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

    Musings From the Oil Patch November 29th 2016

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section:

    You read it here first – tomorrow the members of the Organization of Petroleum Exporting Countries (OPEC) will announce an agreement to limit its output. You will have to wait for the details, and more importantly you will have to wait to see whether OPEC members actually do what they say they will do. For those of us who have seen this show before (often with even greater drama/showmanship), the issues with every OPEC agreement are the details and then its execution. Often the details and the execution are not what the public is led to expect at the time of the announcement. 

    OPEC has little choice at this point but to attempt to salvage some degree of respectability, especially following the debacle of the Doha meeting last spring at which a preconceived agreement blew up at the last minute. We are not going to debate the viability of OPEC as a cartel – to us it has always been an excuse to travel to Vienna and Europe for shopping and partying. On the other hand, OPEC does play an important role in helping to corral a number of important crude oil producers into supposedly one voice, although the power of that voice has been diminished by the evolution of energy markets over the last 25 years, and especially in the last few years. 

    The key factor for the oil market that OPEC understands is that it is in a recovery mode. That is not due to a miracle, or can be attributed to the efforts of anyone in particular. Rather, it is the result of economic discipline being restored to the oil market. Fewer uneconomic prospects are being drilled. Assets are moving from weak hands into stronger hands – hands that don’t necessarily have to drill in order to generate revenue to attempt to keep the doors of the companies open. 

    Additionally, companies are figuring out how to operate more efficiently – fewer employees, more efficient operations and employing greater technology. Producers at the moment have benefited from destroying the pricing structure of the oilfield service industry, enabling the producers to lower operating costs. The producers have driven oilfield service company prices down to levels that are not sustainable for the long-term. Short-term gains for producers will have to yield to higher oilfield service prices if the producers wish to have the equipment, technology and employees that deliver the field services that they need. The question becomes how quickly oilfield service prices rise and how much of those increases can be offset by further efficiency gains. 

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    How Apple Lost China to Two Unknown Local Smartphone Makers

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

    “Oppo and Vivo are willing to share their profit with local sales. The reward was an extremely active and loyal nationwide sales network,” said Jin Di, an IDC analyst based in Beijing. While they declined to detail their subsidy program, she estimates the two were the top spenders in the past year. “They’re doing something different -- they do local marketing.”

    China had for years driven Apple’s and Samsung’s growth. The U.S. company generated almost $59 billion of sales from the region in fiscal 2015, which was more than double the level just two years earlier. During that time its shares surged more than 60 percent. At its peak, Greater China yielded almost 30 percent of its revenue and Apple was neck-and-neck with Xiaomi for the mantle of market leader as users clamored for the larger iPhone 6 models. Even as the domestic economy began to sputter, Chief Executive Officer Tim Cook spent a good chunk of an earnings call last year talking up the country’s promise, saying Apple’s investing there “for the decades ahead.”


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    DB Today Global Macro

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

    European Equity Strategy - Weekly Fund Flows - Andreas Bruckner Over the course of last week, DM investors remained energized by heightened expectations of a regime change from monetary to fiscal policy. DM bond funds lost $3bn of assets, which is somewhat lighter than the previous week’s $8bn of outflows, but keeps DM bond fund redemptions on the fastest pace since the 2013 taper tantrum. Meanwhile DM equities garnered $7bn, which showed more constraint than the record-setting $33bn of the week prior, but still accentuated the rotation from bond funds to equity funds that has characterised investor flows since Donald Trump’s election victory on Nov 8. To put this in perspective, DM bond funds have seen $750bn more inflows than DM equity peers since 2007 ($1tn versus $250bn). Looking at the year on year changes of this ‘over-allocation’ since 2004, it seems to be primarily driven by the yearly changes in the US 10-year Treasury yield.

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    Email of the day on the audio/video commentaries

    I’d like to compliment the new video commentary by Eoin. It is especially helpful when he discusses individual markets/stocks from a technical perspective. Seeing the chart as he speaks is excellent. Well done.


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    Fearing tighter U.S. visa regime, Indian IT firms rush to hire, acquire

    This article by Sankalp Phartiyal and Euan Rocha for Reuters may be of interest to subscribers. Here is a section: 

    Indian companies including Tata Consultancy Services (TCS), Infosys and Wipro have long used H1-B skilled worker visas to fly computer engineers to the U.S., their largest overseas market, temporarily to service clients.

    Staff from those three companies accounted for around 86,000 new H1-B workers in 2005-14. The U.S. currently issues close to that number of H1-B visas each year.

    President-elect Trump's campaign rhetoric, and his pick for Attorney General of Senator Jeff Sessions, a long-time critic of the visa program, have many expecting a tighter regime.

    "The world over, there's a lot of protectionism coming in and push back on immigration. Unfortunately, people are confusing immigration with a high-skilled temporary workforce, because we are really a temporary workforce," said Pravin Rao, chief operating officer at Infosys, India's second-largest information technology firm.


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    Holiday Price War Heats Up as Wal-Mart, Target Chase Amazon

    This article by Lindsey Rupp and Sarah Very for Bloomberg may be of interest to subscribers. Here is a section: 

    “With the lines between traditional brick and mortar and e-commerce continuing to blur, the need to make a big splash during large retail events like Black Friday is significant,” Traci Gregorski, senior vice president of marketing at Market Track, said in an e-mailed statement. “The ease of comparison shopping across channels is creating a situation that puts a definitive advantage in the consumers’ hands.”

    Wal-Mart and others also are steering customers toward online deals, rather than just physical stores. While the chain still offers Black Friday specials at its supercenters, the day marks the beginning of a streak of online promotions called “Cyber Week.” Wal-Mart has tripled its e-commerce selection to 23 million products this year, aiming to better compete with Amazon. The world’s largest retailer said in a statement Friday that Thanksgiving was one of its top online-shopping days this year and that about 70 percent of the traffic to its website came from mobile devices.

    Target, meanwhile, is offering 15 percent off almost everything in its stores and website for two days: Sunday and Monday. The aggressive discounts come at a cost. When Target slashed prices last holiday season, its profit margin slipped to 27.9 percent from 28.5 percent.


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    Email of the day on electric cars and overall pollution

    With regard to electric cars decreasing the world's need for fossil fuels, how is the electricity going to be generated? I have heard the Netherlands, who are one of the world leaders in using electric cars, have had to build three new generating plants already to meet the demand and these are coal fired. It is true that electric cars will laudably reduce urban pollution, where 85% of CO2 generation is created. But CO2 production will simply be transferred to rural areas, where electricity generating plants are normally situated. Energy consumption not be reduced and, since the energy production will be a two-step procedure instead of a single stage, it may well be increased.

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