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October 25 2013

Commentary by David Fuller

October 25 2013

Commentary by David Fuller

Email of the day

From Japan, on the country's changing policies regarding nuclear power

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Friday 25th October 2013

Political Dysfunction Harms U.S. Global Standing: Kerry - Here is the opening from this interesting article by Terry Atlas & Nicole Gaouette for Bloomberg:

Secretary of State John Kerry blamed the government shutdown that ended last week for fueling international doubts about America's commitment to global leadership, eroding U.S. standing and influence.

Kerry spoke yesterday as some of America's closest allies are criticizing U.S. electronic spying and questioning its resolve in confronting international crises. The discord risks undermining longtime alliances and support for the Obama administration's pursuit of negotiations with Iranand Syria.

Leaders in Israel and Saudi Arabia, the two closest U.S. allies in the Mideast, are faulting American moves regarding Iran's nuclear program and Syria's chemical arsenal. German Chancellor Angela Merkel and European leaders are echoing angry complaints from Latin America about U.S. surveillance. Asian diplomats, with China in their backyard, are questioning America's pledges to bolster their security after the U.S. backed away from a threatened military strike against Syria.

"It's the perception that there's an abandonment of a robust international agenda," said Ian Brzezinski, a senior fellow at the Atlantic Council, a Washington policy group. "In a world where America is seen as less engaged, our opponents will see more opportunity to assert their values."

"It's less likely to be conducive to the spread of democracy and rule of law," said Brzezinski, a former Defense Department official under President George W. Bush. "It creates a less stable world."

Ben Rhodes, President Barack Obama's deputy national security adviser, said complaints from overseas don't reflect a weakening of American influence, describing such gripes about U.S. power as a cyclical occurrence.

My view - There is little doubt that the ongoing US political impasse leading to brinkmanship over the debt ceiling and the recent partial government shutdown has undermined America's reputation for sound governance.

Nevertheless, there is also a 'damned if you do and damned if you don't' aspect to criticism of US international policies in the last few years. This reflects global anxiety over not only the decisions and events being questioned but also the uncertainty caused by domestic problems in most countries, not least due to weak GDP growth which compounds the difficulties of governance. Consequently, there is additional apprehension over what happens when the US really does exit from quantitative easing (QE).

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Email of the day - From Japan, on the country's changing policies regarding nuclear power:

"Thank you for your comments everyday. I enjoy the comments.

"As for the Japanese electric utilities reform, the reform of Japanese electric power utilities is under way. The generation units and the supply units of all the utilities will be separated. The bill will be introduced into the Diet this fall.

"On the other hand LDP have the discussion about the integration of the reactors' operations. One reason is the operation risks are too big for private enterprises. Another reason is the government want to export the power reactor units. The government needs stable and safe operations to avoid the bad reputations.

"Now several reactors' safety inspections are under way. These reactors will probably run next spring or summer. The Energy costs are high in Japan as you said. Japanese Economic Circles have been demanding restarting the reactors."
David Fuller's view - Thank you so much for responding to my request on Wednesday for insights on this topic. Your summary sounds like what I would describe as a 'virtuous circle' for Japan, in that everyone stands to benefit:

1) Japan needs cheaper Energy to propel its economic recovery and this will require nuclear power. 2) The Japanese public needs reassurance that a policy of centralised control and administration of nuclear power will avoid another Fukushima. 3) Japan's economy would benefit from a commercial nuclear power industry but first it needs to reassure potential buyers by successfully reviving its own domestic capacity.

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October 24 2013

Commentary by David Fuller

Are Those White Elephants In The Water?

This is an excellent column by Matt Ridley for The Times (UK) (may require subscription registration but a PDF is posted in the Subscriber's Area). Here is the opening
Here's a short quiz. Question One: which source of Energy is allowed to charge the highest price for its electricity? Question Two: which source of Energy is expected to receive the greatest capital expenditure over the next seven years? The answer to both questions is offshore wind.

Offshore wind farms are the elephant in the Energy debate. Today, the Energy department estimates that electricity prices are 17 per cent higher as the result of green policies and that this will rise to 33 per cent by 2020 or 44 per cent if gas prices fall, as many expect. Offshore wind is the single biggest contributor to that rise. Of the £15 billion a year that the Renewable Energy Foundation thinks consumers are going to be paying in total green imposts by 2020, the bulk will go to support offshore wind.

Britain is a proud leader in offshore wind. "The UK has more offshore wind installed than the rest of the world combined and we have ambitious plans for the future," says Ed Davey, the Energy Secretary. I wonder why that is. Could it be that other countries have looked at the technology and decided that it's far too costly? George Osborne says he does not want Britain out ahead on
green Energy. He should take a long hard look at why we are so far out ahead on this extravagant folly.

Currently we get under 3 per cent of our electricity from offshore wind, or less than 0.5 per cent of our total Energy. If Mr Davey's ambitions are realised and 20 per cent of our electricity comes from offshore wind in 2020, then we will need 20 gigawatts of capacity because wind turbines, even at sea, operate at less than 40 per cent of capacity. That's about six times what we have today and the cost of building it would be greater than the investment in nuclear Energy over the period
David Fuller's view - I have long been an opponent of wind farms because they are the most expensive and least reliable source of renewable Energy. They are also a monstrous blot on the countryside and for sea views, taking up far more space than any other sources of Energy, and for less output. They are murderous cuisinarts for birds and we are only beginning to understand the extent to which they adversely affect sleeping patterns for anyone living within approximately a mile of these towering, noisy eyesores.

The UK Government has been incredibly naïve about wind farms, and apparently no one more so than the Prime Minister. The current Energy Secretary mentioned above appears to have learned nothing and is little more than a cheerleader for a bad policy which he temporarily oversees. This incompetence has jeopardised Britain's Energy security and increased prices far more than would have been necessary with sensible policies, starting with fracking for shale oil and gas.

(There are 26 Archived articles and comments on this subject which you can access via the 'Search' facility shown upper-left, fourth item down. Click on that and it will open a window; type in wind farms and then click on the blue Search button to the right of the window.)

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October 23 2013

Commentary by David Fuller

Japan Mulls Plan for One Operator to Run All [Nuclear] Reactors

Here is the opening from this interesting Bloomberg article
Japan's government is discussing a radical overhaul of its nuclear power sector, the world's third largest, that would combine the nation's 50 operating reactors into a single company to rebuild an industry that's been effectively halted by the March 2011 Fukushima disaster.

The company would be owned by Japan's nine regional utilities, and two wholesalers Japan Atomic Power Co. and Electric Power Development Co. (9513), while the government and local reactor makers would give financial and technical support, Taku Yamamoto, who chairs the ruling Liberal Democratic Party's Energy committee, said in an interview.

Part of the profit from sales of the new company's electricity would be funneled toward the cleanup of Tokyo Electric (9501)Power Co.'s wrecked Fukushima atomic station and victim compensation, which combined may cost more than 11 trillion yen ($112 billion). The plan would keep Tokyo Electric alive to shoulder Fukushima costs and avert any blackouts in Tokyo, the host of the 2020 Olympics.

"The plan is based on Tepco's profits covering Fukushima costs without taxpayers' money and to increase the government's role in the nuclear industry," said 61-year-old Yamamoto. "Who's going to like a bankruptcy of Tepco? The company has to go on working hard for the Fukushima disaster until it dies."

Setting up a comprehensive nuclear-management company should help Japan expand its exports of reactors and operation skills as domestic electricity demand slows, Yamamoto said.

Tsuyoshi Numajiri, a spokesman for Tokyo Electric which is also known as Tepco, declined to comment on lawmakers' discussions to spin off nuclear operations at utilities, saying such plans are subject to change.
David Fuller's view - I was surprised to see this article because nuclear power has been a dead issue in Japan following the understandable public reaction to the Fukushima disaster in 2011. That will not easily or quickly change. Nevertheless, this plan may help and it sounds sensible.

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October 18 2013

Commentary by Eoin Treacy

Adjusting to reality

Thanks to a subscriber for this informative report from Standard Chartered focusing on the Middle East and North Africa. The full report is posted in the Subscriber's Area but here is a section
Social and political challenges in the wider Levant and North Africa are in stark contrast with the economic boom much of the GCC is enjoying. The GCC economies are benefiting from years of robust hydrocarbon dynamics, although they also face longer-term challenges.

Saudi Arabia is pouring resources into its longer-term development objectives, supporting healthy economic growth. Yet this brings inflation and concerns about productivity. Dubai‟s economy, which not long ago faced severe challenges, is performing extremely well against a backdrop of strong investment in the region, benefiting from its role as a trade and services hub. Jordan is now fast-tracking badly needed Energy reforms to slow the drain on government finances. Egypt‟s political transition is ongoing, and funding from the GCC is supporting the Egyptian pound (EGP) and the balance of payments. Reforms, however, have been delayed and look unlikely as long as social pressures and political uncertainty remain high.

We see three core themes for the region:

1. The need for subsidy reforms to reduce the load on government finances. While these measures may bring near-term pain, they are essential to reduce heavy subsidy burdens in the region.

2. Employment challenges are widespread, even in wealthy economies like Saudi Arabia. Creating sustainable employment opportunities is a priority.

3. The region needs to develop strong and robust legal systems, which are key to sustaining cross-border investment flows that are necessary to support economic growth and create employment.
Eoin Treacy's view - The Middle Eastern region has been among global laggards during the post credit crisis boom that has overtaken the majority of global stock markets. Political upheaval, violence and inflation have increased uncertainty. Changes in the administration of countries such as Libya have also resulted in oil production cuts However countries that have avoided the ravages of war, have been able to increase production and the economic outlook is turning more positive. The elevation of Qatar and the UAE from frontier to emerging market status by MSCI in June appears to have been a catalyst for improved investor sentiment. (Also see Comment of the Day on from June 5th).

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October 14 2013

Commentary by Eoin Treacy

Email of the day

on an addition to the Chart Library
October 14 2013

Commentary by Eoin Treacy

Martin Springâs On Target

Thanks to the author for this edition of his iconoclastic report. This month he kindly reviews Crowd Money but here is a section on the German utilities sector
German companies now have to pay almost three times as much for electricity as their American competitors, according to a Siemens study. One reason is that there’s no supply in Europe of cheap shale gas. Another is the cost of huge subsidies given to producers of wind, solar and biomass power.

Because of lack of a national grid, too much of that power is generated in the North, yet isn’t available where it’s needed, in the South. And because those supplies are so erratic, polluting coal-fired plants have to be used to make up the difference, increasingly being fuelled by imports from the US.

The German government has shut half the nation’s nuclear power production, and planned to close the rest. It’s committed to sourcing 80 per cent of its electricity from renewables by the year 2050. Subsidies for wind and solar power are now costing $23 billion a year, and forecast to total $735 billion by 2050.

Most of these extra costs are being loaded on consumers, with the pain greatest for those least able to afford them. More than 300,000 households are having their power shut off for lack of payment as winter approaches.

One consequence of the chaotic policymaking is that Germany’s emissions of greenhouse gases are actually rising, with older “dirty” power stations being reopened.

Energy policy, known in German as Energiewende (Energy turnaround), is an “unholy mess,” says FT editor Tony Barber.
Eoin Treacy's view - Iberdrola’s CEO highlights that the politically driven subsidies for wind and solar are not only affecting German consumers.

“More than 50 percent of the bill European consumers are paying today has nothing to do with power generation and networks, and that’s because of political decisions,” said Iberdrola’s Ignacio Galan. “That has already created a lot of distortions.”

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October 09 2013

Commentary by Eoin Treacy

The impact of rising east coast gas prices

Thanks to a subscriber for this detailed report from Deutsche Bank focusing on the Australian gas market. The full report is posted in the Subscriber's Area but here is a section
Access to LNG infrastructure and a demand side response will limit price rises.
We disagree with the premise that east coast gas prices must rise to international pricing equivalence. In our view the theoretical arbitrage opportunity for 3rd party gas seller to achieve LNG netback pricing will not eventuate. The three CSG-to-LNG projects currently under construction have sufficient reserves to meet their combined export requirements, suggesting no net additional supplies are needed from 3rd parties. In addition, we believe there will be a demand side response to rising gas prices, led by the power generation sector which currently represents c.30% of gas demand on the east coast. Higher gas prices imply power stations move up the cost curve and generate less, acting as a natural release valve to rising prices.

The impacts on the Australian economy are negative but manageable
Higher gas prices will inevitably lead to higher input costs for end consumers. However if prices increase to $6-7/GJ as we expect, there are no stocks within Deutsche Bank’s Australian coverage universe facing double digit earnings downside. In addition, mitigation opportunities led by increased Energy efficiency and fuel switching could see earnings impacts further reduced. We do not subscribe to the thesis of looming irrevocable damage to the Australian economy from higher Energy costs
Eoin Treacy's view - As Australia’s natural gas export capacity ramps up it is likely to offer a useful template for the USA where the debate continues on how committed the country should be to exports.

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October 01 2013

Commentary by David Fuller

The Threat of 'Abegeddon' From Taxes in Japan

Here is the opening for this interestingly sceptical column by Bloomberg's Asia-Pacific columnist, William Pesek
Posterity is watching carefully as Shinzo Abe goes ahead with a sales-tax increase aimed at getting a handle on Japan's huge debt burden, the world's largest. Unfortunately history may judge him no better than Ryutaro Hashimoto, the last Japanese prime minister to kill an economic recovery with ill-timed fiscal tightening.

That's not the conventional wisdom of the moment. Markets are euphoric over surging confidence among large Japanese manufacturers. September's jump in the quarterly Tankan (JNTSMFG) index -- to the highest levels since before the Lehman Brothers Holdings Inc. collapse in 2008 -- gave Abe just the tail wind he needed to raise the consumption tax to 8 percent from 5 percent starting in April 2014, with a further 2 percent increase in the cards for 2015.

Yet Abe is ignoring two things that could end his revival program, dubbed Abenomics: the precedent set by Hashimoto, Japan's 53rd prime minister, and the specter of inflation.

Hashimoto's 1997 sales-tax increase scuttled Japan's best chance at strong growth in a decade. By the time Hashimoto left office in 1998, business leaders were deriding him as Japan's Herbert Hoover, the 31st president who botched the U.S. exit from the Great Depression with badly timed austerity measures.

Inflation heightens the risk Abe is making the same mistake. The government hailed news last week that consumer prices are rising at the fastest pace since 2008 as a vindication of Abenomics. Yet the 0.8 percent jump in prices excluding fresh food in August was purely an Energy story, driving by a surge in costs for fuel imports.
David Fuller's view - All of William Pesek's remarks in the column above are relevant and no one ever thought that the challenge of reinvigorating Japan's economy was going to be easy. After all, there is the enormous government debt and the national loss of confidence over the last 25 years. The Fukushima disaster in 2011 has compounded Japan's Energy problems and the global economy is soft.


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September 30 2013

Commentary by David Fuller

September 27 2013

Commentary by David Fuller

Shale Gas Study Showing Minimal Methane Leakage Exposes Rifts in Enviro Movement

Here is the opening from the Huffington Post's article on this study
A new Environmental Defense Fund-University of Texas methane gas study has exposed deepening rifts in the environmental movement over the future of natural gas.

One of the central tenets of anti-shale gas activists -- such as green campaigner Bill McKibben, NGO's like Environmental Working Group or websites like Desmogblog -- is that methane leaked during the hydraulic fracturing extraction process makes natural gas more carbon polluting than coal carbon. The assertion that 'natural gas is bridge to a low carbon Energy future' is a sham, they claim. But a growing number of progressive-minded Energy experts at the EDF, Natural Resources Defense Council, Council on Foreign Relations and elsewhere are taking a more science-based approach, and letting the empirical evidence guide their views.

Indeed, methane is a potent greenhouse gas, so leaks could theoretically wipe out the documented climate benefits with respect to reduced carbon emissions of natural gas, a comparatively clean fossil fuel. But the fears were based almost entirely on a contested study presented as a letter and released two years ago by two Cornell University scientists who claimed catastrophic levels of methane were being leaked by fracking operations.

In its most recent estimate based on ancient data extending back to 1990 to the Paleolithic era of shale gas extraction technology, the Environmental Protection Agency had estimated that "natural gas systems" emit about 1.3 percent of total natural gas production. Many in the natural gas industry had asserted that this estimate was outdated and way too high, while anti-fracking campaigners said it understated the methane leakage problem.

Now we almost certainly know the answer. Released September 23, the report led by David Allen at the University of Texas found that methane emissions from new wells being prepared for production, a process known as completion, captured 99 percent of the escaping methane -- on average 97 percent lower than the 2011 EPA estimates. It is the most comprehensive shale gas emissions study ever undertaken on methane leakage, covering 190 well pads around the United States.

Energy experts and environmentalists celebrated the finding that almost all the escaping methane could be captured by state of the art equipment. "The good news is that under EPA regulations issued in April 2012 most fracked natural gas wells will have to capture or flare methane during well completions staring in 2015," wrote Dan Lashof on his blog at the Natural Resources Defense Council.
David Fuller's view - This is welcome news and another triumph for technological innovation. If you agree, tell your politicians because the world needs to use more natural gas and fracking provides access to the shale reserves in most countries

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September 27 2013

Commentary by David Fuller

The World's Climate Scientists Explain How to Avoid Drastic Global Warming: It's Not Easy

Here is the opening for this interesting summary of the Intergovernmental Panel on Climate Change (IPCC) report
Humans are warming the planet. Climate scientists are 95 percent sure of this - as sure as they are that cigarette smoking causes cancer. That's one takeaway from the big new climate report by the Intergovernmental Panel on Climate Change, which began rolling out Friday.

The major report synthesizes the vast array of climate science research out there. Humans have pushed temperatures higher by burning fossil fuels, clearing forests, and other activities. If we keep emitting greenhouse gases, that will lead to more ice melt and higher sea levels in the decades ahead.

None of this is too surprising. Climate scientists have known that humans are warming the planet for many years - their confidence has gone up, but the conclusion has stayed the same.

