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

    U.S. Launches Missile Strike on Syria in Response to Gas Attack

    This article by Tony Capaccio and Nick Wadhams for Bloomberg may be of interest to subscribers. Here is a section:

    At the United Nations, diplomats privately debated a resolution that would condemn the poison-gas attack and demand access to Syrian air bases by UN investigators. Russia, which has backed Assad militarily since late 2015, would probably veto that measure after putting forward a separate measure which wouldn’t compel Syria to provide such access.

    At the UN Security Council on Wednesday, U.S. Ambassador Nikki Haley stood up at her desk to show diplomats photos of dying children gasping for air. She accused Russia of pushing a “false narrative” that blames rebel forces for the attack, and issued a new warning.

    Safronkov, the Russian diplomat, said he’d been “very frank” in consultations with U.S. officials.
    “We have to think of negative consequences, and all responsibility of military action will be on the shoulders of those who initiated such doubtful and tragic enterprise,” he told reporters at the UN

    Syria’s government said pilots bombed what turned out to be a rebel-controlled chemical weapons stockpile, while Russian officials on Wednesday said it’s too soon to assign blame for the attack. Nonetheless, it appeared before Thursday night’s missile strike that Russia’s support for Assad hadn’t diminished.

    Tillerson’s talk of creating a coalition “gives the impression that in the West there is a rush to use the situation to take from Assad the success in turning around the situation in the country and attain their previous goal: removing him from power at any cost,” Konstantin Kosachyov, chairman of international affairs committee in the Russian parliament’s upper house, said by email.

    The State Department official said Thursday afternoon that Tillerson would go to Moscow as planned for meetings with senior officials on April 12. That visit was expected to include a meeting with President Vladimir Putin.


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    Winners and losers of the Industrial Internet

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

    Industrial end-markets are still at the beginning of their digitalization journey
    The Industrial Internet is about optimizing entire manufacturing systems, including products, processes, supply chains and business models. We estimate digitized solutions could generate c.15% annual opex savings in industrial markets by making assets more efficient. This could reduce the addressable market size for traditional manufacturers of big iron machines. However, this should translate in a market opportunity of c.$200bn for IIoT suppliers in areas like predictive maintenance or operation optimization.

    IIoT strategies are as much defensive as they are offensive 
    Industrial companies will have to be good at software to remain successful as an increasing share of the manufacturing value chain could shift to providers of sensors, data analytics and industrial cloud architectures. For example, a key risk for the manufacturers of large pieces of equipment requiring maintenance/retrofit is that software companies specializing in analytics or 3D printing might take a growing share of the lucrative service business pie.

    3 building blocks for success: Siemens and Schneider well placed
    We believe successful companies in an IIoT world will combine an integrated platform of digital solutions; deep domain know-how to give context to data analytics and automation/control activities to in real-time the insights from data analysis on manufacturing processes. Siemens stands out for its comprehensive portfolio of automation and software tools but, the group faces significant digital disruption risks on servicing of its installed base. We rank Schneider and ABB highly. Both have relatively similar IIoT competencies but in different end-markets. We also estimate Schneider is running 5 years ahead of ABB in implementation of its group-wide digital platform and strategy.


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    Europe: Complexity Rules

    Thanks to a subscriber for this note from Henry H. McVey for KKR which may be of interest. Here is a section:

    Our bottom line: We actually left feeling more encouraged about the prospects for risk assets in the near term, though some of our long-term concerns about the “Union” remain intact. See below for full details on our latest views, but our initial Thoughts from the Road are as follows:
    Despite significant political uncertainty — and almost in spite of itself — European GDP continues to chug along at a steady clip. In fact, we are lifting our 2017 GDP forecast to 1.7% from 1.4% previously, driven by better than expected investment trends. Maybe more important, though, is that our quantitative GDP model is forecasting robust growth in Europe of 2.5% for 2017 (Exhibit 11). This forecast is driven largely by the powerful effects of the European Central Bank’s highly accommodative monetary policy regime, partially offset by stagnant housing market concerns. However, if mortgage lending growth does accelerate, implied growth by our model could be even stronger, though we fully acknowledge an overall political risk discount of 50-75 basis points to our quantitative growth model likely makes sense in the current environment.

    Investors should continue to think about a European macro environment where consumption, particularly around experiences, remains compelling relative to overall trend growth. This viewpoint is consistent with an emphasis on sectors such as travel, health/beauty, and home improvement. By comparison, we remain cautious on global trade, and our research shows increasing examples of China insourcing manufacturing equipment that used to be built by leading European industrial enterprises (Exhibit 10). Our bigger picture conclusion is that globalization flows and production increasingly now appear to be moving towards more of a regional model, with a particular emphasis on Asia, Europe, and the Americas.

