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

    Italian Assets Resume Slide After Euroskeptic Appointments

    This article by James Hirai and Anooja Debnath for Bloomberg may be of interest to subscribers. Here is a section:

    The Italian Senate picked euroskeptic economist Alberto Bagnai, author of two books advocating the dismantling of the European monetary union, as head of the finance committee.

    Claudio Borghi, an adviser for the League party on the economy and on issues such as the mini-bots short-dated notes, was named the head of the budget committee in the lower house. The populist government program doesn’t include any reference to a possible option for a euro exit.

    “There are a couple of high caliber League euroskeptics getting appointed to important parliamentary jobs in Italy this morning: Borghi and Bagnai,” said Antoine Bouvet, an interest- rate strategist at Mizuho International Plc. “The fact that they get roles that have to do with finance and budget has been understood by the market as a sign that the League intends on pushing its anti-euro ideas.”

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    Germany's Largest Auto Makers Back Abolition of EU-U.S. Car Import Tariffs

    This article by William Boston and Bojan Pancevski for the Wall Street Journal may be of interest to subscribers. Here is a section:

    That would mean scrapping the EU’s 10% tax on auto imports from the U.S. and other countries and the 2.5% duty on auto imports in the U.S. As a prerequisite, the Europeans want Mr. Trump’s threat of imposing a 25% border tax on European auto imports off the table.

    Over the past few weeks, Mr. Grenell has held closed-door meetings with the chiefs of all major German automotive companies, including bilateral meetings with the CEOs of Daimler AG , BMW AG and Volkswagen AG , which operate plants in the U.S. Overall, Germany’s auto makers and suppliers provide 116,500 jobs in the U.S., according to the Association of German Automotive Manufacturers.

    During these talks, which the ambassador initiated, the managers said they would back the scrapping of all import tariffs on trans-Atlantic trade in automotive products as the keystone of a broader deal covering industrial goods. The German government is on board and Mr. Grenell promised to support the idea, according to U.S. and German officials.

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    Starbucks Delivers the Wrong Kind of Jolt

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

    So I'm paying more attention to the weak comparable sales guidance the company offered for the third quarter, and the factors it says have been weighing on sales of late.

    Executives said Tuesday that in the U.S. market, Starbucks struggled to draw customers in the afternoons. This has been an ongoing problem for Starbucks, and executives haven’t demonstrated they have a clear solution. They've recently put up some TV advertising emphasizing Starbucks as an afternoon destination, and perhaps we'll soon see payoff from that.

    But it'd have an easier time luring people for more than just their morning caffeine fix if it could establish itself as more of a go-to for food, not just beverages. And speaking of its menu, the chain has work to do on its signature drink offerings, too. Look at what has happened to Frappuccino sales:

    Perhaps this shouldn't come as a shock, given that Frappuccinos pack a lot of calories and customers are increasingly looking for healthy choices. But Starbucks needs some new hits to give people a reason to come back through its doors, especially with so many insurgent and boutique coffeehouses chasing the same customers.

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    Investing Without People

    Thanks to a subscriber for this memo from Howard Marks at Oaktree which may be of interest. Here is a section:

    It seems obvious that s formula’s application and popularization eventually will bring an end to its effectiveness. Let’s say (in an incredibly simplified example) you study of the market show that a small-company stocks have beaten the market over a given period, so you overweight them.

    Since “beating the market,” “out-appreciating” and “out-performing” often are just the flip of “becoming relatively expensive”, I doubt any group of stocks can outperform for long with becoming fully- or over-priced, and thus primed for underperformance.
    And it seems equally clear that eventually others will detect the same “small-cap effect” and pile into it. In that case, small-cap investing will become widespread and – by definition – no longer a source of superiority.

    To reiterate, George Soros’s Theory of Reflexivity says the behavior of market participants alters the market. Thus no formula will be a winner forever. For me, that means the achievement of superior returns through quantitative investing requires the ability to constantly and correctly update the formula. Since investing is dynamic, the rules relied on in quantitative investing have to be dynamic.  