Even so, it's worth reading through the summary of the IPCC report to see what else the climate panel has to say. There are some new details here, including the critical point that humans will have to keep the vast majority of their fossil-fuel reserves in the ground if we want to keep global warming below 2ºC, the level deemed "dangerous" by world leaders.

1) Humans are in control of how much the planet will heat up in the decades ahead. We can choose 1ºC (or less) of global warming. Or we can choose a drastic 4ºC.

This may seem like an obvious point, but it's worth dissecting. The IPCC report notes that there's typically a fair bit of natural variability in the climate system, thanks to volcanic eruptions, solar cycles, and various ocean processes. As a result, we're likely to see some fluctuations in global temperatures for years to come - the recent slowdownis a perfect example - even as the long-term trend is upward.
David Fuller's view - I have had a good look at the official summary of the IPCC report released today, and you will not be surprised to hear that it is an uncomfortable read. However, its' 'solution', and apparently only for part of the problem, at least in terms of what IPCC has said so far, is to significantly reduce the use of fossil fuels.

We already know that not a single developed country has had much 'success' in doing this, and the cost has been uncompetitively high fuel costs and a risk of future blackouts, as we face here in the UK. More importantly, developing countries and not least those with high populations have made it very clear that they are not going to reduce their consumption of fossil fuels. Their priority is GDP growth because they know that higher fuel costs would be devastating for their numerous citizens who still live in conditions of severe poverty.

We can reduce CO2 emissions with natural gas and the new generation of nuclear Energy. Simultaneously, we can develop less costly technologies for capturing CO2 when using fossil fuels. Additionally, it should not be beyond the ability of today's rapidly developing technologies to suck CO2 emissions out of the atmosphere.

(See also: Four Numbers Say Wind and Solar Can't Save Climate, posted on 23rd September, and This Car Runs on Gas Made Out of Thin Air, posted on 6th September 2013

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September 23 2013

Commentary by David Fuller

September 23 2013

Commentary by David Fuller

Amid Economic and Safety Concerns, Nuclear Advocates Pin Their Hopes on New Designs

Here is a sample from this informative article from Time Science & Space
The challenge of nuclear waste - another factor that has held back new construction in the U.S., since no one can agree where to put it - is also at the heart of another atomic start-up. TerraPower is experimenting with a traveling-wave reactor design, which would largely eliminate the need for uranium enrichment. (Traveling wave refers to the fact that fission occurs bit by bit in the reactor core, as if a wave of Energy were slowly spreading through it, rather than in the entire core all at once as in standard fission.) In conventional reactors, composition of the isotope uranium-235 has to be increased in the fuel before it becomes fissile. TerraPower's reactor design could use the depleted uranium found in nuclear waste, burning it for decades without refueling. That revolutionary potential is what attracted Bill Gates, who is one of TerraPower's main funders. "We think we could have a prototype by the early 2020s and become the commercial reactor of choice by the 2030s," says John Gilleland, TerraPower's CEO
David Fuller's view - These are promising developments and new nuclear projects offer the best and most practical long-term solutions to our Energy problems.

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September 23 2013

Commentary by David Fuller

Four Numbers Say Wind and Solar Can't Save Climate

Here is the opening and some additional samples from this informative column by Robert Bryce for Bloomberg
This month, the Intergovernmental Panel on Climate Change will begin releasing its fifth assessment report. Like earlier reports, it will undoubtedly lead to more calls to reduce emissions of carbon dioxide worldwide.

As the discussion unfolds, I would urge everyone to keep four numbers in mind: 32, 1, 30 and 1/2. These are the numbers that explain why any transition away from our existing Energy systems will be protracted and costly. Let's take them in sequence.

First, 32: That's the percentage growth in carbon dioxide emissions that has occurred globally since 2002. In the past decade, these emissions have increased by about 8.4 billion tons. And nearly all of that has happened in the developing world. In Asia, emissions rose 86 percent; in the Middle East, 61 percent; and in Africa, 35 percent.

In the U.S., meanwhile, carbon dioxide emissions were 8 percent lower in 2012 than they were in 2002, largely due to a surge in shale gas production, which has reduced coal use. In Europe, carbon dioxide emissions have been essentially flat for a decade.

That 32 percent increase in global carbon dioxide emissions reflects the central tension in any discussion about cutting the use of coal, oil and natural gas: Developing countries -- in particular, fast-growing economies such as Vietnam, China and India -- simply cannot continue to grow if they limit the use of hydrocarbons. Those countries' refusal to enact carbon taxes or other restrictions illustrates what Roger Pielke Jr., a professor of environmental studies at the University of Colorado, calls the "iron law of climate policy": Whenever policies "focused on economic growth confront policies focused on emissions reduction, it is economic growth that will win out every time."

Over the past 10 years, despite great public concern, carbon dioxide emissions have soared because some 2.6 billion people still live in dire Energy poverty. More than 1.3 billion have no access to electricity at all.

Now to the second number: 1. That's the power density of wind in watts per square meter. Power density is a measure of the Energy flow that can be harnessed from a given area, volume or mass. Six different analyses of wind (one of them is my own) have all arrived at that same measurement.

Wind Energy's paltry power density means that enormous tracts of land must be set aside to make it viable. And that has spawned a backlash from rural and suburban landowners who don't want 500-foot wind turbines near their homes. To cite just one recent example, in late July, some 2,000 protesters marched against the installation of more than 1,000 wind turbines in Ireland's Midlands Region.

Consider how much land it would take for wind Energy to replace the power the U.S. now gets from coal. In 2011, the U.S. had more than 300 billion watts of coal-fired capacity. Replacing that with wind would require placing turbines over about 116,000 square miles, an area about the size of Italy. And because of the noise wind turbines make -- a problem that has been experienced from Australia to Ontario -- no one could live there.


Now let's turn to the third number: 30. This represents the massive scale of global Energy use, which is about 250 million barrels of oil equivalent per day, or the output of about 30 Saudi Arabias. (Since the 1970s, the Saudis have produced about 8.2 million barrels of oil per day.) Of that 30 Saudi Arabias of daily Energy consumption, we get 10 from oil, nine from coal, seven from natural gas, two from hydro and 1 1/2 from nuclear.

That remaining 1/2 -- the final number -- represents the amount of Energy we get from all renewable sources, not counting hydropower. In 2012, the contribution from all of those sources amounted to about 4.8 million barrels of oil equivalent per day, or roughly one-half of a Saudi Arabia. Put another way, we get about 50 times as much Energy from all other sources -- coal, oil, natural gas, nuclear and hydropower -- as we do from wind, solar, geothermal and biomass.
David Fuller's view - If we are going to reduce global carbon dioxide emissions anytime soon, meaning within the next five to ten years, countries need to take two important steps: 1) Increase the production of natural gas which exists within shale formations in most countries; 2) Build new nuclear power stations.

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September 19 2013

Commentary by David Fuller

Email of the day

On the cost of 'Gulf of Mexico Oil Riches'
"I refer to your recent item on oil/gas riches in the Gulf of Mexico.

"As these are at great depth, the recovery cost must be very high. This should help to place a floor under the oil price

"Any idea what cost of production would be? Maybe one of the Energy experts, who read Fullermoney may wish to contribute."
David Fuller's view - My guess is that only the oil companies involved know approximately what the eventual cost of production is likely to be. However, we do know a big portion of it, in that figure of over $100 million to drill each of these deep wells. Fortunately the success rate is high and they are already certain that the resource is massive, according to the article. Additionally, the increased drilling activity confirms the optimism of these large oil producers.

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September 18 2013

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks' ever interesting report on the Energy sector. Here is a section
We have discussed in many previous articles the reasons why social trends are undercutting vehicle miles driven – the growing use of the Internet for working and for shopping, the preference for social contact through electronic medium rather than personal contact for our teenagers and youth, and housing and work patterns that favor the use of alternative modes of transportation over personal vehicles. The cartoon below addresses why America's teenagers are not getting their driver's licenses. It is hard to see many of these factors changing soon.

We remain convinced that Toyota's view of future new car sales in the U.S. will prove more accurate than the forecasts calling for an ever upward sales projection. In the early 2000s, before the financial crisis, when yearly car sales were in 19-20 million units a year range, the market was in a bubble supported by the housing bubble and the use of home equity loans to finance all sorts of consumer spending including new vehicles. We believe that U.S. social and demographic trends impacting the amount of driving will prove stronger than auto forecasters who believe we will return to historic auto-buying patterns. None of these beliefs are overly negative for the outlook for the auto industry or those businesses closely associated with new car sales, however, increased vehicle fuel-efficiency mandates will take a toll on the volume of gasoline sales meaning a challenging future for the petroleum industry. That outlook needs to be assessed in light of the other trends at work in the U.S. and North American Energy market, all of which could result in the U.S. reassessing its prohibition against crude oil exports.
Eoin Treacy's view - Gasoline prices have been ranging within a somewhat triangular pattern since early 2011 and have dropped from the July peak near $3.25 to test the progression of higher reaction lows. While some steadying is to be expected in the current area, a clear upward dynamic will be required to check the downward bias.

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September 18 2013

Commentary by David Fuller

Merkel gambles on big energy shift

Here is the opening of this informative article published by Power Engineering
Energy-conscious to an extreme, Olaf Taeuber relies on just a single 5-watt bulb that gives off what he describes as a ''cozy'' glow to light his kitchen when he comes home at night. If in real need, he switches on a neon tube, which soaks up all of 25 watts.

Even so, he found himself seeking help last week to fend off a threat from Berlin's main power company to cut off his electricity, one of a growing number of Germans left unable to pay their soaring Energy bills. He is among those feeling the immediate effects of Chancellor Angela Merkel's most ambitious domestic project: Germany's energiewende, or Energy revolution, under which the country is shutting down its nuclear power reactors, discouraging coal-fired plants and encouraging a near-complete shift to renewable Energy sources.

''Often, I don't go into my living room in order to save electricity,'' said Mr. Taeuber, 55, who manages a fleet of vehicles for a local social services provider. ''You feel the pain in your pocketbook.''

''Energy poverty,'' as Germans now call it, is just one of the many problems confronting Ms. Merkel's plan, the likes of which has never been tried - not just in Germany, but in any major industrial country. Energy prices in Germany - the highest in Europe - have spiked 30 percent over the last five years as costs have risen with the transition. Providers pulled the plug on an estimated 312,000 German households unable to pay their bills in 2011, according to official figures.

Newly constructed offshore wind farms churn unconnected to an Energy grid still in need of expansion. Carbon emissions actually rose last year as oil- and coal-burning plants were fired up to close gaps in Energy supplies. Energy-intensive industries have begun to shun the country for fear of the even steeper costs ahead.
David Fuller's view - Arguably, this is a brave move by Mrs Merkel and Germany but is it entirely rational? Opinions will obviously vary on the emotive topic of expensive green Energy versus fossil fuels such as crude oil and, increasingly, natural gas. These are obviously much cheaper if produced domestically. However, with a troubled Middle East and other Energy exporters keen to see prices just below levels that could weaken global demand (crude oil Brent and WTI), we have not yet reached the point where Energy costs are likely to be permanently lower in real (inflation adjusted) terms, due to increased global supplies. Upside breakouts from these trading bands shown above would certainly be a headwind for the global economy.

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September 18 2013

Commentary by David Fuller

African states push back on Chinese oil deals

Here is the opening for this interesting article from the NYT & IHT, using the latter paper's headline
NIAMEY, Niger - In Niger, government officials have fought a Chinese oil giant step by step, painfully undoing parts of a contract they call ruinous. In neighboring Chad, they have been even more forceful, shutting down the Chinese and accusing them of gross environmental negligence. In Gabon, they have seized major oil tracts from China, handing them over to the state company.

China wants Africa's oil as much as ever. But instead of accepting the old terms, which many African officials call unconditional surrender, some cash-starved African states are pushing back, showing an assertiveness unthinkable until recently and suggesting that the days of unbridled influence by the African continent's mega-investor may be waning.

For years, China has found eager partners across the continent, where governments of every ilk have welcomed the nation's deep pockets and hands-off approach to local politics as an alternative to the West.

Now China's major state oil companies are being challenged by African governments that have learned decades of hard lessons about heedless resource-grabs by outsiders and are looking anew at the deals they or their predecessors have signed. Where the Chinese companies are seen as gouging, polluting or hogging valuable tracts, African officials have started resisting, often at the risk of angering one of their most important trading partners.

"This is all we've got," said Niger's oil minister, Foumakoye Gado. "If our natural resources are given away, we'll never get out of this."
David Fuller's view - There are two important aspects to this situation: 1) Africa's governments are becoming worldlier, which is certainly in their own interests; 2) Worldwide demand for crude oil, natural gas and all other forms of Energy can only rise as the global economy recovers.

Currently, few developed economies have secured their future Energy supplies at internationally competitive costs, although many still have a window of opportunity in which to do so. The main exceptions are Canada, the USA, Norway and Australia. Yes, they have their own domestic supplies of crude oil and natural gas. However, most other developed economies could improve both their Energy supplies and costs if they prioritised development of their own shale resources. The USA pioneered this technology and has utilised it increasingly successfully, with little evidence to date of serious earthquakes or the contamination of water supplies predicted by naysayers.

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September 17 2013

Commentary by Eoin Treacy

North Dakota Oil Production Posting A Huge Jump In July

Thanks to a subscriber for this update on US onshore oil production from the Bakken formation from DNB. The full report is posted in the Subscriber's Area but here is a section
According to the Industrial Commission of North Dakota the number of drilling permits in July was 178 while it rose to 276 permissions in August, which is by far the highest number of drilling permits issued in a month so far this year. This suggests we should expect further large hikes in output going forward.

After having posted the largest Year-on-Year increase of crude oil output in May-2012 of 280 kbd, the growth had fallen every month since then to 157 kbd in June and most people had expected the growth to continue to drop for the coming months. Hence it is interesting to note that the year on year growth for July in North Dakota jumped back up to 198 kbd. Even if oil production in North Dakota should not increase any more from now to the end of the year, the year on year growth will average about 140 kbd for the remaining 5 months of the year.

The average rig count per month in North Dakota has fallen from 185 rigs in January to 182 rigs in July according to the Industrial Commission of North Dakota. According to Baker Hughes the number of horizontal rigs working in the Bakken was 157 in July and 159 in August. In July last year there were 209 horizontal rigs working in the Bakken, yet production was 199 kbd lower. This fact is quite telling for what is going on in this industry. Efficiency is improving quicker than many though possible and it is no longer possible to count the number of rigs to get a feel for how many wells will be drilled.
Eoin Treacy's view - The revolution in unconventional oil and gas supply continues to be a game changer for the Energy sector. However, due to the high prices paid for drilling rights and the ensuing collapse of natural gas prices, the stock market performance of many shale gas companies lagged the wider market as they adjusted to the new pricing environment. In many cases this necessitated migrating to shale oil properties, not least in the Bakken and Eagle Ford formations. That process has ended and shares are responding favourably once more.

While shale oil and gas have been making headlines this is by no means the only source of additional supply likely to affect the Energy markets over the next decade. Offshore and particularly deep water drilling also represent important opportunities for the sector. A piece contrasting the performance of these two portions of the Energy sector in Comment of the Day on January 18th 2013, which highlighted the outperformance of the offshore drilling sector may be of interest.

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September 17 2013

Commentary by David Fuller

Blow to Abenomics as Japan shuts last nuclear reactor

My thanks to a subscriber for this informative article by Ambrose Evans-Pritchard of The Telegraph (UK). Here is the opening and also a section from the conclusion
Japan has switched off its last nuclear reactor and will have to rely on imported oil and gas to power its industrial machine for the rest of the year, bowing to anti-nuclear sentiment as controversy rages over the botched handling of the Fukushima clean-up.

Failure to revive Japan's nuclear industry is a major setback for premier Shinzo Abe, who had hoped to restart at least eight of the country's 50 reactors this year to cut reliance on ruinously expensive crude oil and liquefied natural gas (LNG). While a surge in output from solar and other renewables has plugged a gap equal to three reactors, it too comes at a high cost.

Mr Abe's dash for growth after 15 years of deflation and perma-slump depends crucially on affordable Energy, but Japanese companies must now pay three times as much as US rivals for power.

Tokyo says it costs four time more produce power from oil compared to coal or nuclear reactors, creating an incentive to build new coal plants.

The cost squeeze threatens to offset gains from a 20pc fall in the yen against the dollar since Mr Abe first signalled his monetary blitz last year. It has also wiped out Japan's trade surplus, leading to deficits in 2011 and 2012 for the first time in over 30 years. Junko Nishioka from RBS said this takes away a key shield protecting Japan against a bond market crisis.

Nuclear power provided a third of Japan's electricity before the Fukushima melt-down in February 2011, when all plants were switched off.


For now, at least, Mr Abe's broader economic gamble is working. The Bank of Japan's vow to purchase $75bn a month of Japanese bonds and double the monetary base by mid-2014 has been electrifying. Growth was 4.1pc in the first quarter and 3.8pc in the second quarter, making Japan the fastest-growing economy in the G7 so far this year.

The question is whether it is a monetary "sugar rush" or a genuine revival. Failure to find affordable Energy quickly could prove the Achilles Heel of Abenomics.
David Fuller's view - I maintain that Abenomics is a winning formula for Japan but Energy costs are the biggest obstacle. Given Japan's long history of nuclear horrors - from Hiroshima and Nagasaki in 1945 to Fukushima in 2011 - it is understandable that its citizens will not tolerate the reopening of these plants.

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September 13 2013

Commentary by David Fuller

Wildcatter Hunch Unlocks $1.5 Trillion Oil Offshore U.S.

Here is the opening section for this important discovery and development story by Edward Klump for Bloomberg
Texaco Inc. geologist Robert Ryan didn't suspect he was helping change the Energy future of the Gulf of Mexico when he gave the go-ahead for a well that would break the world record for deep-water drilling.

