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

    OPEC, Allies to Extend Oil Cuts for Nine Months to End Glut

    This article by Nayla Razzouk, Golnar Motevalli and Laura Hurst for Bloomberg may be of interest to subscribers. Here is a section:

    "The market seems to be a bit disappointed as there is no ‘something extra,’” said Jan Edelmann, a commodity analyst at HSH Nordbank AG. “It seems as though OPEC fears letting the stock-draw run too hot.”

    The Organization of Petroleum Exporting Countries agreed in November to cut output by about 1.2 million barrels a day.

    Eleven non-members joined the deal in December, bringing the total supply reduction to about 1.8 million. The curbs were intended to last six months from January, but confidence in the deal, which boosted prices as much as 20 percent, waned as inventories remained stubbornly high and U.S. output surged.

    OPEC agreed earlier Thursday to prolong their own output cuts by nine months. Nigeria and Libya will remain exempt from making cuts and Iran, which was allowed to increase production under the original accord, retains the same output target, Kuwait’s Oil Minister Issam Almarzooq said after the meeting.

    That deal gave the Islamic Republic room to increase output to a maximum of 3.797 million barrels a day.

     

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    Some reflections on Japanese monetary policy

    This article by Ben Bernanke for The Brookings Institute may be of interest to subscribers. Here is the conclusion:

    If all goes well, the BOJ’s current policy framework may yet be sufficient to achieve the inflation objective. We’ll have to wait and see. If not, there are relatively few options available. The most promising possibility—should we get to that point—is more explicit coordination of monetary and fiscal policies. Monetary policy that is aimed at limiting the impact of fiscal expansion on the government’s debt could both make fiscal policymakers more willing to act and increase the impact of their actions. The BOJ may be reluctant to take such a step. In the possible future state that I am contemplating, however, there would be no real alternative other than to abandon the fight to raise inflation and, perhaps, even to accept a new bout of deflation. After such a long and valiant effort to end deflation and raise interest rates from their effective lower bound, that would be a most disappointing outcome.

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    Are Cryptocurrencies Becoming a New Asset Class?

    Thanks to a subscriber for this article by Mark Chandler at Brown Brothers Harriman for FinancialSense. Here is a section:

    The volatility also does not lend itself to being a store of value (another agreed upon function of money). Consider that it is not unusual in recent days for the price of the Bitcoin to change by 2%-3% a day. The US dollar, in contrast, rarely moves one percent a day, and while the Bitcoin has appreciated by nearly 50% over the past month, the Dollar Index has fallen 2.3%.

    Crypto-currencies appear easy to buy but are more difficult to liquidate. Reports suggest that even modest amounts take days to complete. It appears that a small part of the float actually trades, and the supply is limited. There are around 16.3 mln Bitcoins and 1800 new ones a day.

    The rising price for crypto-currencies and new interest does not alter our assessment. These are not currencies in any meaningful sense. To the extent that some retailers accept them is a bit of a novelty and marketing fluke. Some of the larger businesses, like Virgin, who previously indicated a willingness to accept Bitcoins as payment, reportedly convert such payments into hard currencies. It is a gimmick, not confirmation of its currency status.

    Leaving aside questions on the origin of money, under conditions of modernity, money facilitates exchange and is used to pay taxes and settle debts. When crypto-currencies can be used to pay taxes, and/or are generally accepted to retire debt, then their money status needs to be reviewed. Under present condition, none of the functions of money are met by crypto-currencies. They are hardly used as a means of payment. They are poor stores of value. They are not units of account.

    People can still make and lose money trading them. They are part of the universe of paper assets, with their own niche rules governing supply. One can use some crypto-currencies to conceal transactions, but do not expect the taxman, the landlord or grocer to accept them anytime soon. They are currencies to the extent that contacts on Facebook are friends and that "grande" means medium at Starbucks.

     

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    The Big Green Bang: how renewable energy became unstoppable

    Thanks to a subscriber for this article by Pilita Clark for the FT which may be of interest. Here is a section: 

    “I have been early twice in financing the low carbon energy transition,” says Bruce Huber, cofounder of the Alexa Capital advisory group. “But we feel it’s third time lucky.”

    One reason for his optimism is what he calls the “tectonic plateshifting” in the car industry that is driving down the cost of energy storage. Storing clean power has long been a holy green grail but prohibitive costs have put it out of reach. This has begun to change as battery production has ramped up to meet an expected boom in electric cars.

