plans versus cash flow demonstrates that overspending remains high.  This may signal that it will take time for companies to generate positive cash flow.  

    In recent weeks, as Brent oil prices have risen at a faster rate than WTI oil, the forward oil price curve moved into backwardation, meaning that barrels of oil able to be delivered immediately are worth more than if they are stored and delivered in the future.  This price disparity is further impacted by the cost of storing the oil.  Backwardation encourages holders of oil in storage to begin selling those barrels, which has accelerated the shrinking of global oil inventories.   

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    Switzer Report

    Thanks to a subscriber for this report concentrating on the Australian market. Here is a section on retail:

    Longer term, the fortress shopping malls are fabulous assets. A prime shopping centre, such as Chadstone in Melbourne, or Westfield Bondi Junction, is impossible to replicate at the location. As they attract more service outlets, such as fancier restaurants, consumers are visiting the mall as much for entertainment as to buy basic products.

    In time, newer fortress shopping centres will offer upmarket housing accommodation and hotels, as integrated property developments. Westfield is embracing this trend offshore.

    The changing retail mix at fortress malls will lead to a higher average spend per customer, per visit, in the next five years. More people will eat breakfast at the mall when they shop early; or dinner when they go to a movie there. We’ll buy more goods and services at fortress malls and fewer at strip shopping malls and sub-regional (or second-tier) malls.
    It’s no surprise that Westfield is rationalising its US, UK and European portfolio away from second-tier assets to fortress centres. The shopping-centre giant wants to own the world’s premium shopping-centre portfolio and is investing billions to get there.

    Westfield is a story of short-term pain for long-term gain. Its shopping-centre redevelopment will drag on earnings as rents are foregone during construction. But the medium-term effect should be faster growth in Westfield’s net tangible assets and a rising share price.


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    Don't let the EU dictate Brexit if you want a speedy US trade deal, Trump adviser warns UK

    Thanks to David for this article by Ambrose Evans Pritchard for the Daily Telegraph. Here is a section: 

    Speaking at the Confederation of British Industry (CBI) conference, Mr Ross said his trip to the UK allowed him to “address with the UK some concerns we have that they may be tempted to include (provisions) in their agreement with the European Commission (EC) that could be problems for a subsequent FTA (Free Trade Agreement) with the US".

    While he struck a friendly tone, he also issued a veiled warning that talks with Washington could go off the rails if Theresa May, the Prime Minister, aligned too closely with Brussels in designing the post-Brexit settlement.

    It is a reminder that Britain risks having to pick sides between two trade superpowers with starkly different demands.
    Mr Ross accused Brussels of imposing higher tariffs than the US across the “vast majority” of traded goods – including a 10 per cent charge on cars, compared to America’s 2.5 per cent – and trying to enforce its regulatory codes on third countries rather than allowing an open global system.

    “While the EU talks a lot of free-trade rhetoric, it is really quite protectionist,” he said.

    He vowed to avoid “tit-for-tat” bargaining when it came to negotiating a trade deal with Britain but left no doubt that there would be trouble if the UK signed up to core elements of EU ideology deemed most aggravating in Washington, not least the EU curbs on chlorinated chickens and – far more important – genetically modified foods.


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    Melbourne Cup: Quant Style Going Max Active

    Thanks to a subscriber for this report which arrived a day too late for me to post before the “race that stops a country”. Here’s to next year. This section may be of interest:

    As the Melbourne Cup rolls around again for 2017, we turn our attention back to that most worthy and intellectually satisfying of pursuits: Figuring out how to take a good punt at the races. Despite the lacklustre performance of the Macquarie Quant Halpha Model at the 2016 Melbourne Cup, we believe that fundamental approach behind the model – to pick undervalued horses rather than those with the greatest absolute probability of winning – remains the rational objective for the fiscally minded punter. Our model does this by identifying factors that other punters systematically overvalue. 

    For example, punters tend to over-value the form of a horse. Hence, while horses with good form are indeed more likely to win, the odds offered on these are typically too short to justify them as a systematically profitable bet. As with our standard Macquarie Quant Alpha Model, the Halpha model is designed to statistically capture inherent biases in the preferences of other market participants. These biases skew both betting odds and stock prices away from fair valuation. Quantitative models such as the Quant Halpha Model (and our regular Alpha Model) then takes advantage of these inefficiencies by betting (or trading) against the direction of the skew.

    In order to improve the confidence and robustness of the Halpha model, this year, we have a (not-so-secret) secret weapon: More data. Thanks to Luke Byrne and Jared Pohl, the fine folks behind Kaggle’s Horses for Courses dataset, we have been provided access to data for an additional 3,700 horse races from 2017 to complement the existing dataset of 3,400 races from 2016. The expanded data sample both allows a larger training set to construct the Halpha model, and enables us to partition out-of-sample validation and test sets.