The project known as BAHA, undertaken in 1996 by Texaco and its partners, Royal Dutch Shell Plc (RDSA), Amoco Corp. and Mobil Corp., was a dry hole. That normally would've made it a flop. Instead, BAHA's discovery of oil-rich sands where none were thought to exist was the first step in unlocking a $1.5 trillion trove of crude that's revived the prospects of a body of water many thought had long ago given up most of its fossil-fuel riches.

Just as technology has allowed explorers to tap vast new oil and natural gas supplies in onshore shale fields, it's now reinventing the Gulf. BAHA was the first deep-water well to try plumbing the Lower Tertiary, a layer of the earth's crust formed more than 25 million years ago after mammals had replaced dinosaurs as the dominant life form.

A series of recent finds in the ultra-deep has profoundly changed the thinking on U.S. offshore geology, with 2013 seeing the Gulf of Mexico become one of the most promising frontier oil plays in the world and the fastest-growing offshore market.

New seismic equipment and computer power has allowed explorers to see into once-invisible layers of rock. Engineering innovations enable them to drill five miles into the earth through waters more than 10,000 feet deep, where temperatures are more than hot enough to boil water and high pressures approach the weight of four cars resting on one square inch.

The Gulf is heading for record deep-water output equivalent to almost 2 million barrels of oil a day in 2020, according to industry researchers Wood Mackenzie Ltd. The U.S. estimates about 15 billion barrels of recoverable oil remain to be found in the Lower Tertiary.

While most U.S. shale fields have now been identified and mapped, the Gulf is seen as having much bigger yet-to-be-discovered potential -- 48 billion barrels of oil compared to the 13 billionbarrels estimated for onshore and coastal oilfields, according to U.S. data.

Investment is pouring in, with 42 drilling rigs operating in 1,000 or more feet of water as of Sept. 9 -- 35 percent more than four years earlier, according to U.S. data on the Gulf. By the end of 2015, 60 rigs are slated to be working in the deep water off U.S. shores, estimates Brian Uhlmer, an analyst at Global Hunter Securities LLC in Houston.
David Fuller's view - This is a fascinating and hugely significant discovery and development project which is only now coming into production. Importantly, technology is once again proving that Mother Earth remains a cornucopia of oil and gas supplies for our rapidly developing global economy. Indeed, it actually underpins our global economic expansion for many more decades, during which renewable Energy sources, led by solar power, will be refined and perfected to the point where they can eventually become the major sources for our inexhaustible Energy requirements.

Lest future generations take this almost for granted, think back over the second half of the last century and the earlier years this century. Most forecasters were convinced that recoverable supplies of global oil were rapidly diminishing. They feared that the free world would be held to ransom by a dwindling, mostly despotic and unstable group of Energy suppliers. They forecast that Energy prices would only rise in real rather than inflationary terms.

Fullermoney has forecast that technological innovation would result in a much more favourable outlook for both Energy supplies and their real cost before the end of this decade, not least since US oil companies invented hydraulic fracturing technology, commonly know as fracking

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September 11 2013

Commentary by David Fuller

Eagle slaughter: Wind farms kill 67 eagles in 5 years

Here is the opening from this alarming but all too predictable report from The Washington Times
WASHINGTON (AP) - Wind Energy facilities have killed at least 67 golden and bald eagles in the last five years, but the figure could be much higher, according to a new scientific study by government biologists.

The research represents one of the first tallies of eagle deaths attributed to the nation's growing wind Energy industry, which has been a pillar of President Barack Obama's plans to reduce the pollution blamed for global warming. Wind power releases no air pollution.

But at a minimum, the scientists wrote, wind farms in 10 states have killed at least 85 eagles since 1997, with most deaths occurring between 2008 and 2012, as the industry was greatly expanding. Most deaths - 79 - were golden eagles that struck wind turbines. One of the eagles counted in the study was electrocuted by a power line.

The president of the American Bird Conservancy, Mike Parr, said the tally was "an alarming and concerning finding."
David Fuller's view - This is a disgrace and Fullermoney is among others who have long described wind farm technology as Cuisinart for birds.

The plight of eagles understandably attracts headlines but think of the many thousands of smaller birds that are being killed by windmills, and barely noticed, if at all.

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September 06 2013

Commentary by David Fuller

Ice Melting Faster in Greenland and Antarctica in UN Leak

Here is the opening to this interest report from Bloomberg
Ice in Antarctica and Greenland is disappearing faster and may drive sea levels higher than predicted this century, according to leaked United Nations documents.

Greenland's ice added six times more to sea levels in the decade through 2011 than in the previous 10 years, according to a draft of the UN's most comprehensive study on climate change. Antarctica had a fivefold increase, and the UN is raising its forecast for how much the two ice sheets will add to Earth's oceans by 2100.

The changes in the planet's coldest areas are a "very good indicator" of a warming planet, according to Walt Meier, a research scientist with the U.S. National Aeronautics and Space Administration.

"It's an early warning system," Meier said by phone fromNASA's Goddard Space Flight Center in Greenbelt, Maryland. "When you think about a couple of degrees of warming, in the U.K. or U.S., it's not something that would be too noticeable, whereas in an area of snow and ice, it can have a huge effect. With sea ice, minus 1 to plus 1 is the difference between skating on the ice and swimming in the ocean."
David Fuller's view - We cannot afford to assume either that this is not happening or that it is only a temporary anomaly. Of course our increasing human population and developing technologies are warming the planet. However, I suggest the solution is not to throw the world into economic depression by banning fossil fuels. We need a variety of Energy sources to prosper, including fossil fuels while they remain competitive.

The solutions to our human contributions to global warming can be found in our technologies. After all, we put carbon dioxide in the atmosphere and have the incentive to take some of it back out, if it is a potentially useful resource, as other articles including the previous one above on "gas made out of thin air" suggest.

Note: There appears to be a contradiction in this article, if I am reading it correctly. The second paragraph above says that Antarctica's ice is also melting more quickly. However, the 'Melt Season' section at article's end says: "The extent of Antarctica's sea ice 'very likely' increased 1.2 percent to 1.8% percent a decade over the same period."

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September 03 2013

Commentary by Eoin Treacy

Rebirth of the Cold War

Thanks to a subscriber for this interesting report by Lucas Hermann and colleagues at Deutsche Bank. The full report is posted in the Subscriber's Area but here is a section
European gas volumes in 2013 may be well below their 2008 peak but with spot prices hitting new seasonal highs you'd be hard pressed to know it. With indigenous supply collapsing and LNG diverting to Asia, a market that should be in the doldrums looks poised to see prices breaking to the upside. As Gazprom's market share moves towards record levels and its export supply hits new peaks we worry quite where Europe expects to go next for its gas. We conclude that despite sub-par gas demand growth to 2020 European prices are moving to a new phase, with US LNG imports much needed if Russia's ever growing dominance and high pricing is to be contained.

Back in Gazprom's embrace
We are concerned. With indigenous gas production in steady decline, Norwegian output at peak, gas storage levels at five year lows and the start-up of material Asian-focused LNG capacity unlikely to begin in earnest for another 12-18 months European gas pricing looks increasingly to be balanced on a knife's edge. Influenced by an unusually severe winter, Europe is again caught in Gazprom's embrace and with it confronting elevated, oil-linked pricing. For Europe's IOC gas suppliers, not least Statoil, a new golden age is just arriving.

Whoops – we forgot about where to source forward supply
Moreover, after five years during which, perhaps deluded by the promise of unconventional gas, the continent's utility buyers and aggregators have been reluctant to commit to new supply be it LNG or pipeline gas, we question where a recovering Europe will source its much needed future supplies. With the delivery of European unconventional gas if anything moving backwards, North African stability in question and additional Caspian flows unlikely pre-2019 (and even then set at a paltry 10bcm) home-grown options look narrow.
Eoin Treacy's view - One can't but have a pessimistic attitude to Europe's Energy security when so many public officials have invested political capital in debunking unconventional supply initiatives. It is therefore notable that the European commissioner for Energy, Geunther Oettinger, was today quoted saying “Germany needs to keep option of shale gas open as it makes Putin nervous”.

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September 02 2013

Commentary by Eoin Treacy

Batista's OGX Soars as Rout Boosts Ibovespa Weighting: Rio Mover

This article by Denyse Godoy for Bloomberg may be of interest to subscribers. Here is a section
OGX has the third-highest weight in the Ibovespa at 5.21percent, according to data compiled by Bloomberg. That compares with 0.92 percent on Aug. 30, the data show. BM&F Bovespa SA is considering excluding stocks trading for less than 1 real, or penny stocks, from the Ibovespa, which is otherwise weighted just by trading volume, according to a statement on the exchange operator's website.

“Shares slumped on Friday as foreign investors massively sold because OGX would not be part of the MSCI Brazil anymore,” Sandro Fernandes, a trader at Geraldo Correa, said by phone from Belo Horizonte, Brazil. “Today shares are rallying because some funds needed to buy more stock as OGX's weighting on the Brazilian benchmark increased.”
Eoin Treacy's view - The Bovespa Index has been ranging with a downward bias for more than two years and dropped abruptly from May to a July low near 44000. The heavy weighting of Energy, resources and banking shares has been a headwind for performance and OGX in particular has been a concern. (Also see Comment of the Day on July 30th.

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August 27 2013

Commentary by David Fuller

While Britain Dithers, the world is fracking

Here is the conclusion from this forceful article from The Times (UK) (note, subscription registration required but a PDF version is in the Subscriber's Area
Russia imagined that Gazprom would bring its gas customers to heel by threatening a big winter freeze that would reach as far as Germany, but even Bulgaria has used a global gas glut to renegotiate the price down by 20 per cent. Meanwhile Azerbaijan, Kazakhstan and Turkmenistan have become rival suppliers with the Trans-Anatolian Natural Gas Pipeline bypassing Russia entirely. For the first time since the 1989-90 revolutions much of Europe can look forward to being totally free of a Russia that under Vladimir Putin is regressing to bullying Soviet pathologies. In the longer term, Europe may also benefit from the huge offshore gas reserves of Cyprus, Israel and Lebanon.

Which brings us back to Europe's noisy Green Luddites and the politicians who pander to them. Angela Merkel has signalled the closure of Germany's remaining nuclear power plants, even as her country will still import nuclear-generated Energy from France and Poland. Her Energy policy is as much of a mess as ours, with northerly offshore wind farms lacking connection with southern industries. The Italian Government has also caved in to environmental lobbyists over deep-water oil prospecting in the Adriatic. Judging from opinion surveys, the Poles would happily frack but, for the time being, their geology makes this prohibitively expensive. Britain should grab a piece of this global action as soon as possible - perhaps with a sovereign wealth fund so that the fruits are not squandered.

Despite his Cotswolds affinities, David Cameron has unambiguously endorsed fracking. He says local communities will receive economic benefits and there'll be minimal impact on a countryside that is no more "scenic" than northern Britain, and which was "industrial" itself when charcoal was used in the iron industry. It is just inhabited by people who know how to bounce the media better than those in Cheshire or Cumbria.

Since the PM cannot give this truly existential issue his undivided attention, amidst attending to Syria or gay rights abuses in Russia, he should designate an articulate champion who can make the case for shale gas with the urgency our Energy crisis demands. Michael Fallon is the obvious choice. Or is Energy policy - and hence what folk pay for such basic rights as heat and light - going to be dictated by the likes of Bianca Jagger and Dame Vivienne Westwood in what, to coin a second new word, is starting to look like a "celebocracy" as well as "chummocracy"?
David Fuller's view - I favour lobbying for fracking in the UK or wherever one lives, if your country also has considerable reserves of shale gas and oil. The benefits will be cheaper Energy costs, as we see in the USA, contributing to a more vibrant economy for many decades.

If you liked the article above and can log-on to The Times, you may also be interested in the mostly sensible emails which follow

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August 23 2013

Commentary by Eoin Treacy

Tesla Model S receives top marks in NHTSA safety testing

This article for GizMag by Angus MacKenzie may be of interest to subscribers. Here is a section
Tesla reports that the all-electric sedan received a 5 stars in every NHTSA category. Only 1 percent of all manufacturer vehicles achieve a five star rating and the NHTSA does not publish a star rating above 5. However safety levels better than 5 stars are captured in the overall Vehicle Safety Score (VSS) provided to manufacturers. The S scored a record 5.4 VSS rating and set a new record for the lowest likelihood of injury to occupants.

The test scores are based on figures obtained during front, side, rear and rollover incidents. Tesla's high front collision score was achieved in part due to its large front crumple zone. With no massive gas/diesel engine up front, the Model S' front hood becomes more effective in diffusing Energy because the entire zone being dedicated to safeguarding occupants.
Eoin Treacy's view - While Tesla has made waves in the electric car sector by delivering on the type of range people require of a car that costs from $64000 to $85000, the fact that it is also an industry leader in safety will help to alleviate concerns consumers might have about what is still a very new technology.

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August 23 2013

Commentary by Eoin Treacy

Every U.S. Home Becomes a Power House in Utility Grid's Twilight

This article by Christopher Martin, Mark Chediak and Ken Wells for Bloomberg highlights some important dynamics in the Energy markets. Here is a section
“Renewable Energy is so unlike fossil fuel Energy,” says John Farrell, a senior researcher with the Minneapolis-based Institute for Local Self-Reliance, a group pushing distributed generation. “You don't need large amounts of capital to build it, you don't need to produce it all in one place and use high- voltage transmission lines to transport it somewhere else. The idea that we would continue to have a centralized form of ownership and control of that system is really inconsistent with what the technology enables.”

Farrell is a supporter of distributed power. However, the Bernstein Energy industry black book, a kind of bible of Energy trends published by Sanford C. Bernstein that's followed devoutly by institutional investors, also predicts that parity in the cost of unsubsidized solar and conventional electricity will radically change the Energy dynamic.

“The technology and Energy sectors will no longer simply be one another's suppliers and customers,” the report finds.

“They will be competing directly. For the technology sector, the first rule is: Costs always go down. For the Energy sector and for all extractive industries, costs almost always go up. Given those trajectories, counter-intuitively, the coming tussle between solar and conventional Energy is not going to be a fair fight.”
Eoin Treacy's view - My view – Themes such as the growth in natural gas supply from what were previously considered unconventional sources, the high price of Energy encouraging efficiency, the pace of technological development and a regulatory environment heavily skewed in favour of wind and solar is creating a highly disruptive environment for utilities. Those that keep pace with change will survive and possibly thrive. The outlook is likely to be much more uncertain for those that fail to innovate.

The Dow Utilities Average (P/E 14.4, DY 4.07%) has a long record of dividend growth and competitive yields and it performed impressively from the 2009 lows as demand for investments with defensive characteristics increased. The Average surged higher from November in a manner inconsistent with the previous three-year uptrend and subsequently experienced its largest decline since early 2009. The net result is a loss of momentum with prices currently trading at the same level as this time last year. A sustained move above 500 will be required to reaffirm medium-term demand dominance and question current scope for additional volatility and ranging.

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August 22 2013

Commentary by Eoin Treacy

Email of the day (1)

on the medium to long-term outlook for oil
“Please find attached a report plus slides from DNB Markets on the long term trends of the oil market. DNB got considerable media coverage with their bold – and disputed – forecast in the summer of 2012 that 2013 and 2014 oil prices would drop from the levels seen in 2011 and 2012. So far DNB has been right. Well, since last summer many other analysts have had to change their earlier optimistic (i.e. high) oil price scenarios to take into account the shale revolution and weaker demand. DNB Markets confirms its earlier predictions of cheaper oil in coming years, but not a return to cheap oil as such. The report includes a good overview of the North American shale revolution.”But does that mean Saudi Arabia will choose to cut to protect prices this time? We are not sure. The fact is that Saudi Arabia does not really need a certain oil price to balance their budget, the kingdom needs revenues. The revenues from oil sales are a function of both price and volume. It is of course not a factor of price alone. Here is some food for thought when it comes to what kind of strategy Saudi Arabia will choose the coming years:

Currently Saudi Arabia is producing about 9.8 million b/d which at 100 $/b is worth 358 billion USD per year. If as an example Saudi Arabia have to cut output by 1.5 million b/d to 8.3 million b/d to maintain 100 $/b, revenues will drop to 303 billion USD per year. How far can the oil price drop and still provide the same revenues of 303 billion USD per year? The answer is 85 $/b. Saudi Arabia could in other words earn the same oil revenues by maintaining production at 9.8 million b/d and let the oil price slip to 85 $/b as the kingdom would receive by cutting output to protect the oil price. This is just an example to illustrate the strategic choices that could soon face Saudi Arabia. The benefit for the kingdom of maintaining output at a higher level to a lower oil price is that it would provide a larger oil market share for them, and also probably higher global oil demand.

What the kingdom will choose to do is not “written in stone”. During the 1980's the Saudis cut massively to protect the oil price but changed that tactic after losing too much market share and then targeted volume instead. This time it might be a better strategy to let prices slide towards 85 $/b instead. The Saudis are fully aware of the cost curves for the shale oil industry and they know that many sellers would disappear if the oil price drifted lower than 80 $/b. Why not let the market take care of this adjustment and just let oil prices slide 15-20%? As already described if the price falls more than that, then non-OPEC will come to the rescue instead and start cutting output (drilling less shale wells).
Eoin Treacy's view - It has been our view at Fullermoney since at least 2010 that shale oil and gas represent a game changer for the Energy sector, not least because the additional supply unlocked with new technology and an innovative state of mind among wildcatters changes the dynamics of the market.

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August 20 2013

Commentary by Eoin Treacy

Peru to welcome US$15bn in copper mining projects from 2013-2015

This article by Dorothy Kosich for Mineweb may be of interest to subscribers. Here is a section
Peru's Minister of Energy and Mines Jorge Merino Tafur said $15 billion in mining project programs are now underway that will raise Peru's copper production by 1.3 million to 2.8 million tonnes by 2016.

These projects are scheduled to commence operations between 2014 and the first half of 2015, he noted.

Among these projects are Chinalco's $4.8 billion Toromocho Copper Project in Peru's Junin region with production scheduled to begin in December; Glencore/Xstrata's $5.2 billion Las Bambas copper project in the Cusco Region, scheduled to commence production in May or June of 2015; and the $5 billion expansion of Freeport-McMoRan's Cerro Verde copper mining joint venture, which is slated to start production by 2015.