    According to Raj Mahajan of Goldman Sachs, my principal tutor on these matters. “The best models today will change exposures as the environment changes and as dynamics of the factors chance (e.g. as they become cheaper or more expensive). The rules have become increasingly complex, and they are able to “learn” (that is, they are “conditional” or “contextual”) in that they understand more of the environment.” Constant renewal – not “a formula along” – seems to be a minimum requirement for any quants’ long-term success.

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    Noble's Marathon Revamp Nears Finish After Goldilocks Deal

    This article by Krystal Chia and David Yong for Bloomberg may be of interest to subscribers. Here is a section:

    The remaining equity in the new company is being split between senior creditors and management. Under the latest deal, senior creditors stand to receive 70 percent of the trader, while management’s share will be 10 percent.

    In a separate statement, Noble Group said Pinpoint Asset Management Ltd. and Value Partners Ltd., holders of its perpetual securities, withdrew a lawsuit filed against the company on June 13. Perpetuals have been offered $25 million of new bonds in exchange for securities with a face value of $400 million. On Wednesday, the perpetuals rose 0.6 cent, the most in a week, to 7.8 cents.

    “Obstacles to the completion of the restructuring are probably getting removed,” said Neel Gopalakrishnan, senior credit strategist at DBS Group Holdings Ltd. “But the key question is still whether, post restructuring, the company will be able to turn around operations for creditors to recover value.”

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    Xi Can Make Life Difficult for U.S. Companies After Trump Threat

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

    Pressuring companies through bureaucratic means “is a practice that the Chinese have used for a long time and our companies are on guard,” William Zarit, chairman of the American Chamber of Commerce in the People’s Republic of China, said on Bloomberg Television. “This is definitely a concern.”

    South Korean and Japanese companies have all felt this effect, with their businesses in China hurt as part of a dispute between states.

    In 2017, following the Seoul government’s decision to deploy an anti-missile system that China opposed, China forced South Korean retailer Lotte Shopping Co. to suspend operations at many of its hypermarkets in the country for alleged violations of fire-safety rules. The company eventually decided to pull out of China, but still can’t sell all its units and continues to rack up losses. In total due to the dispute, Lotte Group lost an estimated 2 trillion won ($1.8 billion) in the year from March 2017, according to Yonhap News Agency.

    The backlash also led to boycotts, with consumers shunning cars from Hyundai Motor Co. and cosmetics from Amorepacific Group. Chinese tourists cancelled Korean vacations, forcing airlines to scrap flights and hotels to slash rates. The Bank of Korea estimated that 0.4 percentage point was cut from 2017’s gross domestic product.

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    US Oil Firms Use Shale Know-How To Revitalize Old Oilfields

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

    Wildcatters first pumped oil from the Austin Chalk nearly a century ago, but output reached its peak in the early 1990s even though the formation still contains about a billion barrels of crude, according to U.S. government's Geological Survey.

    That is not unusual. Oil producers have historically extracted less than half the oil from any particular field because the rest has not been accessible at a profit.

    That is changing in fields like the Austin Chalk.

    Based on test wells and modeling techniques, Conoco believes long, horizontal wells with multiple fracks - a technique used often in shale fields - will deliver strong results from its acreage in the Austin Chalk.

    "What we were seeing with some of the newer technologies work really well in the Austin Chalk," Conoco Chief Executive Ryan Lance told Reuters.

    Some wells they have fracked in the Austin Chalk have produced more prolifically than shale wells. Wildhorse's newer Austin Chalk wells produced more than three times the initial output of wells at the Eagle Ford shale field, the company said this month.

    EOG also said an Austin Chalk well it drilled this year in Texas produced nearly 3,000 bpd in its first month, more than twice the first month rate of a shale well it had completed in the Permian during the same period.

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