    While inventing strategies for horse-racing betting markets is mostly just for a bit of fun, the quantitative processes we apply here (i.e. identifying the forecast parameters and detecting pricing inefficiencies) largely reflect those used to address more sophisticated cash equity markets. In comparison to the latter, betting markets provide a cleaner prediction environment based on behavioural biases with less interference from macroeconomic cycles and idiosyncratic news-flow. As such, the Halpha model provides a useful didactic tool for exploring underlying concepts behind quantitative equities models.


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    A resignation, detentions and missiles: 24 hours that shook the Middle East

    This article by Tamara Qiblawi for CNN may be of interest to subscribers. Here is a section:

    Saudi Arabia was still putting out the fires caused by the missile attack when state TV announced the onset of an anti-corruption crackdown led by the crown prince. Over 17 princes and top officials were arrested on graft charges, according to a list obtained by CNN and cited by a senior royal court official.

    The list includes billionaire business magnate Prince Alwaleed bin Talal, who owns 95% of Kingdom Holding, which holds stakes in global companies such as Citigroup, Twitter, Apple and News Corp.

    The list also includes formal head of the royal court Khaled Al-Tuwaijri, Saudi media mogul Waleed Al-Ibrahim and Prince Turki Bin Nasser.

    "Some of the wealthiest figures in the Arab world are in apprehension today," said military analyst Riad Kahwaji.
    "This is unprecedented. We're seeing it for the first time and it's definitely causing shockwaves across the region."


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    How To Diversify Your Portfolio and Transfer Wealth Across Generations Without Financial Advisory

    Thanks to Bernard Tan for this note which offers an interesting perspective on why truly global companies, that dominate their respective niches, with long track records, tend to outperform over time. Here is a section:

    I’m going to use 3M to illustrate the following points. 

    1. Equities as an asset class is often perceived as riskier than others but there is one sector within equities that I will argue is safer than everything else including fixed income and real estate. 

    2. If you invest in a world class, global scale company that is from this sector, you are already fully diversified, hedged and all the macro economic issues and challenges taken care of. 

    3. This sector is resilient in the face of even a global financial crisis because frequently, these companies do not have high financial leverage. (Caveat: In recent years, it has become less true in the US and Europe) 

    What is 3M really? It is a deep physics, chemistry and material science company. Everything they do is about manipulating the atoms and molecules of nature to create functional materials that we can use in our daily lives.  

    With each passing year, 3M piles on more patents, a bigger library of chemicals and processes, more knowhow. All this knowledge is cumulative. The company is now 115 years old. All that accumulated intellectual property is practically unassailable. There will never be another company like 3M anywhere else in the world. Certain segments of their business can be separately attacked but there will never be another company that can challenge 3M on most fronts simultaneously.  

    This is the nature of science and intellectual property. The strength is cumulative over time. In contrast, for real estate companies and banks, big or small has no bearing on vulnerability to debt crisis storms, as we all learnt in 2008. The underlying strength is not cumulative over time, not the way it is for a science and intellectual property company.


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    Offshore Trove Exposes Trump-Russia Links And Piggy Banks Of The Wealthiest 1 Percent

    This article from the International Consortium of Investigative Journalists may be of interest to subscribers. Here is a section:

    In addition to top-flight international banks such as Barclays, Goldman Sachs and BNP Paribas, other elite Appleby clients have included the founder of one of the Middle East’s largest construction conglomerates, the Saad Group, and the Japanese company operating the crippled nuclear power plant in Fukushima.

    The files reveal that America’s most profitable company, Apple Inc., shopped around Europe and the Caribbean for a new island tax shelter after a U.S. Senate inquiry found that the tech giant had avoided tens of billions of dollars in taxes by shifting profits into Irish subsidiaries.

    In one email exchange, Apple’s lawyers asked Appleby to confirm that a possible move to one of six offshore tax havens would allow an Irish subsidiary to “conduct management activities . . . without being subject to taxation in these jurisdictions.” Apple declined to comment on details of the corporate reorganization but told ICIJ that it explained the new arrangements to government authorities and that the changes did not reduce its tax payments.

    The files also reveal how big corporations cut their taxes by creating offshore shell companies to hold intangible assets such as the design of Nike’s “Swoosh” logo and the creative rights to silicone breast implants.

    One of Appleby’s top corporate clients was Glencore PLC, the world’s largest commodity trader. The files contain decades of deals, emails and multimillion-dollar loans to bankroll ventures in Russia, Latin America, Africa and Australia.


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