Merino noted that the country has other great projects like Southern Copper's Tia Maria, the long-delayed Tambogrande gold project, Anglo American's Quellaveco and Michiquillay copper projects, Rio Tinto's La Granja Copper Project and other polymetallic deposits, which he suggested should be exploited to bring more development around the country.
Eoin Treacy's view - The Oyo Tolgoi mine came online in the last few months, bringing to fruition an almost decade long struggle to develop Mongolia's vast mineral wealth. However while the mine represents a large source of new supply, it is by no means the only major project slated to come on line in the next few years. Latin America and Africa remain significant supply growth candidates as the above article demonstrates.

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August 15 2013

Commentary by Eoin Treacy

Email of the day (1)

on solar innovation
"Thank you for the chart showing the efficiency of various types of solar panel. Here is a popular press article just published making the point that solar is now nearly ready to compete - without subsidy - even with low priced coal and gas.

"The technology is advancing rapidly and there are more recent advances not mentioned in the chart nor the newspaper article. Graphene may have the potential to trump the best of existing technology by delivering over 60% efficiency in capture of sunlight.

“So, no need for those ugly inefficient subsidized windmills!

“I observe that the share price of some solar power companies has sky-rocketed in recent months, with some being up 4-5x this year.

“What a wonderful age of opportunity we live in!"
Eoin Treacy's view - I share your optimism about the future and thank you for these informative articles which help to highlight the pace of technological innovation in solar cells and how this is altering perceptions of the sector's viability for electricity production. As you point out solar cell manufacturer shares have been rallying impressively since January. (Also see Comment of the Day on July 19th) It is worth considering the cause and effect of the rally in renewable Energy shares.

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August 13 2013

Commentary by Eoin Treacy

Email of the day (2-4)

on additions to the Chart Library
“Please could you add the share Tableau Software (DATA on NYSE) to the chart library. This company IPO'd in May and is now trading around double that level so worth looking at the chart. Many thanks"


“Please add Energy Assets Group (EAS) to the chart library”
Eoin Treacy's view - Thank you for these suggestions which have been added to the Chart Library

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August 13 2013

Commentary by Eoin Treacy

Email of the day (1)

on solar innovations
“An interesting technology development in Energy production. Fullermoney readers may be interested in this video report on research into the printing of solar cells just like Australia's polymer banknotes.”
Eoin Treacy's view - Thank you for this informative article highlighting the different ways in which solar power production can be enhanced. The evolution of polymer solar cells evokes the trade-off that occurred in chip manufacture with the advent of cheap memory in the 1980s. This allowed Intel's higher Energy consumption models to dominate until ARM gained an advantage in handheld devices where heat and Energy consumption trumped brawn.

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August 13 2013

Commentary by Eoin Treacy

State Council issues policies to form a Rmb4.5tn market

Thanks to a subscriber for this interesting report by Michael Tong and Jun Ma for Deutsche Banks which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section
On 11 August, China's State Council published a detailed set of guidelines to boost the environmental protection and Energy conservation industries and ncrease their domestic demand and improve their economic structure. The State Council aims to raise the total output value of the environmental protection industries to Rmb4.5 trillion (USD730 billion), or a CAGR of 15%, by 2015 to form a new pillar industry for Chinese economic growth. In this note, we provide a summary of this newly announced policy document and a list of the major players which may benefit from increasing investment and expanding market demand as a consequence of strong government support.

Guiding principles
The faster development of the Energy conservation and environmental protection industries should 1) stimulate potential market demand to form a new economic growth driver, 2) expand domestic consumption, stabilize growth, and optimize the economic structure, 3) improve the environmental quality of certain livelihoods and accelerate ecological development.

A Rmb4.5 trillion market by 2015
By spurring technological innovation and expanding demand for green and Energy-saving products and related services, the government aims to grow the Energy conservation and environmental protection industries at a CAGR of 15% or above, with total industrial output value to reach Rmb4.5tn by 2015.

Key areas of environmental protection
Key areas of environmental protection: denitrification and desulphurization equipment, new water treatment technologies and equipment, integrated system solution for solid waste treatment, technologies for remediation of contaminated soil, development and application of environmental monitoring instruments.

Key areas for Energy conservation
Key areas for Energy conservation: high-efficiency boilers, high-efficiency electrical motors, regenerative combustion technology and equipment, new Energy vehicle technologies, industrialization of semiconductor lighting technology
Eoin Treacy's view - The success of China's development plans rests on enhancing the productivity of its human capital. Improving the living conditions of its citizens through the provision of sewage, clean air and fertile land are among the administrations priorities as the economy transitions to more of a services and valued-added focus.

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August 12 2013

Commentary by Eoin Treacy

German Utilities Hammered in Market Favoring Renewables

This article by Tino Andresen for Bloomberg may be of interest to subscribers. Here is a section
While utilities across Europe have seen demand dwindle, those in Germany are also contending with a phase-out of nuclear Energy. RWE and EON acknowledge the decision to close all reactors by 2022 forces them to abandon plants they had counted on to produce income for years.

Smaller competitor EnBW Energie Baden-Wuerttemberg AG said last month it will shut four plants in Marbach and Walheim following “a drastic fall in revenue.” The utility expects earnings from generation and trading to plunge as much 40 percent this year.

The shift from fossil fuels has also hurt other operators in the country. Vattenfall AB, a Swedish utility with coal and nuclear plants in Germany, announced plans July 23 to split off non-Nordic units after writing down $4.6 billion. It will have to cut investments and push through deeper cost cuts, it said, partly blaming the failure of nations to align policies.

“The idea of an integrated European Energy market is in shambles,” Chairman Lars G. Nordstroem said last month. “Energy politics is becoming increasingly national. Everyone looks at their natural assets and their policies.”
Eoin Treacy's view - Nothing highlights Europe's Energy disadvantage more than the underperformance of the utility sector. Not only is the Eurozone a major Energy importer without a significant domestic supply of oil and gas, but a number of countries have embarked on an ideological quest to introduce renewable Energy at uncompetitive rates.

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August 12 2013

Commentary by Eoin Treacy

China 's Stocks Jump to Two-Month High on Economic Optimism

This article by Weiyi Lim for Bloomberg may be of interest to subscribers. Here is a section
The China Securities Regulatory Commission will make decisions regarding financing for real-estate projects based on examinations of the company and opinions of the Ministry of Land and Resources, according to a statement posted on the regulator's website on Aug. 9.

“There's optimism developers will be allowed to raise funds again,” Zhou Lin, an analyst at Huatai Securities Co., said by phone from Nanjing . “Investors are also putting money now into cyclical stocks such as Energy and property because of the recent macro data.”

Chinese factory production increased 9.7 percent in July from a year earlier, retail sales advanced 13.2 percent while fixed-asset investment excluding rural households grew 20.1 percent in the first seven months of the year, according to the statistics bureau.
Eoin Treacy's view - While the focus of media attention has been on how well Wall Street has performed relative to other markets, it is probably also worth considering that the Fed has provided one of the most accommodative monetary environments in history while countries such as China and, more recently India, have been attempting to curtail speculation. This has contributed to China 's stock market being one of the worst performers globally over the last two years.

Since economic growth has returned to a level monetary authorities have signalled they are reasonably happy with, the odds are now in favour of a lighter hand in terms of how the financial and real estate sectors are dealt with.

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August 09 2013

Commentary by David Fuller

August 07 2013

Commentary by Eoin Treacy

BHP's CEO Sees U.S. Shale Expansion as Mineral Demand Grows

This article by Elisabeth Behrmann for Bloomberg may be of interest to subscribers. Here is a section
Asian Energy demand, including from China, is helping drive the development of about $180 billion of liquefied natural gas projects in Australia, BHP's home country. The nation is forecast to surpass Qatar as the world's largest exporter of LNG by the end of the decade.

“We're not yet investing in export terminals in the U.S., we're simply producing the gas,” Mackenzie said. “But I do believe that Australian LNG will face stiff competition from U.S., Canada and Africa to supply the next tranche of LNG into Asia.”

The U.S. Energy Department is weighing 20 applications for LNG export terminals. Hydraulic fracturing of shale rock formations from Texas to West Virginia has boosted supplies of gas in the U.S., helping the nation overtake Russia as the world's biggest producer of the fuel in 2009.BHP, due to report earnings on Aug. 20, expects annual economic growth in China to moderate toward 6 percent over the next two years, Chief Financial Officer Graham Kerr said in April. China, whose economy grew 7.9 percent last year, the slowest since 2008, accounts for 30 percent of BHP's sales
Eoin Treacy's view - One of the great challenges for any mining operation is how to replace reserves at attractive prices. For a global miner such as BHP Billiton, the challenge is to deploy cash effectively to ensure not only reserve life but diversification so that the company is not overly impacted by moves in an individual commodity.

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August 07 2013

Commentary by David Fuller

Irwin Stelzer: Get drilling now and break the grip of energy's bad guys

Here is a sample from this hard-hitting article published by The Sunday Times (note: subscription registration required but a PDF version is in the Subscriber's Area)
No fracking in my back yard is the latest variant of the Nimby phenomenon that pits local against purported national interests, most notable in battles to prevent wind machines in "my back yard", the construction of a new runway at Heathrow, a high-speed train through the world's most scenic countryside, and other facilities that just might contribute to national economic growth at the expense of inconvenience and annoyance to local residents. Since most representation in democratic Britain is provided by MPs keenly attuned to their constituents' desires, it is no surprise that local impact often takes precedence over the national interest.

Which is the case with Energy supply. If Britain desperately needs anything just now, it is more rapid economic growth. It is inarguable that ample supplies of low-cost Energy are an important driver of such growth, and that Energy shortages, or high-cost supplies, can make a nation less competitive internationally.


Indeed, there is more to play for here than "mere" low-cost Energy. One is environmental quality - natural gas is the least-polluting fossil fuel, and anyone who thinks that fossil fuels will not be a dominant Energy source for the foreseeable future is kidding himself. Another is independence from the bad guys who unfortunately sit on the bulk of the world's oil and gas reserves - or did until fracking set America on the road to becoming the world's largest producer.


If the beneficial effect of the reduction of the geopolitical power of nasty regimes doesn't persuade Britain's policy makers to allow shale gas development to proceed on a measured basis, monitoring the environmental impact and distributing the benefits fairly, consider this: billions in inbound investment and thousands of new jobs. Better that than a prolonged dose of austerity.
David Fuller's view - This is a good, short summary by Irwin Stelzer. Some of his comments may irritate those who are concerned about climate change, specifically the pollution created by mankind and our extensive use of fossil fuels.

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July 31 2013

Commentary by David Fuller

Scientists make "Impossible Material" ⦠by accident

Here is a brief section from this informative scientific article from Gizmag
In an effort to create a more viable material for drug delivery, a team of researchers has accidentally created an entirely new material thought for more than 100 years to be impossible to make. Upsalite is a new form of non-toxic magnesium carbonate with an extremely porous surface area which allows it to absorb more moisture at low humidities than any other known material. "The total area of the pore walls of one gram of material would cover 800 square meters (8611 sq ft) if you would 'roll them out'", Maria Strømme, Professor of Nanotechnology at the Uppsala University, Sweden tells Gizmag. That's roughly equal to the sail area of a megayacht. Aside from using substantially less Energy to create dryer environments for producing electronics, batteries and pharmaceuticals, Upsalite could also be used to clean up oil spills, toxic waste and residues.
David Fuller's view - When in commercial production, this sounds like it has the potential to be extremely useful.

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July 31 2013

Commentary by David Fuller

Adding up China's debt to rein it in

Here is a section from this informative column by James Saft, first published by Reuters under a different title from the above, which the International Herald Tribune introduced
Reuters) - Like William the Conquerer before him, Premier Li Kequing is initiating his own Domesday survey in China, and this time the attempt to curb local abuses of power will have global economic consequences.

China's State Council, chaired by Premier Li, has ordered the National Audit Office to begin auditing what could total $2 trillion or $3 trillion of debt taken on by local governments.

The Audit Office will suspend other work and give all staff "crash" training so that auditors can begin fanning out across the country this week, according to a report by the state-run People's Daily.

The clear implication is that China is seeking to rein in local governments, which have helped along what is clearly a boom and may be a bubble by borrowing and spending freely on local development. For China, this will act as another brake on already slowing growth. For the rest of the world, it means less demand, especially for the kinds of raw materials and Energy which go into real estate development and infrastructure .
David Fuller's view - What China's new government is doing is positive for the longer term but a headwind which has slowed its economic juggernaut at a time when the world's other powerful regions are also underperforming.

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July 30 2013

Commentary by Eoin Treacy

OGX beyond the Hype

This blog post by Mark McHugh focusing on OGX may be of interest to subscribers. Here is a section
It was naive to expect that OGX was somehow going to remain immune from the scrutiny of the market forever. There exist undoubtedly huge potential and strong indications that OGX will be successful—a world scale resource base, Energy sector experienced management team and board, and a good liquidity position. However, there is still little tangible on which to base a full evaluation at this time—hence investors in some senses are placing bets on the upside. Early results have been seized upon and have taken-on disproportionate significance. Moreover, exploration companies like OGX, are notoriously high risk, volatile and will have erratic earnings during the early stages of development. OGX can only be properly assessed in the future, based on its long-term performance in consistently finding and producing oil and gas in profitable, commercial quantities.

Meanwhile, Eike Batista and OGX's management must accept the blame for their current predicament. It is an inevitable consequence of their hard sell, raising unrealistic expectations in the market with little substance to back it up. Even so, the share price debacle has had a positive side—it appears to have created a realignment of company objectives as part of the natural transition towards development and production. Consistent with this, there appears to be greater realism in target setting.
Eoin Treacy's view - The collapse of OGX has been making headlines because of the losses taken by its CEO Eike Batista, who has seen his wealth deteriorate by more than $33 billion in less than 18 months. The company's assets include both shallow and deep water reserves as well as other valuable resources. A number of news items are now talking about a fire sale, where stronger participants will have the opportunity to pick up at least some of these attractive assets at fire sale prices.

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July 30 2013

Commentary by David Fuller

Why Are Banks Selling Aluminium Anyway?

Here is the opening from an informative editorial by Bloomberg
The largest U.S. banks are accused of causing problems in markets ranging from Energy to aluminum. Regardless of whether they're guilty of market-rigging, as critics say, the charges raise another question: Why are the banks active in these businesses in the first place?

Part of the answer is a point we've stressed before: They're among the country's most subsidized enterprises. The Federal Deposit Insurance Corp. and the Federal Reserve, both backed by taxpayers, provide an explicit subsidy by ensuring that banks can borrow money in times of market turmoil. Banks that are big and connected enough to bring down the economy enjoy an added implicit subsidy: Creditors will lend to them at low rates on the assumption that the government won't let them fail.

The subsidies arose because banks perform a special public service. The lending they do and the payments they process are crucial to the functioning of the economy. Problem is, access to cheap, subsidized financing gives banks a big advantage if they move into markets beyond their core business. That's great for the banks, but it distorts the competitive landscape.

Consider the recent mini-scandal in the aluminum market. Taxpayer subsidies gave the banks an edge in holding the metal. Subsidized financing -- made particularly cheap by the Fed's efforts to stimulate the economy with near-zero interest rates -- encouraged banks and their clients to build bigger stockpiles than they otherwise would have, tying up supplies. If the bets were to go wrong and lead to distress at a big bank, the Fed would have to provide emergency financing for an activity that taxpayers never intended to support.

Commodities are just one area in which the largest U.S. banks have sought to expand at taxpayer expense. Aside from trading and issuing securities and derivatives, they have gotten into water utilities, electricity generation, natural-gas distribution and even the operation ofChicago's parking meters. The full extent of the sprawl is hard to assess due to a lack of public disclosure.

There's no good economic reason for banks to be in such businesses. All they bring to the table is their privileged access to cheap financing. The solution is twofold: Reduce the subsidies and confine them as much as possible to the lending and payments businesses that legitimately require taxpayer backing.

In principle, much can be achieved within the framework of existing legislation. Regulators can reduce the implicit subsidy by requiring banks to fund themselves with more loss-absorbing equity, thus making them less likely to require government bailouts. The so-called Volcker rule, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, can limit banks' ability to use the remaining explicit subsidies for speculative trading. The Fed also has great leeway in deciding what activities it considers complementary to, or naturally flowing from, the core business of banking.
David Fuller's view - In the realm of unintended consequences, there are considerable risks if behemoth banks are speculating in commodity futures, including inviting institutional clients to participate in tracker funds. This can quickly destabilise the thinly traded commodity futures markets, as we last saw with serious consequences in 2008. I have long maintained that the surge in commodity prices, not least crude oil, was a bigger factor in the severe recession which followed than most people realised.

Here is one short paragraph from a longer discussion of this problem from my lead article comments on Tuesday 8th July 2008:

"Thereafter it should be a matter of common sense. After all, if Energy and food prices continued to spiral higher with the help of tracker funds over the next few months, the gains in those investments would soon be more than offset by the deflationary impact of a severe global recession on most of one's non commodity assets. In other words, it would be a Pyrrhic victory."

A week later I was queried on this point in an interesting email which remains relevant to today's discussion: "On investments in commodity futures".

Today, we are much closer to legislation which would restrict banks from speculating / investing in commodity markets, as you will see near the end of today's leader article posted above.

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July 25 2013

Commentary by David Fuller

Megan McArdle: Obama's Speech is a Confession of Impotence

Here is the opening from this good but sobering column published by Bloomberg
"What we need," President Barack Obama told a group in Galesburg, Illinois, today, "isn't a three-month plan, or even a three-year plan, but a long-term American strategy, based on steady, persistent effort, to reverse the forces that have conspired against the middle class for decades."

nequality, layoffs, economic insecurity -- it's a conspiracy! Sounds sinister . . . and yet, in a way, oddly comforting. A conspiracy is something you can do something about: find the villains and slay them. On the other hand, titanic and impersonal forces like globalization and technological progress are harder to vanquish.