    Lithium ion battery prices have halved since 2014, and many analysts think prices will fall further as a slew of large battery factories are built.

    The best known is Tesla and Panasonic’s huge Nevada “gigafactory”. Tesla claims that once it reaches full capacity next year, it will produce more lithium ion batteries annually than were made worldwide in 2013.

    It is only one of at least 14 megafactories being built or planned, says Benchmark Minerals, a research group. Nine are in China, where the government is backing electric cars with the zeal it has directed at the solar industry.

    Could this lead to a China-led glut like the one that helped drive solar industry writeoffs and crashing prices after the global financial crisis?

    “It’s something to watch,” says Francesco Starace, chief executive of Italy’s Enel, Europe’s largest power company.

    The thirst for electric cars, not least in China, means “the dynamics of demand are completely different” for batteries than for solar panels, he adds.

    Still, Enel’s internal forecasts show battery costs falling by about 30 per cent between 2018 and 2021 and it is among the companies already pairing batteries with solar panels to produce electricity after dark in sunny places where power is expensive, such as the Chilean desert.

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    Global gold study: Find your 'safe place'

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:

    In a volatile macro environment, follow the cash flow & avoid the debt laden 
    The USD gold price has rallied +10% this year, following a sustained sell-off post the U.S. election in Nov 2016. Markets remain focused on global growth prospects (and U.S. rate hikes), but rising tensions in the Middle East and Asia, along with concerns around U.S. policy disappointment & the Chinese property market pose risks to the pro-growth trade. We believe the global gold sector presents a compelling investment thesis despite our neutral outlook on gold. Costs have fallen across the sector, lifting free cash flow (average FCF yield of 6% this year), while debt levels are falling (average net debt/EBITDA now 1.2x). The sector is trading on an undemanding 7.6x EV/EBITDA, but we believe the companies best positioned to manage price volatility are still those with the highest quality portfolios. Evolution (13% FCF yield), Barrick Gold (12%) & St. Barbara Mining (10%) are the best cash generators. Newmont (8% FCF yield) has the best balance sheet amongst the majors (0.6x net debt/EBITDA), is trading on 0.8x P/NPV, and is our top pick amongst global majors. 

    Divergent trends amongst the global large-cap, mid-cap and small-cap sectors
    Global gold majors remain focused on reducing costs, increasing cash flow and repairing balance sheets. Gearing amongst majors remains elevated (29% average), offsetting appealing cash flow metrics; we believe the majors will continue to progress longer term growth options while retaining free cash to pay down debt. Mid-cap gold miners are in better positions, with stronger balance sheets & internal growth options. The mid caps are trading on 7.6x EV/EBITDA (8.5x for global majors), highlighting the discount applied by the market for lower reserves. Small cap golds provide compelling value opportunities, with strong cash flow (St Barbara 10% FCF yield, Regis 9%) and the best 3-year production growth prospects across the sector. OceanaGold (Hold) has a clear growth mandate, while Alacer Gold & Dacian Gold (both 0.5x P/NPV) are building new projects, are fully-funded and screen deep value. 

     

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    China's Markets Get a Double Dose of Caution From Moody's, MSCI

    This article by Chris Ansley and Enda Curran for Bloomberg may be of interest to subscribers. Here is a section: 

    Moody’s Investors Service unveiled a surprise downgrade of China’s sovereign credit rating, citing concerns about its continued buildup of debt. Earlier, the head of one of the world’s top stock-index compilers suggested China had more work to do to get its onshore stocks into emerging-market gauges. With a June 20 deadline looming, “there’s still a lot of issues to resolve,” MSCI Inc. Chief Executive Officer Henry Fernandez said.

    Underlying the critique from both: issues stemming from the Chinese leadership’s preoccupation with control. Few analysts expect painful reforms to be unleashed ahead of the Communist Party’s leadership reshuffle due later this year. While officials preach the need to rein in credit, ensuring the economy hits a 6.5 percent growth target remains the top priority.

    Moody’s highlighted that policy makers’ are fixated on economic growth targets, meaning already-high leverage will continue to build. For MSCI, concerns include authorities placing restrictions on financial products abroad that would incorporate Chinese stocks.

     

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