    Europe continues to barrel down the path of a two-tiered economy, which is likely long-term unsustainable, in our view. Specifically, there is a large and growing dichotomy between Germany, with its strong growth, and the rest of Europe, Italy in particular. See below for details, but Italian GDP is now seven percent below its 2008 level in real terms; by comparison, Germany is a full eight percent above its 2008 level in real terms. During the next few quarters we believe that the ECB will allow Germany to run “hot,” leading to a further widening between Europe’s largest and fourth largest economies. Somewhat ironically, the better Germany’s GDP performs, the more German bunds the ECB has to buy, while Italy’s economic underperformance currently leads to less ECB purchases of Italian sovereign debt. We view these types of divergences as unsustainable, underscoring our belief that Europe will need to implement monetary and fiscal policies that better smooth economic growth and equality across the region; otherwise, we fear it will lead to even more dire populist reactions, particularly if immigration issues are not reconciled


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    Vanguard has a Growing Dominance but Customer Service Takes a Hit as it receives Epic Inflows of Cash

    Here is a section of this topical article from philly.com:

    Vanguard's legacy was set by founder John Bogle, now retired, whose revolutionary idea was a low-cost index fund that kept fees low and returns higher -- as much as 0.50 percent higher annually over time.

    That consumer-friendly concept has drawn in more than 20 million investors since its founding in 1975, and it's an edge that Vanguard is keen to maintain. 

    When Fidelity Investments recently ran full-page ads in the Wall Street Journal and the New York Times touting its "lower-than-Vanguard" expense ratios on several funds and ETFs, Vanguard hit back and lowered those of several funds,  said Dan Wiener, editor of the Independent Adviser for Vanguard Investors. “What we’re talking about here is bragging rights.”

    Indeed, Vanguard says its fee cuts this year alone have created $143 million in savings across 124 funds.  

    So much money has poured into Vanguard’s largest funds – the $465 billion Total Stock Market Index and S&P 500 – that the team that runs those along with 200 more index funds has grown to 80 people today, led by Portfolio Manager Gerry O’Reilly and co-heads of trading Mike Buek and Ryan Ludt, from just a small team two decades ago.

    Online, Vanguard fans are giving the firm the benefit of the doubt — for now.

    After all, Vanguard’s assets have tripled in a decade, rising by $1 trillion to $4.2 trillion in just the last five years. Costs have fallen from 0.68 percent to 0.13 percent on average since 1975, McIsaac added.

    “Until recently the quality of customer and operational service, and technology was always superb.  Virtually error free,” wrote a client named Larry Mariasis on the Wall Street Journal’s comment pages. “But the pace of recent growth has impacted negatively the quality of service. ... Vanguard needs to seriously consider slowing down its growth ... to catch up with staff hiring and training.  Otherwise Vanguard risks tarnishing an amazing reputation.”

    David L. Zalles, a Blue Bell accountant, says his peers complain about mistakes in record-keeping at Vanguard. He said he personally had been "disappointed" about the tax cost basis record-keeping. "No one at Vanguard apparently understands the actual reporting requirements."

    Vanguard spokeswoman Arianna Stefanoni Sherlock said that the company had seen "an uptick in service-related complaints in sporadic months of last year," but that the stress "has all but abated," due in part to hiring here and for its Arizona and North Carolina locations.  

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    Nicola Sturgeon Out of Touch With Scots Over Brexit as Poll Shows Support for Theresa May Vision

    Here is the opening of this article from The Telegraph:

    Nicola Sturgeon has been accused of being out of touch with Scotland about Brexit after a major survey found almost two-thirds of Scots oppose her demand for a different deal and support Theresa May’s UK-wide blueprint.

    The First Minister’s justification for a second independence referendum was severely undermined by the NatCen research, which found 62 per cent of Scots think trade and immigration rules should be the same as in the rest of the UK.

    An overwhelming majority also support Mrs May’s plan to curtail free movement from the EU and oppose the First Minister’s insistence that it continue, with 64 per cent believing that immigrants from the Continent should be subject to the same restrictions as those from elsewhere in the world.

    The research concluded that Scots’ views are similar to those of people in the rest of Britain and warned Ms Sturgeon that her argument that the Prime Minister’s Brexit blueprint justifies an independence vote “is unlikely to prove particularly persuasive.”

    The Conservatives said the survey showed it was Ms Sturgeon who is out of touch with Scots’ views on Brexit, with even a majority of independence supporters demanding curbs on immigration.

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    There is Nothing Wrong with Britain Playing Mr Nasty: Negotiating Brexit Will Require Tough Talk

    Britain must embrace its new, nasty brand. As we enter negotiations with the EU, everything is going to be on the table. We are no longer partners in a project to create a harmonious Europe. We are a nation state bargaining for our people’s self-interest. We want the world to love us for our tea and decency. But on this occasion we’re going to have to fight – and if that means acting nasty to convince as nasty, so be it.

    I know, I know – that’s a very simplistic narrative. In fact, Britain has always been regarded as an irritant on the continent. We begged to get into the Common Market. Once in, we said we weren’t all in, just halfway in. Now we say we want out. The Europeans must think we’re mad, especially since Theresa May tied the future security of Europe to a good trade deal with Britain. But the Government has not gone Looney Tunes Right-wing and nor is it really being nasty. It is simply stating the facts.