Unfortunately, there's no easy villain to be conquered, no easy fix to bring the middle class back to the glory days of the 1950s and 1960s. Inequality and economic insecurity are rising everywhere in the developed world, not just in America. This is not a matter of policy tweaks or bad, greedy people. It's a matter of seismic shifts in the global economy.

Nonetheless, in his speech, Obama claimed that he could do something about the ills facing us -- that he had a plan to bring back the bourgeois boom. But the strategies themselves were less than promising.

"The first cornerstone of a strong and growing middle class has to be an economy that generates more good jobs in durable, growing industries," the president told his audience. "Over the past four years, for the first time since the 1990s, the number of American manufacturing jobs hasn't gone down; they've gone up. But we can do more."

"So I'll push new initiatives to help more manufacturers bring more jobs back to America. We'll continue to focus on strategies to create good jobs in wind, solar, and natural gas that are lowering Energy costs and dangerous carbon pollution. And I'll push to open more manufacturing innovation institutes that turn regions left behind by global competition into global centers of cutting-edge jobs."

Obama has been promising green jobs for years, and failing to deliver them for just as long. There's little evidence that more environmentally friendly Energy sources will be net job creators. The middle class may enjoy bluer skies if we convert more of our power generation capacity to wind and solar. But we've no reason to think that they'll enjoy more green in their wallets.

The manufacturing innovation institute, meanwhile, is just another iteration of an idea that's been around for longer than Barack Obama has. Go to any Rust Belt city and you'll find research campuses, innovation institutes and similar institutions named after hopeful politicians who promised that a new manufacturing base would coalesce around this exciting agglomeration of creative minds. Unfortunately, in most instances it has turned out that manufacturing bases would rather coalesce around cheap land, low taxes and acres of uncongested freeway.

Besides, the problem in America is not that we suddenly lost our manufacturing mojo. In fact, we're still very good at it; according to the Boston Consulting Group, the inflation-adjusted value of our manufacturing output has more than doubled since 1972. But our manufacturing employment is down by one-third, because production is highly automated in most industries. Even small metalworking operations now use computer-aided design and robots as much as they do grizzled machinists.
David Fuller's view - Following on from the last sentence above, manufacturing bases also need competitive Energy costs. I maintain that the USA would be struggling to avoid recession, had it not been for private industry's invention and utilisation of fracking technology. However, that was opposed by President Obama, at least until it became obvious that fracking was lowering the USA's Energy costs, which were enticing manufacturing businesses back to America and creating more jobs in the process than any other programme.

The bigger long-term problem for employment is automation, due to this era of accelerating technological innovation. Wonderful technologies are making many of us more efficient, and corporations are the biggest beneficiaries. However, as technological innovation increases, it is replacing jobs more rapidly than they are being created elsewhere. This is a problem for all developed economies and increasingly, also for developing economies.

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July 19 2013

Commentary by Eoin Treacy

July 19 2013

Commentary by Eoin Treacy

WTI Sheds Busted Benchmark Status as Glut Ebbs: Energy Markets

This article by Moming Zhou for Bloomberg may be of interest to subscribers. Here is a section
“The speed that it happened was eye-opening,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by phone. “A lot of people made money from it but it also caught a lot of people off guard. We also saw severe contraction in the Brent versus WTI spread.”

Since the start of 2012, new and reversed pipelines have boosted capacity to Houston from the central U.S. by almost 1.2 million barrels a day, with 850,000 more coming online by the end of the year, according to data compiled by Bloomberg. Inventories at Cushing, Oklahoma, the delivery point for WTI futures, have dropped 11 percent from a record 51.9 million barrels in January, according to EIA data.

Enterprise Products Partners LP and Enbridge Inc. switched the direction of the Seaway pipeline last year to move barrels to the Houston area from Cushing. Planned expansions by Magellan Midstream Partners LP's Longhorn pipeline, TransCanada Corp.'s southern leg of Keystone XL and Sunoco Logistics Partners LP's Permian Express line will also divert supplies from Cushing.
Eoin Treacy's view - The flood of oil moving towards Houston which has been diverted from the Cushing facility has contributed to a backwardation right across the oil futures curve highlighting the short-term supply deficit at the main storage terminal. This migration has also led to the spread between Brent crude and WTI contracting from record highs above $25 to negative territory today. This reasserts the historical premium WTI has enjoyed over Brent but the question now is how sustainable the situation is?

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July 19 2013

Commentary by Eoin Treacy

Investment Implications of a Stronger $

Thanks to a subscriber for this detailed report from Deutsche Bank which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section
earnings, and profound impacts on oil and commodity prices
Dollar cycles impact equity multiples because they reflect and drive capital flows. Dollar cycles impact earnings through a complex variety of channels encompassing both top line and margins, but go well beyond the obvious translation impacts on foreign earnings and competitiveness. The dollar is a key driver of oil and commodity prices with a higher dollar negative for prices.

With the dollar's current up cycle still in its early stages, we see significant divergences in regional equity market, sector and individual
stock performance for some time to come. Key top-down strategic themes are:

Multiple over earnings: overweight the US on prospective capital inflows;
Regionally, long commodity importers and short commodity exporters;
Overweight the drivers (growth and rates) of the US dollar up cycle; US financials benefit, bond-like payout sectors Telecoms and Utilities lose;
Underweight Energy and Materials.

There are several common themes in company analyst views on the impact of a higher dollar on industries and individual stocks:

Higher USD revenue and assets are positive, higher USD costs and liabilities are negative; Japanese companies in most sectors benefit disproportionately given their export focus, while global European companies also benefit as most have large US operations;
FX market hedging practices vary widely across industries and firms;
Cost and revenue impacts go beyond the direct translation/ competitiveness effects; such as for US retail;
Market structure will determine whether FX changes are passed on or accrue to margins; oligopolistic markets likely to see benefits to margins;
FX exposure of the industry and not just the individual company matters as currency moves realign competitor cost advantages;

EM banks negatively exposed to tightening local liquidity;
Strategic implications (cross border M&A; cash repatriation; on versus offshoring) likely to be mixed.
Eoin Treacy's view - It has been quite some time since a Dollar bull market has been a realistic consideration. At present the Dollar is a favoured currency by process of elimination rather than a compelling bullish theme. For example, the devaluation of the Yen and the associated pressure this puts on other Asian currencies, continued stress on the European economy and the weakness of commodity investment for the Australian Dollar, Canadian Dollar and other commodity related currencies leaves the US Dollar as one of the few relatively appealing alternatives.

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July 18 2013

Commentary by David Fuller

Bloomberg: Lift the Ban on U.S. Oil Exports

Here is a section from this informative editorial
The last time serious talk about exporting oil was heard in Washington, the Soviet Union still loomed, the Reagan Revolution had yet to take place and the National Basketball Association had an equitable distribution of talent.

It was the 1970s, and with the Arab oil embargo a fresh memory and fears that domestic drilling had peaked, Congress instituted fuel-economy standards for cars, an Energy-conservation program for consumer products and the Strategic Petroleum Reserve. It also banned all exports of U.S. oil except for small amounts to Canada.

Four decades later, that ban is threatening to put a damper on the shale-oil boom in the U.S., and Congress or the president should find a way to reverse, or at least temporarily suspend, it.

Consider how drastically the U.S. oil picture has changed. Production has increased to 7.4 million barrels a day from 5 million in 2008, thanks to new methods of extracting oil from deep rock using horizontal drilling and hydraulic fracturing, or fracking. In the past year alone, these techniques have boosted output by a million barrels a day.


The point is, unless some of the shale oil is exported, it will be stranded, or simply left in the ground. And though to some environmentalists that may sound like a tempting prospect, it would not reduce global consumption of oil -- just the consumption of U.S. oil. Lessening total use will take efforts more directly targeted to that end, including programs to develop renewable Energy and efficiency and to put a price on carbon emissions.

By increasing exports even as it continues importing oil, the U.S. can exercise maximum flexibility in world oil markets. It can keep U.S. oil flowing, encouraging further exploration and drilling. And it can help maintain relatively stable gasoline prices, because these are largely determined by world markets.
David Fuller's view - Those in the USA who oppose the exporting of oil from their country cite two arguments: 1) It would be a selfish, short-term gain and deprived future generations of this valuable resource; 2) We should stop polluting the planet by producing and burning fossil fuels.

The first argument above has been around for decades, and it has been proved to be wrong as the technology for extracting oil has progressed. It is a finite resource but the invention of fracking (long described by Fullermoney as a 'game changer') not to mention future improvements in extraction techniques, should ensure that known reserves of oil and gas last into the next century, at the current rate of production.

As for the second argument above, Fullermoney understands the environmental risks, and maintains that the world needs some luck regarding the future rate and nature of climate change. We have to take that risk because if the world stopped using fossil fuels, the global economy would be plunged into the severest of depressions. So we need time and ever improving technologies, to both reduce CO2 emissions and also extract CO2 from the atmosphere. Additionally, we need time to improve the efficiency of solar and other renewable Energy sources. We also need time to improve and construct new generation nuclear plants.

Will it all work? Hopefully, and awareness of the problems is sufficient to ensure an increasing technological effort on all fronts.

By exporting oil, even if only a small amount, the US can help its own economy and also global GDP growth. Japan, the USA's most important Asian ally, would be an obvious candidate. Oil exports would increase the US's influence in this industry, and encourage other countries to tap their own shale reserves. It might also pull some of the speculative funds out of the oil market.

Despite generally soft commodity markets, oil prices have rallied (WTI & Brent), and further strength would weigh on global GDP growth which is still struggling from the lingering effects of the credit crisis recession. Brent crude is not yet a problem as it is only recovering from the lower side of its range for the last two-and-a-half years, but the amber warning lights will be flashing if it approaches $120.

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July 17 2013

Commentary by David Fuller

Bernanke Says Fed Bond Purchases Not on 'Preset Course'

Here are some highlights from Bloomberg's interesting report on the Fed Chairman's statement
Federal Reserve Chairman Ben S. Bernanke said the central bank's asset purchases "are by no means on a preset course" and could be reduced more quickly or expanded as economic conditions warrant.

"The current pace of purchases could be maintained for longer" if inflation remained too low, the outlook for employment became less favorable or "financial conditions -- which have tightened recently -- were judged to be insufficientlyaccommodative to allow us to attain our mandated objectives," Bernanke said today to the House Financial Services Committee.

If the economy improved faster than expected, and inflation rose back "decisively" toward the central bank's 2 percent target, "the pace of asset purchases could be reduced somewhat more quickly," the 59-year-old Fed Chairman said in prepared testimony. The Fed would also be prepared to increase the pace of purchases "for a time, to promote a return to maximum employment in a context of price stability."

The Fed chairman's remarks highlight the Federal Open Market Committee's desire to assure that the economy and labor markets have sufficient momentum before reducing its $85 billion in monthly bond purchases. Treasury yields have jumped since June 19, when Bernanke outlined a possible timetable for tapering purchases.


In today's testimony, the Fed chairman described labor markets as "far from satisfactory, as theunemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high."

While risks to the economy have diminished since late last year, Bernanke said, "the risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery."

The slow pace of the recovery means that it remains "vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated."


Bernanke and policy makers have had to gauge how much government spending cuts and higher tax rates are sapping consumer confidence and growth. JPMorgan Chase & Co. economists estimate that an expiration of tax breaks could reduce take-home pay this year by more than $100 billion.

Retail sales climbed 0.4 percent last month, about half of what economists forecast, and the figures showed households are replacing outdated vehicles and furnishing new homes while cutting back on electronics and meals outside the home.

"The consumer is under pressure," said Bob Sasser, chief executive officer of Chesapeake, Virginia-based discount retailer Dollar Tree Inc. "They're now facing higher taxes," a weak job market, "and the uncertainty around the economy," Sasser told analysts and investors on a conference call in May.

The U.S. faces a "very troublesome and challenging recovery," Kendall J. Powell, chairman and chief executive officer of Minneapolis-based General Mills Inc., said in a June 26 conference call with shareholders and analysts.

Still, Fed stimulus has helped fuel a housing-market rebound and this year's 17.5 percent surge in the Standard and Poor's 500 Index of stocks.


Slack in the labor market, including 7.6 percent unemployment last month, helped keep inflation for the 12 months ending May a full point below the Fed's 2 percent goal, reducing the odds of any tightening based on that measure. the participants on the FOMC. In December, when the committee expanded the program of $40 billion in monthly buying of mortgage bonds with purchases of $45 billion of Treasuries, about half of FOMC participants wanted to halt the stimulus around the middle of this year, according to minutes from the meeting.

The language suggests that concern over the risks from the program extends beyond the four Fed regional bank presidents who have publicly spoken out against it: Esther George of Kansas City, Jeffrey Lacker of Richmond, Richard Fisher of Dallas and Charles Plosser of Phildelphia.
David Fuller's view - Ben Bernanke is inevitably a somewhat controversial figure, although obviously not due to his mild and studious demeanour. Instead, it is entirely because of the power and influence his unprecedented quantitative easing (QE) policies wield over the US economy and financial markets.

I have no issue with this, recalling that Mr Bernanke was appointed Fed Chairman precisely because he was the academic expert who said he knew how to avoid a repeat of the USA's 1930s Depression, and also a lengthy Japanese-style deflation. Today, we can credit him with avoiding another depression. However, we know there are some deflationary pressures in the US and also the global economy, not least because of the depression in parts of Europe, plus slumps experienced by South American resources economies following China's slowdown.

The US economy has recovered somewhat but is far from robust. While this is consistent with the data I have previously cited, stating that 'it takes at least five to seven years to recover from a credit crisis recession', it would be premature to call Mr Bernanke's QE's experiment an unqualified success. Moreover, half the Fed appears to believe that the risks of QE now outweigh the potential additional benefits.

What is beyond any doubt is that Wall Street (S&P 500 & Russell 2000) has been a big beneficiary of QE, which has also helped to lift a number of other stock markets, in addition to their own national policies. Nevertheless, US equities are currently clear outperformers, as you can see from this chart of the DJ World Stock Index Ex USA.

Is this outperformance due to the USA's three strong cards which I often mention: 1) competitive Energy costs thanks to fracking; 2) superior technology in many areas; 3) many of the most successful corporate Autonomies?

They are certainly bullish factors, not least for the long term. However, a number of momentum players have clearly genuflected before Mr Bernanke and bought on the back of his QE largess. Wall Street is overbought, albeit still in form, but susceptible to a disappointment which will most likely be confirmed by the next clear downward dynamic. To see what those can look like, note the key day reversal which occurred on May 22nd.

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July 16 2013

Commentary by Eoin Treacy

Crude Supply Drops to Five-Month Low in Survey

This article by Moming Zhou for Bloomberg may be of interest to subscribers. Here is a section
Refineries boosted their operation as gasoline consumption increased to an 11-month high in the week ended July 5, the EIA, the Energy Department's statistical arm, said last week. Fuel demand is highest from the last weekend in May to the Labor Day weekend in early September, the prime U.S. vacation period. West
Texas Intermediate crude has jumped 10 percent in July.

“We've got the peak driving season,” Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based Energy consultant, said by phone yesterday. “Crude oil is refined into products and that refining process is going to draw down inventories. Another crude draw would be supportive for WTI prices.”
Eoin Treacy's view - The recent strength in oil prices and the underperformance of gasoline has weighed on the crack spread upon which refiners rely. The 3:2:1 spread failed to sustain the breakout to new ten-year highs in February and has since halved. It found support last week and additional follow through to the upside this week would suggest more than temporary demand dominance.

Despite a strong performance in the latter half of 2012, the US refining sector has for the most part experienced its deepest pullback in a number of years. Tesoro and Valero posted some of the shallower reactions and found at least temporary support last week in the region of their 200-day MAs. They will need to continue to find support above last week's lows if the benefit of the doubt is to be given to medium-term potential for additional upside.

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July 16 2013

Commentary by David Fuller

Email of the day (1)

On my recent Audios
"Perhaps it is my imagination but your Monday audio seemed more upbeat than recent big picture audios. Your recent audios have suggested a pullback in the US markets to around or below the 200 day ma followed by extended ranging. This would clearly affect most world markets. Monday's audio included a possible 30% lift in the Japanese market in the next few months and very positive comments about the US. With this scenario do you not feel that world markets would follow, suggesting another leg up in the bull market? Many world markets, including emerging ones have seen significant pullbacks so are not overbought."
David Fuller's view - I do not think it was your "imagination" and thanks for bring this up so that I can clarify my views for all subscribers.

A number of leading stock markets, which had been rallying since late last year, pushed higher above their 200-day moving averages in April and May than we had seen previously during the rally. Overextensions of this type are unsustainable and most of the indices fell back to test and even break their MAs before recovering somewhat in recent weeks.

I did think that the S&P 500 would also test and temporarily move below its rising MA, but it has yet to do so, probably because Ben Bernanke's last statement was seen as quite bullish in terms of interest rates remaining low. I think Bernanke has been quite consistent but the markets took fright when he mentioned an eventual tapering of quantitative easing (QE) in May.

The S&P 500 and other leading indices such as Japan's Nikkei 225 are once again overbought on a short-term basis. I maintain that leading stock markets are now in a somewhat choppy, ranging environment which could persist for a lengthy period, not least because the next big change in monetary policy will be a programme of tapering and eventually ending QE.

Our longer-term view of the US is quite positive, largely because of: 1) Its competitive Energy costs, thanks to fracking; 2) Its lead in many technologies, which appears to be increasing; 3) The dominant role of its Autonomies, which should mostly increase in strength and overall profitability as the global economy eventually recovers.

However, I believe the Monday Audio also mentioned some short-term hurdles for the US stock market: 1) Its latest rally is somewhat overextended; 2) Valuations have generally increased following the strong rally since last November; 3) Growth in corporate profits is slowing; 4) Economic growth does not appear to be the White House's top interest or priority.

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July 15 2013

Commentary by Eoin Treacy

A wealth of diversity

Thanks to a subscriber for this informative report concentrating on Sub Saharan Africa. Here is a section
South Africa is more susceptible to global risks, and has seen a slowdown in domestic growth momentum. Recent market volatility has limited countercyclical policy options. We lower our 2013 South Africa GDP forecast to 2.2% (2.7% previously). Elsewhere in Africa, demand is more resilient. Angola, Cote d?Ivoire, Ghana, Zambia, and a swathe of new resource economies in East Africa should all see medium-term trend growth of c.7%.

Fears that Africa will be hit hard by a moderation in China?s growth trend are misplaced. While much of Africa?s growth impetus remains domestic, trade with China continues to increase.

The impact of QE tapering on Africa will not be uniform. More liquid markets that have seen a higher level of foreign investor participation are more vulnerable. Nonetheless, with a tapering of QE now largely discounted, we expect domestic fundamentals to reassert themselves.

We maintain an Overweight duration and FX weighting on Nigeria, we are Overweight duration on Ghana, but Neutral on the Ghana cedi. We maintain a Neutral duration stance on South Africa, and Underweight FX weighting on the rand. We are Neutral duration in Kenya and Uganda, given a less favourable demand/supply outlook. We remain Neutral duration on Zambia given expectations of tighter liquidity.
Eoin Treacy's view - Sub Saharan Africa is interesting from a number of perspectives, not least because of the improving standards of economic and fiscal governance evident in a number of countries. Additionally, as one of the world's major population growth centres, the region has the capacity to post outsized economic growth, provided governance remains on an improving trajectory. The discovery of significant new Energy resources in East Africa should also act to improve the fiscal position of respective governments over future decades.

The Nigerian Index found support three weeks ago, at the upper side of the underlying trading range; having unwound the majority of its overbought condition relative to the 200-day MA. A sustained move below 34,500 would be required to question medium-term recovery potential.

Botswana has paused in the region of the 2008 peak in what has so far been a relatively gradual process of mean reversion. Ghana has a relatively similar pattern. Kenya found support last week in the region of the 200-day MA. Namibia hit a medium-term peak in January and has since experienced its deepest pullback in at least two years. The Index rallied impressively last week but a sustained move back above 950 will be required to confirm a return to demand dominance beyond the short term.

This additional report from IJG Securities focusing on Namibia, kindly forwarded by a subscriber, may also be of interest to subscribers.

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July 15 2013

Commentary by David Fuller

To Re-Start Nukes, Japan Must Raze 'Nuclear Village'

Here is a sample from this interesting editorial by Bloomberg
The governing coalition led by Japan's pro-nuclear Liberal Democratic Party is predicted to win a majority in the July 21 Upper House elections.

That prospect might alarm the almost half of all Japanese citizens who say they don't want to restart the 48 nuclear reactors that remain offline for safety checks after the March 2011 earthquake and tsunami that triggered a catastrophic meltdown. Even now, engineers are struggling to contain the radioactive water seeping into the groundwater under the crippled Fukushima Dai-Ichi facility.

Yet nuclear power, which before the tsunami generated almost 30 percent of Japan's electricity, is reliable, safe and climate-friendly, and should remain part of the country's Energy mix. The challenge Japan faces is to tear down the "nuclear village" -- the collusive nexus of government and industry that drove the country to pursue atomic Energy at the expense of its citizens' safety.

The relationship was so cozy that even months after the disaster, more than 50 ex-government officials were still working at the Tokyo Electric Power Co. (9501), Fukushima's operator.

Last September, Japan's previous government took an important first step by creating theNuclear Regulation Authority. Unlike the Nuclear and Industrial Safety Agency that it replaced, the NRA is not housed within the Ministry of Economy, Trade and Industry, which aggressively promoted Japan's nuclear industry. The new agency has been granted more bureaucratic independence and has strict rules governing personnel transfers -- once you work there, for instance, you can't go back to your ministry. Already, the NRA has declared that the Tsuruga reactor of the Japan Atomic Power Co. sits on an active seismic fault, a finding that could keep the plant closed and lead to the company's collapse.
David Fuller's view - Prime Minister Shinzo Abe will know that Japan's expensive and largely imported Energy supplies represent one of the biggest hurdles faced by his economic recovery. Therefore, restarting Japan's nuclear programme is essential. However, this will encounter significant and justified opposition if the government only reopens nuclear power stations, following inspections, of plants that are currently closed.

To address the nuclear safety issue, Japan needs a medium to longer-term programme, including the following steps: 1) Permanently close the Tsuruga reactor, mentioned above, and any others that the NRA regards as unsafe; 2) Announce that only stations approved by the NRA will be reopened, but only for a limited period because they are 'old nuclear' in terms of technology; 3) Commence a 'new nuclear' programme, based on improved technologies, and locate these plants in regions that do not sit on seismic faults.

Japan needs to focus on all competitive and reliable sources of Energy, from oil and gas, including shale projects, to nuclear, hydroelectric and solar. Where these are not economically feasible within Japan's national territory, they can be developed in conjunction with Energy industries in less developed countries. As a high-tech economy, Japan has the skills to become a leader in Energy development programmes.

Meanwhile, helped by a reinvigorating economy, Japan's stock market recovery is already well on its way to qualifying as a cyclical bull market. A return to the 18,000 - 20,000 region appears achievable during the remainder of this year. Additionally, subject to competitive Energy costs, Japan is a candidate for a secular (long-term) uptrend.

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July 10 2013

Commentary by Eoin Treacy

WTI Oil Surges to 14-Month High as U.S. Crude Inventories Plunge

This article by Mark Shenk for Bloomberg may be of interest to subscribers. Here is a section
Cushing inventories dropped 2.69 million barrels to 47 million last week, the report showed. Supplies reached a record 51.9 million barrels in the week ended Jan. 11 .

“We're seeing a reordering at Cushing, which is very supportive to WTI,” said John Kilduff, a partner at Again Capital LLC, a New York hedge fund that focuses on Energy. “Cushing is no longer a bottleneck as new delivery routes have become available because of investment in pipelines and rail.”

Refineries operated at 92.4 percent of capacity, up 0.2 percentage point from the prior week and the highest level this year. Utilization rates usually peak during the summer months when U.S. gasoline demand rises.

Gasoline stockpiles unexpectedly fell 2.63 million barrels to 221 million. Inventories of distillate fuel, a category that includes heating oil and diesel, advanced 3.04 million to 123.8 million. Supplies of both gasoline and distillate fuel were projected to advance 1 million barrels in the Bloomberg survey.
Eoin Treacy's view - Both Brent Crude Oil and West Texas Intermediate are trading in backwardation right across the futures curve suggesting not only short-term but potentially medium demand dominance. Considering the widely held perception of slowing global growth, the market may currently be more heavily influenced by the internal machinations of producing, storing and transporting the commodity and concerns surrounding Egypt.

West Texas Intermediate continues to extend the break back above $100 and a sustained move below that level would be required to question potential for additional upside. Brent Crude has been less explosive but is also extending its breakout from a short-term range.

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July 09 2013

Commentary by Eoin Treacy

New All Time Highs on NYSE.AMEX and NASDAQ

Eoin Treacy's view - The relative strength of the US Dollar, the outperformance of the banking sector and the Russell 2000 breaking upwards to new all-time highs are all noteworthy and can be considered positives from the perspective of stock market investors. The speed with which the S&P500 rallied from the October/November lows to the June peak and the size of the subsequent pullback suggests that some time is required for the market to regroup before significant new highs can be sustained.

However, even assuming that the wider market is likely to range, some shares are already breaking upwards to new all time highs. I used the Chart Library's High/Low Filter to identify companies on the NYSE, AMEX and NASDAQ exchanges that have posted new all time highs in the last five days. I then used Bloomberg to create a table displaying market cap, P/E ratio, dividend yields, price, the latest value for the 200-day MA and the industry subsector. I then segmented the results by companies with a market cap of greater than $1billion and those with a smaller market cap. A number of ETFs also appeared in the results and I grouped these at the end of the list.

A delegate at the May venue for The Chart Seminar mentioned that my view of the world seemed to be like that espoused by Peter Diamandis and Steven Kotler in their book, Abundance: The Future is Better Than You Think. I just finished reading it. The central premise of the book is that technological innovation is occurring at an exponential rate, that change is occurring at such a prodigious pace that the vast majority of people have no conception how much their lives are likely to change and that the shortage of resources we are all accustomed to dealing with is likely to become a thing of the past. I found it a compelling read and the optimism expressed is welcome, particularly when many pundits seem to spout nothing but pessimism. We can only guess at the timeline of exactly when these innovations will make a difference to our lives and at Fullermoney we will of course be guided by the price action.

The book came to mind when viewing the results of the above filter this morning. Of the ETFs, the Powershares Aero & Defence, Powershares Dynamic Biotech & Genomics, Powershares Dynamic Technology and Vanguard Consumer Discretionary have all posted new all-time highs in the last five trading sessions. Here are the top-10 holdings for each: Powershares Aero & Defence, Powershares Dynamic Biotech & Genomics, Powershares Dynamic Technology and Vanguard Consumer Discretionary. Veteran subscribers will be familiar with many of these shares from the various chart reviews posted in the Comment of the Day over the last five years. Many of these companies represent the confluence of major themes we have highlighted for a number of years i.e. the greatest urbanisation in history, the increasing pace of technological innovation and the potential for Energy prices to trend lower in real terms from the latter half of this decade. The Autonomies represent a group of some of the most globally oriented companies we believe are most likely to benefit from these themes.

Some of the most noteworthy chart patterns include:

Carefusion completed a three-year base in January and continues to trend consistently higher. The most recent reaction is similar to that posted in March and a break in the progression of higher reaction lows would be required to question medium-term scope for additional upside.

Applied Industrial Technologies is an intermediary for industrial parts. In common with W.W. Grainger, it continues to trend consistently higher.

Stericycle completed a two-year range in March and found support near $105 from mid-June. A sustained move below that level would be required to question medium-term scope for additional upside.

Western Digital is particularly noteworthy for its low valuations. The share broke emphatically out a three-year base in April and while somewhat overbought in the short-term; the upside can continue to be given the benefit of the doubt provided it holds above the 200-day MA.

Whole Food Markets formed a reasonably orderly consolidation between October and May and a sustained move below $48 would be required to question medium-term scope for additional upside.

EnPro Industries is in the process of completed a six-year base and a break in the progression of higher reaction lows would be required to question medium-term upside potential.

Moog Inc broke successfully above $50 in May before consolidating for six weeks. It reasserted the medium-term uptrend last week and a sustained move below $50 would be required to begin to question medium-term upside potential.

It occurs to me that the outperformance of a significant portion of the military industrial complex may be influenced by the increasingly potent civilian applications of their technology.

Despite widespread pessimism about the pace of the US economic expansion, the fact that such a large number of restaurants, retail chains and regional banks are in positions of outperformance would suggest that there is cause for medium-term optimism.

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July 09 2013

Commentary by Eoin Treacy

Email of the day (2)

on shale oil
“There was also an excellent piece by Matt Ridley on shale oil last week which increased my own understanding in some specific areas. It may also be of interest to the collective.”
Eoin Treacy's view - Thank you for this enthusiastic article which may be of interest to subscribers. Here is an important section:

Thanks to faster and cheaper drilling (which means less-rich rocks can be profitable) and things such as “zipper fracturing”, where two parallel wells are drilled and alternately fractured to help to release oil for each other, the oil recovery rate is rising from 2 per cent towards 10 per cent in places. Gas is now nearer 30 per cent. Well productivity has doubled in five years.

Now the Bakken is being eclipsed by an even more productive shale formation in southern Texas called the Eagle Ford. Texas, which already produces conventional oil, has doubled its oil production in just over two years and by the end of this year will exceed Venezuela, Kuwait, Mexico and Iraq as an oil “nation”.

Then there's the Permian Basin in west Texas, which looks as big as the other fields, and the Monterey shale in California — the source rock for all California's ordinary oilfields — which, at 15 billion recoverable barrels, could be bigger than the Bakken and Eagle Ford combined, according to a new report prepared for the Energy Information Administration.

Political lobbying represents one of the greatest threats to the USA's ability to develop its natural resources using the technological prowess the country is so noted for. Texas and California may as well be in different countries such is the difference in their respective Energy policies. Texas has long fostered wildcat explorers and innovators while California prefers to believe in the ability of technology to overcome the need for fossil fuels regardless of the impact this has on pricing and how long it may take.

Solar technology holds great promise over the medium to long-term but in the meantime producing as much cheap oil and gas will be essential to enhance economic productivity and to tackle the USA's trade and budget deficits.

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July 09 2013

Commentary by David Fuller

IMF Reduces Global Growth Outlook as U.S. Expansion Weakens

Here is the opening for this relevant report from Bloomberg
World economic growth will struggle to accelerate this year as a U.S. expansion weakens, China's economy levels off and Europe's recession deepens, the International Monetary Fundsaid.

Global growth will be 3.1 percent this year, unchanged from the 2012 rate, and less than the 3.3 percent forecast in April, the Washington-based fund said today, trimming its prediction for this year a fifth consecutive time. The IMF reduced its 2013 projection for the U.S. to 1.7 percent growth from 1.9 percent in April, while next year's outlook was trimmed to 2.7 percent from 3 percent initially reported in April.

"Downside risks to global growth prospects still dominate," the IMF said in an update to its World Economic Outlook. It cited "the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the U.S. leads to sustained capital flow reversals."

The fund urged central banks in wealthy nations facing low inflation and economic slack to keep injecting stimulus until recovery is entrenched, saying rising longer-term interest rateshave hurt emerging markets the most. The developing economies need to be alert for financial risks if the "anticipated unwinding" of the U.S. Federal Reserve's bond-buying program reverses capital flows, the IMF said.

"The growth in the U.S. has slowed down, and they're catching up to that," Jay Bryson, a global economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said after the IMF released its report. "This is not the U.S. economy of the 1990s that was a locomotive for the rest of the world" though the U.S. remains "one of the primary engines of growth."
David Fuller's view - Wall Street has seen a good recovery over the last three weeks, fuelled by money coming out of cash, bonds, and emerging markets. The appeal of US equities has been apparent for several years and is not difficult to appreciate. Here is a brief summary of America's advantages, frequently referred to by Fullermoney during the bull market to date:

1) The USA has a huge advantage in terms of competitive Energy costs among large, developed economies, thanks to its invention and utilisation of fracking technologies, enabling it to tap its large reserves of shale gas and oil.

2) The success of fracking technology has helped to reinvigorate America's inventive, entrepreneurial culture, which is pulling away from other countries, in an era of exponential technological innovation, long forecast by Fullermoney.

3) The USA has the largest number of successful, multinational corporate Autonomies, by far. These leading firms have become increasingly powerful, despite the valuation contraction cycle often discussed by Fullermoney over the last dozen years.

These dynamic themes bode well for the longer term. However, the powerful additional stock market rally experienced by the USA and a number of other countries since mid-November 2012, increased valuations and led to overextensions relative to the trend means, approximated by 200-day moving averages, as you can see from the S&P 500 Index.

Currently, US indices are near their highs, at a time when a strengthening dollar, slowing global economy, and higher US taxes have reduced the growth rate in corporate profits. Nevertheless, global investors view the USA as a safe haven in an uncertain world that has seen Treasury bond yields rise in recent months.

America is somewhat safer for investors, despite an administration that is not known for its economic prowess. Among equities, favour relative strength, but watch out for overextensions relative to MAs, and expect some market turbulence over the medium term.

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July 08 2013

Commentary by David Fuller

Fuel the Future

Here is a sample from this excellent editorial by The Times (UK) (subscription registration required, PDF also provided)
Danny Alexander read out a blizzard of numbers yesterday to put flesh on the bones of the coalition's plans for capital spending on infrastructure. None of them was as significant as a figure he left out - the British Geological Society's latest estimate of Britain's shale gas reserves. The BGS says more than 1,300 trillion cubic feet of gas lie under Yorkshire and Lancashire alone.

The multiplier effects of big public spending projects on the wider economy are always uncertain. The effects of discovering a mother lode of relatively cheap Energy on your doorstep are not.

The industrial might of the United States in the early 20th century was built on cheap domestic oil. North America's recovery since the 2008 crash - sluggish but still enviable by European standards - has been fuelled largely by the rapid exploitation of shale oil and gas reserves from the Dakotas to California. Their effect on domestic Energy prices and American Energy security has been so dramatic as to make a sideshow of President Obama's vision of a US industrial future based on wind turbines and solar cells.

A similar transformation of national Energy supply is possible in Britain. It could create tens of thousands of jobs, boost tax revenues, improve a lopsided balance of payments, end British Energy dependence on foreign gas suppliers and exert steady downward pressure on domestic prices.

The figures are compelling. The estimate of 1,300 trillion cubic feet is of "gas-in-place" rather than gas that is known to be commercially recoverable. But at the accepted US rate of 10 per cent recoverability, the figure still represents a 26-fold increase on the last BGS estimate for the same area from 2010. Even at an extremely conservative 1 per cent recovery rate, the figure means Britain has two and a half times more shale gas in what is known as the Bowland/Hodder formation than was thought three years ago.

And from the conclusion:

Without growth, every element of a spending review looks hopeful at best. With growth, hope begins to look plausible, and nothing underpins it more reliably than cheap, domestic Energy. Greenpeace would naturally like the world to use less of it, but it has no monopoly on environmental concern and local gas is greener by far than imported gas, or coal. It is time to drill.
David Fuller's view - We are all green at heart and Planet Earth needs some luck in terms of the rate of climate change. Meanwhile, we will all be better off by tapping our national supplies of shale gas, which has approximately half the CO2 emissions of coal, and lowering our Energy costs in the process.

If more of our economies experience a satisfactory rate of GDP growth, there will be additional funds for vital scientific work, including addressing the challenges of climate change. Conversely, where GDP growth continues to slow, in part due to expensive and less reliable sources of Energy, millions of people could easily be worse off than the likely consequences of climate change currently suggest.

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July 04 2013

Commentary by David Fuller

Can This Man Save US From A Population Crisis?