    One fact is that the EU is not negotiating with a regular European state. This isn’t “so long Portugal and thanks for all the fish”. Britain has one of the best intelligence services in the world; we have nuclear weapons; we are at the heart of Nato. This is part of the context to these talks and it would be odd if the UK did not mention it. One reason why we’ve been running the fifth largest defence budget in the world is so that we can purchase clout.

    Is this outrageous? No. It is rational. It was equally rational of Spain to insist that any decisions about Gibraltar that come up in the Brexit talks should be run by Madrid. Spain wants Gibraltar, just as the Argentinians want the Falklands. That’s an expression of national self-interest, that’s understood.

    But it’s also rational of Britain to point out that the Gibraltarians voted by 99 per cent in 2002 to reject joint sovereignty with Spain. And it is equally rational to add that the UK has a commitment to maintaining Gibraltar’s status that is, implicitly, backed by force of arms.

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    The voter apathy that helped Donald Trump win is about to hit France

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

    The paralysis has no quick fix. Last night (April 4), in an effort to lift spirits, France’s presidential debate organizers decided to trot out all 11 eligible candidates for the second televised debate, rather than just the top five. The barrage of small candidates on stage left each with “no room to develop an idea,” and voters no time “to exercise their judgment,” one critic (link in French) argued. “Does this really help the undecided to form an opinion?” another asked (link in French).
    All the better for France’s far-right wing. Voter turnout in France (80% in 2012) has long upstaged that of neighboring Germany (71%), the UK (66%) and Switzerland (47%). But as that number drops in France’s multi-round system, the odds of a far-right win creep up.

    That’s because fervent support for Le Pen in the first round will likely carry over to votes for her in the second. But candidates with more tepid support, including centrist Emmanuel Macron, conservative François Fillon, and socialist Benoît Hamon, may suffer if non-Le Pen voters abstain (paywall) in the second round. Right now, Le Pen and Macron are neck-and-neck in French polls for the first round.

    The predicament was similar in 2002, when candidate Jacques Chirac’s famous slogan (link in French) “Vote for the Crook, not the Fascist” helped him secure a landslide victory against Le Pen’s father, Jean-Marie Le Pen, in the second round. This time, voters may have had their fill of crooks and fascists both.


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    Bezos is selling $1 billion of Amazon stock a year to fund rocket venture

    This article by Irene Klotz for Reuters may be of interest to subscribers. Here is a section: 

    “My business model right now … for Blue Origin is I sell about $1 billion of Amazon stock a year and I use it to invest in Blue Origin," said Bezos, the chief executive of Amazon.com Inc (AMZN.O) and also the owner of The Washington Post newspaper.

    Ultimately, the plan is for Blue Origin to become a profitable, self-sustaining enterprise, with a long-term goal to cut the cost of space flight so that millions of people can live and work off Earth, Bezos said.

    Bezos is Amazon's largest shareholder, with 80.9 million shares, according to Thomson Reuters data. At Wednesday's closing share price of $909.28, Bezos would have to sell 1,099,771 shares to meet his pledge of selling $1 billion worth of Amazon stock. Bezos' total Amazon holdings, representing a 16.95 percent stake in the company, are worth $73.54 billion at Wednesday's closing price.

    For now, Kent, Washington-based Blue Origin is working toward far shorter hops - 11 minute space rides that are not fast enough to put a spaceship into orbit around Earth.


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    Cheap Indian engineers now have no place in Donald Trump's America

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

    The National Association of Software and Services Companies (NASSCOM), a trade group that represents the Indian IT industry, played down the possible impact of the new USCIS memo. “The clarifying guidance should have little impact on NASSCOM members as this has been the adjudicatory practice for years and also, as several of our member executives have noted recently, they are applying for visas for higher-level professionals this year,” the association said in an emailed statement.

    The Indian IT sector has been preparing for this sort of tightening for some time now. For instance, TCS, India’s largest IT services company, has sharply reduced the number of US visa applications: In 2016, it filed only 4,000 compared to 14,000 the year before. In 2015, the company also began tweaking its business model to effectively operate in “a visa-constraint regime,” former TCS CEO N Chandrasekaran explained in January.

    Late last year, Infosys, the second-largest in the sector, too, signalled that it would look to hire local talent more aggressively in the US, a far cry from the turn of the decade when such companies were infamously called out for “body shopping“—i.e, hiring Indian software professionals to use them on short-term projects elsewhere.

    Despite all such evasive action, though, the US clampdown will hurt the sector. “It’ll be a short-term jolt,” said Sanjoy Sen, a former Deloitte partner and doctoral researcher at UK’s Aston Business School, although the exact magnitude of the impact will depend on the size of the companies and their levels of preparation. Smaller firms with a headcount in the hundreds, in particular, may be harder hit, Sen said.


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