Here is the conclusion to this interesting article from The Times (UK), which is mainly about climate change
Why is 2013 so different from 1813, or 1963 for that matter? Because right now all the graphs in his book, which you suspect he carries around in his head as well — graphs for world population, CO2 parts per million, global ocean heat content and loss of tropical rainforest and woodland, for instance — are lurching upward in ways they never have before.

“It's precisely because of those graphs that I think we are in trouble,” he says. But despite everything, behind the scenes, he's a bit of a rational optimist himself. Why else would he assign some of his best scientists the task of creating artificial photosynthesis? His lab is one of only seven in the world working on this.

The goal is to take carbon out of the atmosphere and at the same time create Energy using the same process that plants use to make carbohydrates.

“It's a high-risk project but the ultimate goal would be a trillion artificial trees running a trillion living software operating systems generating electricity and potentially sequestrating carbon,” he says.

Now that's more like it. We're only probably f****d.
David Fuller's view - I had not previously heard of this artificial photosynthesis research, but it sounds very interesting.

As I said yesterday: “… I would rather see the serious environmental issues tackled by government funded scientific programmes. The alternative is for economies to weaken themselves with increasingly expensive Energy policies, as we currently see in most of Europe .”

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July 03 2013

Commentary by David Fuller

Shale gas revolution 'could halve oil price'

This is an interesting article from The Times (UK) - (subscription registration required, PDF also provided). Here is the opening
The price of oil could halve within the next decade because of a shale revolution, according to industry experts.

John Llewellyn, the former head of international forecasting at the Organisation for Economic Co-operation and Development, said that most oil price forecasts underestimated radically the impact of new extraction techniques for shale oil and gas on supply.

Official estimates last week revealed that Britain was sitting on enough shale gas to power the country for 43 years, although it remains years from extraction. Cheap gas helps to lower the oil price and many shale rocks also contain oil.

In a report written with Puma Energy, the fuel business owned by Trafigura, Dr Llewellyn said that a shift taking place in oil markets between now and 2020 could reverse the significant change that took place in the 1970s, when the price doubled and the United States became a large net importer of oil. Oil costs more than $100 a barrel today.

"[That change] contributed importantly to the quadrupling of the world price of Energy in 1973-74 and the further double in 1978-79. If, as expected, the US becomes Energy self-sufficient over the coming 20 years, the shift could be equally profound," the report states.

One chief executive of a FTSE 100 oil and gas producer said that if shale gas did result in a long-term US gas price close to $5 or $6, that would equate to only $35 a barrel for oil. Even with a premium paid for oil being in a more convenient form than gas, that puts the likely future price of oil at a fraction of current expectations.
David Fuller's view - Fullermoney has been saying for several years that shale gas and oil was a vital 'game changer' in terms of Energy supplies.

However, most countries have been slow to adopt the fracking technology, whether due to their lack of technical ability, or political / environmental considerations. The latter is their choice. Nevertheless, I would rather see the serious environmental issues tackled by government funded scientific programmes. The alternative is for economies to weaken themselves with increasingly expensive Energy policies, as we currently see in most of Europe.

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July 02 2013

Commentary by David Fuller

Martin Feldstein: The Fed Should Start to 'Taper' Now

Here is the opening from this interesting and important article, published by The Wall Street Journal (subscription registration required to read the full article, PDF also provided)
The Federal Reserve should begin now to end its program of long-term asset purchases. It should not wait for the improved labor market that it predicts will come later this year, an improvement that is unlikely to occur. Instead, the Fed should emphasize that the pace of quantitative easing must adjust to the likely effectiveness of the program itself, and to the costs and risks of continuing to buy large quantities of bonds.

Although the economy is weak, experience shows that further bond-buying will have little effect on economic growth and employment. Meanwhile, low interest rates are generating excessive risk-taking by banks and other financial investors. These risks could have serious adverse effects on bank capital and the value of pension funds. In Fed Chairman Ben Bernanke's terms, the efficacy of quantitative easing is low and the costs and risks are substantial.

At his June 19 press conference, Mr. Bernanke described the Fed's plan to start reducing the pace of bond-buying later this year and to end purchases by the middle of 2014. He stressed that those actions are conditional on a substantial improvement in the labor market, leading to an unemployment rate of about 7% by mid-2014 with solid economic growth supporting further job gains. He emphasized that the "substantial improvement" would be judged by more than the unemployment rate.

Over the past year, unemployment has declined to 7.6% from 8.2%. However, there has been no increase in the ratio of employment to population, no decline in the teenage unemployment rate, and virtually no increase in the real average weekly earnings of those who are employed. The decline in the number of people in the labor force in the past 12 months actually exceeded the decline in the number of unemployed.
David Fuller's view - I agree that Mr Bernanke or his successor will have to abandon his 6.5% unemployment rate target for withdrawing quantitative easing (QE). This figure is unlikely to be reached anytime soon for the following reasons: 1) GDP growth is slow; 2) Corporations may not find the skills they require among the USA's unemployed; 3) The big multinationals (Autonomies) may prefer to hire workers closer to their overseas markets; 4) An accelerating rate of technological innovation is replacing some blue and white collar jobs more quickly than they can be replaced, and this trend is more likely to increase than decrease over the medium to longer term.

I commend the rest of Martin Feldstein's article to you. It makes a number of good points with which I agree. These are likely to cause some more market turbulence over the short to medium term as Fullermoney has been saying in recent months.

Nevertheless, I maintain that the USA is in a comparatively strong position: 1) Thanks to its advantage in Energy costs among large, developed nations, having invented and utilised gas and oil fracking technology; 2) The USA's overall lead in technological innovation has actually increased in recent years; 3) The USA has more corporate Autonomies than any other country, making it the most established global competitor.

On the negative side and despite the paragraph above, the USA still has budget and trade deficits, high corporate taxes, and a government that appears more interested in wealth redistribution than wealth creation. There is also a possibility that the US Dollar will appreciate more than many American companies would like to see.

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July 01 2013

Commentary by Eoin Treacy

Miners can't operate with gold below $1,500

This article by Kevin Crowley for Mineweb may be of interest to subscribers. Here is a section
The decision by Newcrest Mining Ltd. (NCM), Australia's biggest producer, to write down the value of its mines by as much as A$6 billion ($5.5 billion), will lead to the biggest one-time charge in gold mining history. Rivals such as Barrick Gold Corp. (ABX), the biggest producer, and Newmont Mining Corp. may be next, according to Jefferies International Ltd.

“There's going to be significant rationalizing in the gold industry,” Holland said. “You can't keep mines producing if they're losing money.”

Gold Fields's South Deep mine in South Africa is one of the few mines that could survive at the current gold price of 1,230 an ounce, Holland said. The mine's size and the fact that it's largely mechanized, meaning it's less reliant on labor demanding pay rises, will help keep costs low, he said.

The Bloomberg Research Global Mining & Exploration Index has fallen 41 percent since April 9, while gold has dropped 22.3 percent amid its biggest three-month decline on record.
Eoin Treacy's view - Gold miners let costs get out of control over the last decade and are now being brought to heel. A marginal cost of production at $1500 is high by any standard. This suggests that the companies who survive will be those best equipped to control costs. Writing down overvalued assets, renegotiating labour contracts, cancelling expansion projects, managing Energy costs and lobbying governments are all likely to play a part in this process.

The NYSE Arca Gold BUGS Index decline reflects the sector's poor fundamentals but it has fallen to such an extent and is so short-term oversold that potential for at least a relief rally has increased. A break in the progression of lower rally highs, currently near 300, would be required to break the medium-term downtrend.

According to its 2012 annual report RandGold Resources has a total cost per ounce of between $700 and $750. The company increased its dividend this year by 25% and yields 0.77%. The share has halved since October, but found at least short-term support in the region of 4000p last week and an unwind of the oversold condition appears to be underway.

Franco Nevada as a royalty company is also noteworthy at this stage. The share currently yields 2% but has an admirable dividend growth rate averaging more than 30% over the last five years. The share halved between September and the end of June but found at least short-term support last week and an unwind of the short-term oversold condition appears to be underway.

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June 28 2013

Commentary by David Fuller

Today's interesting charts

Price charts show you when the consensus view is no longer sustained by market action.
David Fuller's view - The Philippines (weekly & daily), Indonesia (weekly & daily) and Thailand (weekly & daily) became increasingly overextended relative to their trend means, approximated by their 200-day moving averages, during the second quarter of this year. They peaked in May and fell sharply in a mean reversion process, before commencing sharp rallies on Wednesday. Further near-term gains may be more difficult to maintain, because big overextensions relative to 200-day MAs within what have been clear overall upward trends, are signs of euphoria and therefore difficult to sustain over the short-term and also often the medium-term as well.

Singapore's Straits Times Index (weekly & daily) has seen some loss of downside momentum but so far this is only a modest improvement following the 5-week slide. A close above the last 3-day rally high near 3240 is required to provide further evidence that a low of at lest near-term significance has been reached late last week and earlier this week.

India's Sensex Index (weekly & daily) has checked its 5-week slide with a weekly key reversal, and it also saw an upside breakaway gap on the daily chart. Consequently, closes beneath 18,500 are now required to offset some further recovery within the current broad trading range. Note: today's oversold rally was boosted by Energy reforms.

China's Shanghai A-Share Index (weekly & daily) accelerated to its lowest level since January 2009 on Tuesday. It has steadied and should see some further recovery in response to the large decline which commenced in late May, despite all the uncertainty.

Japan's Nikkei 225 (weekly & daily) lost downside momentum in June and closed at its highest level for the month today. It is still well above its MA, but a lot less so than in May. A close beneath 12,430 would now be required to offset current scope for a further ranging recovery. Japan remains the most promising major market, thanks to Abenomics, particularly if the Japan Topix 2nd Section (weekly & daily) can reassert its earlier relative strength.

Europe's Euro STOXX 50 underperformance (weekly & daily) is reaffirmed by the fall to its lowest level of the year on Monday. Nevertheless, a close beneath 2490 is now required to signal lower scope and offset current prospects for a potential downside failure and extension of this year's trading range. Worryingly, the Euro STOXX Bank Index (weekly & daily) remains weaker and is barely steady above lateral support near 100, dating back to September 2012.

The S&P 500 Index vs MSCI World Free continues to show the outperformance of the US stock market since 2008. However, it may be in a latter stage of this relative strength as the top area around the turn of the Century is approached. Nevertheless, a break in the progression of higher reaction lows will be required to signal the next likely reversal phase. Similarly, albeit in reverse order, the MSCI Emerging Markets vs S&P 500 Index, shows that the former sector has accelerated lower recently. Consequently, the first rally in excess of the last one shown since the current downtrend commenced in mid-2010, is likely to mark the onset of a significant change in relative performance.

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June 27 2013

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks' ever insightful report for PPHB which may be of interest to subscribers. Here is a section
To examine the relationship between China's economic growth and its oil consumption, production and imports, we plotted figures from BP's statistical database. We measured China's economic growth as calculated in purchasing power parity terms. Until 1993, China was a net producer of crude oil, but as consumption began accelerating the country was forced to begin importing oil. That demand acceleration came as the economy's growth ramped up from 8% to 14% between 1993 and 2000. The growth was surprising given the Asian currency crisis of the late 1990s, but demonstrated how the technology boom of that decade was powered by manufacturing in China. The tech implosion and 9/11 created a global economic contraction that was felt by China as its economic growth slumped to 4% before rebounding back to double-digit growth. With the exception of a brief slump to 9% growth in 2006, China has enjoyed double-digit growth until the global financial crisis exploded in 2008. Despite slowing growth, China's oil consumption has accelerated – both due to infrastructure investment and the start of a huge strategic oil storage program.

Taking a closer look at China's oil demand and economic growth, we can see how the country's demand has slowed along with the economy. The chart in Exhibit 11 (below) shows that the three smallest yearly oil demand increases coincided with years of serious economic downturns. However, when we look at the oil demand growth projections for 2013 and 2014 from the U.S. Energy Information Administration's (EIA) Short Term Outlook, they will rank among the lowest annual increases in the last 17 years. The key question is do the small yearly increases suggest significantly slower Chinese economic growth or does it reflect a shift in oil use?
Eoin Treacy's view - China continues to represent one of the primary demand drivers for the global Energy sector but is by no means the only one. India's growth can best be described as erratic but it is slowly moving up the GDP per capital tables which is consistent with higher demand growth for Energy. The revolution in supply related technologies increases the possibility that the trend in global demand growth will not result in an Energy crisis. In fact we believe Energy prices will trend lower in real terms from later this decade.

Brent Crude returned to test the psychological $100 level and has been ranging mostly above it for the last two months. It has firmed this week and a sustained move below $100 will be required to check potential for additional higher to lateral ranging.

WTI Crude has been ranging with a mild upward bias, below $100, since September. A break in the progression of higher reaction lows, currently near $93, would be required to question potential for a successful upward break.

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June 27 2013

Commentary by David Fuller

U.K. Says Shale Gas Fields Twice Size of Previous Estimates

Here is the opening from this important report from Bloomberg, released today
The U.K. said fields of shale gas in northern England are twice as large as previously estimated, offering the potential to spur economic growth, replace depleted North Sea deposits and cut Energy imports.

The shale rocks under counties including Lancashire and Yorkshire may hold as much as 1,300 trillion cubic feet of gas, Treasury Chief Secretary   Danny Alexander   said in parliament today, citing the British Geological Survey. While only a fraction of that gas will be extracted, a recovery rate of 10 percent -- similar to fields in the U.S -- would give the U.K. enough gas to meet demand for about 47 years.

The government is pushing for shale exploration to replicate the boom in U.S. gas output that's cut Energy costs and boosted the economy. To win support for drilling, which requires the controversial technique of hydraulic fracturing, explorers promised local communities incentives including a 1 percent share of production revenue.

“The next step for industry is to establish how much gas is technically and commercially recoverable,” Energy Minister Michael Fallon   said in a statement. “We welcome the commitments from industry on community benefits. This will provide a welcome boost for communities who will host shale exploration and production.”
David Fuller's view - Similar studies in other countries which have conducted them are also boosting known reserves. The key question, which I also asked following Tuesday's lead article on fast developing shale industry, is: “How are other countries doing with their Energy policies?”

Impressed by the USA 's rapid progress in producing shale gas and oil, including making the technology safer and more reliable, the UK looks as if it is finally serious about developing this resource. Better late than never, I certainly hope so, because significant shale production would be a boon for the UK economy.

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June 25 2013

Commentary by David Fuller

Frack Music Attracts Halliburton to Submarine Spy Tool

Here is a sample from this fascinating article from Bloomberg
A gossamer-thin glass line threaded two miles underground is allowing oilfield engineers to listen to a new kind of music: the sounds of fracking.

Halliburton Co. (HAL) and competing providers of drilling gear are adapting acoustic spy technology used by U.S. submarines to record sounds made deep in the earth that can guide engineers in finishing a well and predicting how much oil will flow.

The ability to hear inside a well enables producers to fine-tune hydraulic fracturing, or fracking, the process that blasts underground rock with water, sand and chemicals to free trapped oil and natural gas. The technology is targeted at an estimated $31 billion that will be spent this year on fracking stages that yield less-than-optimal results, a majority of the work at 26,100 U.S. wells set to be pressure-pumped in 2013, according to PacWest Consulting Partners LLC.

"We're creating a new science," said Magnus McEwen-King, managing director for OptaSense, a Qinetiq Group Plc (QQ/)unit that's one of the fiber-optics pioneers for the Energy industry. "From an acoustic perspective, this is very much the start of what I think is going to be a revolutionary technology."


Halliburton, the world's largest provider of fracking services, is working on cataloging the combination of sounds that signal the perfect frack: an explosion, cracking rock, and eventually the gurgle of hydrocarbons seeping into the well bore, said Glenn McColpin, director of reservoir monitoring at Halliburton's Houston-based Pinnacle unit. A bad frack means the rock didn't crack as much as it could have.

When perfected, a computer will convert the sounds to a graph that will show how deeply and thoroughly cracks penetrate the rock surrounding the well, indicating the success of each frack stage. The longer and more numerous the cracks, the more oil and gas will flow.


Contractors ranging from Halliburton to Exiius LLC have begun permanently installing fiber optic lines in U.S. wells. During completion of a just-drilled well, the fiber can listen for subtle noises that suggest sealing the well with cement didn't work properly.

Then the fiber can listen for good and bad fracking stages, and finally it'll be able to confirm if oil and gas is flowing. Eventually they'll be able to actually measure production flow based on sounds, McColpin said. He compares it to a flute: as different holes in the well's casing are open or clogged, the sound pitch of fluids flowing through the well are affected.

Programmers also are working on algorithms to detect the difference in sound for water versus oil flowing into the well from surrounding rock. Then valves for different areas in the well bore could be opened or closed as needed to minimize water incursion, which is a waste.
David Fuller's view - The entrepreneurial USA is racing ahead with these technologies. Note this year's 26,100 wells mentioned in the third paragraph above, which will be made more productive and also safer in terms of reducing possible leaks, as you will see from the three paragraphs immediately above.

The national benefits of competitive Energy prices, achieved with technological advances, are enormous for a highly developed country as Fullermoney has often discussed. They permeate throughout the entire economy, lowering costs and inspiring other entrepreneurial achievements. They also attract inward investments and highly skilled job applicants.

How are other countries doing with their Energy policies?

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June 21 2013

Commentary by Eoin Treacy

June 20 2013

Commentary by Eoin Treacy

End of the commodity super-cycle and implications for Asia

Thanks to a subscriber for this interesting report from Deutsche Bank which teases out the implications of lower commodity prices in real terms over the next decade. Here is a section
In conclusion, we consider some geopolitical implications. The fact that one of the key discussion items between Japan and the US during PM Abe's inaugural visit to Washington in February was about clearing regulations to allow natural gas exports from the US to Japan illustrates the importance of shale developments. Given the cost savings involved, Japan's eagerness is understandable, and would clearly further solidify Japan-US cooperation.

Beyond the issue of natural gas production, a lacklustre price outlook for oil has a range of implications. If the US oil production surplus, for instance, ultimately leads to the Brent benchmark falling precipitously with WTI to a level below the fiscal and budgetary level for key oil producers in the Middle East, the economic strain could ultimately lead to potentially widespread social unrest in that region.

Large scale spending on social programs in the Middle East has increased the breakeven oil price for many countries in recent years. According to our EM research team, the average GCC breakeven price last year is estimated to be around USD80/bbl (Brent basis), a 60% increase since 2008. This rising trend is likely to remain in place. And while USD80/bbl is the fiscal/budgetary breakeven, indications are that OPEC members are more comfortable with prices at around USD100-110/bbl. Similarly, the relationship between European Energy importing economies and Russia could be altered fundamentally if price weakness continues in the oil and gas sector. Russia's pricing power would be weakened, with adverse budgetary implications.

We have already pointed out that major Asian commodity producers like Australia, Indonesia, and Malaysia could see their investment, exports, and growth prospects dampened. Consequent fiscal stress and overall economic weakness could have adverse implication for the political incumbents in these economies. The end of the commodity super-cycle would warrant a wide range of economic and political changes, in our view.
Eoin Treacy's view - The increased volatility that has gripped markets over the last week has accelerated the pace of the corrective phase we have been speaking about for the last few months. However, despite deteriorating sentiment, the medium to long term outlook for stock markets remains bullish. Once this corrective phase has run its course, valuations will have improved and when support has been found we will be presented with an attractive entry point.

The confluence of the rise of the middle class, technological innovation and lower Energy prices in real terms represents a powerful force for productivity gains and stock market value creation. However as this report points out, benefits will not be evenly distributed. In a steady to lower commodity price environment, commodity consumers are likely to benefit.

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June 18 2013

Commentary by David Fuller

Even Pessimists Feel Optimistic About the American Economy

This is an informative article by Nelson Schwartz for the NYT & IHT (may require subscription registration, PDF also included). Here is the opening
For more than a decade, the economy has failed to grow the way it once did. Unemployment has not stayed this high, this long, since the 1930s.

But could the New Normal, as this long economic slog has been called, be growing old?

That is the surprising new view of a number of economists in academia and on Wall Street, who are now predicting something the United States has not experienced in years: healthier, more lasting growth.

The improving outlook is one reason the stock market has risen so sharply this year, even if street-level evidence for a turnaround, like strong job growth and income gains, has been scant so far.

A prominent convert to this emerging belief is Tyler Cowen, an economics professor at George Mason University near Washington and author of "The Great Stagnation," a 2011 best seller, who has gone from doomsayer to a decidedly more optimistic perspective.

He is not predicting an imminent resurgence. Like most academic economists, Mr. Cowen focuses on the next quarter-century rather than the next quarter. But new technologies like artificial intelligence and online education, increased domestic Energy production and slowing growth in the cost of health care have prompted Mr. Cowen to reappraise the country's prospects.
David Fuller's view - It is all in the prior history, as I keep mentioning. Economic historians have pointed out that it takes at least 5 to 7 years before GDP growth in an advanced economy returns to what we would regard as normal, following a credit crisis recession. Conditions in the US began to improve after 2008, so approximately 5.5 years have elapsed since the trough.

The so-called 'new normal' mentioned above refers to a period when frightened consumers were trying to reduce their debts, while corporations were cautious and governments experienced widening deficits following a decline in tax receipts.

Inevitably, not all countries will recover at the same rate. For instance, some Asean developing economies were less damaged by 2008 and are currently doing better. Conversely, Europe's economic problems could easily persist for longer, although much delayed economic and political reforms which are now occurring with Mario Draghi's considerable help at the ECB will assist the eventual recovery.

Meanwhile, the USA has some significant advantages. Chief among these is America's current competitive position in Energy costs among developed economies. US private industry invented fracking technology and the additional natural gas produced is helping to reduce America's CO2 emissions. America's favourable Energy costs are attracting both domestic and foreign manufacturing to the USA. Moreover, there are more corporate Autonomies in the USA. These big, multinational companies are both contributors to and prime beneficiaries of America's technological lead during an accelerated rate of innovation.

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June 14 2013

Commentary by Eoin Treacy

Apple's Return to U.S. Assembly Is More Than Good Optics

This article from Bloomberg may be of interest to subscribers. Here is a section
But the sheer number of jobs isn't necessarily the best measure of success. More important, as Willy Shih, a Harvard Business School professor of management explains, is constant innovation, quality control and having engineers, production
lines and suppliers in close proximity. The rush to low-cost China interrupted a lot of the progress U.S. companies had made -- and created new costs.

Inventing products is only a part of the value proposition. Taking an idea from the laboratory to the production line is equally important. The manufacturing process can give vital information to engineers, who in turn can use it to improve designs or manufacturing methods. All of this ultimately leads to greater efficiencies, fatter profits, faster economic growth -- and yes, better-paying jobs.

Insourcing can help speed this process along. Washington could reinforce the trend with a mix of pro-manufacturing policies, starting with taxes. By lowering the corporate income-tax rate from the current 35 percent -- one of the highest in the world -- Congress could stem the flow of jobs overseas. Lawmakers should also make permanent the research-and-development tax credit and liberalize trade with Europe and Asia.
Eoin Treacy's view - As global competition in manufacturing and innovation intensify, every opportunity is being explored to enhance companies' unique advantages. More and more, the knowledge that can be gleaned from an intimate understanding of the manufacturing process is being looked into for productivity gains and as sources of future innovation. The high cost of Energy and how this has contributed to transportation expenses are additional considerations that have become more relevant over the last decade.

As the value proposition for domestic US manufacturing becomes more compelling, companies engaged in insourcing are utilising the most advanced manufacturing processes in order to ensure they have visibility on future production costs. This is fuelling significant demand growth in automated manufacturing.

Japanese listed Fanuc has returned to test the region of its 200-day MA near ¥14,000. While this represents a potential area of support, a clear upward dynamic will be required to confirm a return to demand dominance. THK Corp and Omron Corp are still unwinding their respective overextensions following impressive rallies earlier this year.

US listed Cadence Design Systems has been trending steadily higher since 2009. During this time every overextension relative to the MA has been followed by a reversionary move which have tended to overshoot somewhat. Potential for mean reversion has therefore increased following the recent powerful rally.

Mentor Graphics has rallied impressively to retest the psychological $20 area which has offered resistance on a number of occasions over the last decade. A sustained move above that level will be required to confirm medium-term demand dominance.

Dover Corp has a growing industrial automation unit and rallied impressively from the April lows to test the $80 region where it has at least paused. Potential for some consolidation of recent gains remains more likely than not.

Rockwell Automation has been ranging mostly below $90 for much of the year and found support this week in the region of the 200-day MA, a sustained move below $80 would be required to question medium-term scope for continued higher to lateral ranging.

Brooks Automation steadied this week near $10 and a sustained move below $9 would be required to question medium-term potential for higher to lateral ranging.

Aspen Technology has lost momentum following what had previously been quite a consistent advance. It will need to hold above the April low near $26.50 during this consolidation if the medium-term upside is to continue to be given the benefit of the doubt.

In Europe, Swiss listed ABB has been ranging for the last few months and found support this week in the region of the 200-day MA. A sustained move below CHF20 would be required to question medium-term potential for continued higher to lateral ranging.

German listed Krones AG encountered resistance at the 2011 peak near €60 from April and continues to consolidate its earlier impressive rally. However, a sustained move below the €50 would be required to question medium-term upside potential. Kuka AG has lost momentum following an impressive advance over the last year and will need to hold above €30 if the medium-term uptrend is to continue to be given the benefit of the doubt.

Finnish listed Metso OYJ has returned to test the 18-month progression of higher major reaction lows. A clear upward dynamic is now needed to indicate a return to demand dominance in this area.

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June 14 2013

Commentary by David Fuller

World Bank Forecasts Slower but Smoother Growth

Here is the opening from this interesting article by Annie Lowrey for the NYT & IHT (may require subscription registration, PDF also provided
WASHINGTON - The world economy will face slower but less volatile growth in the coming months and years, the World Bank forecast on Wednesday, as dire risks from the financial crisis in Europe fade and emerging economies confront new challenges adapting to softer commodity prices and the prospect of rising interest rates.

"There's a growing recognition that this is not the aftereffect of the crisis," Andrew Burns, the lead author of the report, said in an interview. "It is a new normal."

All in all, the bank's economists forecast that the global economy will grow about 2.2 percent this year and 3 percent in 2014 in the latest periodic update to its Global Economic Prospects report. That is slightly weaker growth than the World Bank forecast in January.

The report's authors said they expected sluggish growth from high-income countries, with the euro area remaining weak but finally emerging from recession and Japan gaining some momentum from the government's aggressive fiscal and monetary measures after a decade of malaise and stagnation. The bank raised its estimate of 2013 growth for Japan to 1.4 percent from its earlier prediction of 0.8 percent.

The United States is expected to be relatively strong among the world's rich nations. Even so, the World Bank, which is responsible for encouraging development around the globe, anticipates that the American economy will grow only about 2 percent this year, in line with its performance over the last three years.

For emerging economies, conditions vary widely, the report said, but the picture is broadly good. Across large parts of Latin America, East Asia and sub-Saharan Africa, countries are growing close to their potential capacities, tied to factors like increases in productivity and the working-age population, and should expect little acceleration in the coming years, the report said.
David Fuller's view - I think the World Bank's estimates on global GDP growth are about right, based on what we currently know, but I do not agree with Andrew Burns' comment that, "It is a new normal".

History shows us that it takes at least 5 to 7 years before GDP growth returns to what we would regard as normal following credit crisis recessions. Conditions began to improve after 2008, so approximately 5.5 years have elapsed since the trough.

Inevitably, not all countries will recover at the same rate. For instance, some Asean developing economies were less damaged and are currently doing better. Conversely, Europe's economic problems could easily persist for longer.

Energy costs will also be a big factor. The USA invented fracking technology and is currently the leading beneficiary in terms of lower Energy costs. Canada is in a similar position, and interestingly, China appears to have made rapid progress in producing much needed cleaner Energy from a variety of sources, including hydropower, solar, wind and nuclear. Moreover, China should be in a strong position to develop its enormous reserves of shale gas, subject to the availability of sufficient water resources. This informative article covers part of the story on China's rapid renewable Energy adoption: A Look at the Development of China's Renewable Energy Sector.

Currently, Energy costs are high in Asia but there are economies of scale and other countries should be able to follow China's lead in the next few years. Theoretically, this should be true of Europe but the EU is currently locked into Energy costs and unnecessarily restrictive policies which can only delay economic recovery. The UK is in a similar position.

Energy costs are the single biggest variable influence, in my opinion, on regional GDP growth prospects. The outlook is improving, thanks to an increasingly concentrated and creative effort to produce both cleaner and more abundant Energy. The motivating forces behind this effort are high Energy costs, Energy shortages, the need for efficiency gains, and the alarming risks of global warming. There are always bumps in the road, but in my opinion, the prospects for cleaner, cheaper and more abundant Energy will be considerably greater over the next thirteen years and beyond, than they have been during this century to date.

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June 13 2013

Commentary by David Fuller

Silver linings in the IEA report on 2012 fossil fuel carbon emissions

Here is the opening from this interesting article from The Guardian
Carbon emissions from fossil fuels reached record levels, but the 2012 rise was relatively small, and there are positive signs.

As Fiona Harvey reported for The Guardian, the International Energy Agency (IEA) 2012 World Energy Outlook Report found that annual carbon dioxide emissions from fossil fuels rose 1.4 percent in 2012 to 31.6 billion tonnes (gigatonnes [Gt]). The bad news is that this is a new record high level of emissions. The good news is that it represents the second-smallest annual increase since 2003, behind only 2009 when global fossil fuel carbon emissions fell due to the global recession. Emissions estimates from 2009-2010 have also been revised downward, so the reported 31.6 Gt 2012 emissions match the reported value from 2011.

American emissions of carbon dioxide from fossil fuels fell by 200 million tonnes (Mt) to levels last seen in the mid-1990s due to a transition from coal power to natural gas and renewable Energy. European emissions fell 50 Mt due to economic contraction and renewable Energy growth, despite an increase in coal Energy use. Perhaps most encouraging, although Chinese emissions grew by 300 Mt in 2012, this was among the country's smallest annual emissions growth over the past decade. This is a result of China diversifying its Energy sources and installing more renewable Energy.

American emissions of carbon dioxide from fossil fuels fell by 200 million tonnes (Mt) to levels last seen in the mid-1990s due to a transition from coal power to natural gas and renewable Energy. European emissions fell 50 Mt due to economic contraction and renewable Energy growth, despite an increase in coal Energy use. Perhaps most encouraging, although Chinese emissions grew by 300 Mt in 2012, this was among the country's smallest annual emissions growth over the past decade. This is a result of China diversifying its Energy sources and installing more renewable Energy.
David Fuller's view - We need some luck with climate change but risks have concentrated inventive minds in many countries. Green technologies continue to improve, not least solar, but are still somewhat inefficient and unreliable. They will continue to develop but three other steps have an even better chance of lowering CO2 emissions between now and 2020, in my opinion:

1) Least controversially, continue to increase Energy efficiency in buildings, transportation and industry.

2) Develop the production, transportation and consumption of natural gas, which is plentiful and the least polluting fossil fuel.

3) More controversially, speed up the development of new nuclear because it is efficient and adds no CO2 emissions to the atmosphere.

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June 13 2013

Commentary by David Fuller

Atomic Power's Green Light or Red Flag

This is an interesting 2-part article by Matthew L Wald for the NYT & IHT (may require subscription registration, PDF also provided)
WAYNESBORO, Ga. - The two nuclear reactors rising out of the red Georgia clay here, twin behemoths of concrete and steel, make up one of the largest construction projects in the United States and represent a giant bet that their cost - in the range of $14 billion - will be cheaper than alternatives like natural gas.

But something else is at stake with the reactors called Vogtle 3 and 4: the future of the American nuclear industry itself.

The Alvin W. Vogtle nuclear power plant near Augusta is using a new plant design, a new construction method and a new system of nuclear regulation for what the industry says is a faster, better and cheaper system that will lead the way for a new generation of reactors.

Until recently, a new reactor construction project had not been started in the United States for 30 years, and now Vogtle and a similar project in South Carolina, V.C. Summer 2 and 3, are supposed to provide the answer to nuclear power's great questions: What does a new reactor cost? With the price of natural gas near historical lows, can it even be worthwhile?

As the current generation of reactors moves toward retirement, the two projects may be the industry's last best hope.

"Everybody's watching the construction of that plant," said Barry Moline, executive director of the Florida Municipal Electric Association, speaking of Vogtle. Several association members are considering investing in a nearly identical plant proposed by Florida Power and Light in Miami. Mr. Moline said of Vogtle's builders, led by Georgia Power, "If they can do it, that will be the model."

And if they can't, it could be years before anybody thinks of trying again. The new designs are supposed to be a tenth as likely to have an accident and to be easier to operate, but if they cannot be built roughly on time and on budget, then nuclear power will have trouble in the era of plentiful natural gas and emerging technologies like wind.
David Fuller's view - These development plans have proceeded with little or no fanfare for understandable reasons. Nuclear power is controversial, not least because there is still no known way to render highly toxic plutonium waste harmless. Nevertheless, it can be stored and new nuclear plants are expected to be considerably safer.

Therefore cost is the big consideration and if this cannot be contained by the USA, then there will be less incentive for other countries to develop their own new nuclear capacity.

On a longer-term basis, we need nuclear power because it has none of the harmful CO2 emissions which are such a risk in terms of climate change. Interestingly, the US government is determined to ensure that it will never again be a 'hostage to fortune' in terms of Energy imports. Its success with unconventional natural gas and oil production has also given America a considerable advantage in terms of Energy costs among developed economies. New nuclear would extend this advantage.

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June 12 2013

Commentary by David Fuller

Putin's promises slide out of view as economy slows

This is an informative article by Ben Hoyle for The Times UK (requires subscription registration, PDF provided). Here is a brief section
Mr Putin returned to power in May last year with a populist manifesto that many experts think is unaffordable and an introspective, conservative domestic agenda which has done nothing to halt Russia's brain drain. An independent survey last week revealed that 45 per cent of students and 38 per cent of businessmen want to leave.

He has allowed Mr Medvedev, who represented the liberal economist faction in government, to become a national laughing stock. He has committed Russia to staging a series of harrowingly expensive sporting events, notably the Sochi Winter Olympics next year, for which the official budget is already almost four times the cost of the London Olympics and the 2018 football World Cup.

Gazprom, Russia's biggest company, is a quarter of the size it was five years ago and struggling. Bloomberg ran an article by a senior fellow at the influential Peterson Institute for International Economics under the headline "Gazprom's Demise Could Topple Putin". "Where Gazprom goes," Anders Aslund argued, "so does Russia and the Putin government."

Demand for Russian exports is waning, with the emergence of US shale gas a particular headache for the Kremlin, and the price of oil has dropped. Inflation has unexpectedly accelerated to 7.4 per cent, leading the central bank to yesterday keep interest rates at 8.25 per cent for the ninth month running.
David Fuller's view - Fullermoney has long regarded shale oil and gas as hugely significant game changers in terms of global Energy supplies, more than capable of lowering Energy costs over the medium to longer term. This has already happened in the USA, which invented the fracking technology.

Many other countries are capable of adopting and mastering this extraction process for their own reserves of shale gas and oil. However, they have been slow to do so, to date, partly due to reservations about the fracking process and also prior commitments to other forms of Energy development which are currently viewed as more socially acceptable.

Nevertheless, a new era of multiple Energy sources, more efficient Energy consumption, and slower global GDP growth following the West's credit crisis recession have combined to lower the price of crude oil relative to most forecasts in the previous decade. This has weakened Russia's economy which was spending on the outdated basis that Energy supplies were increasingly scarce, ensuring that the demand for them could only drive the price of crude oil higher. Russia is also feeling the effects of lower than expected metal prices.

These factors are reflected by Russia's stock market (historic monthly & weekly) which has been an underperformer since 2Q 2011. It is approaching prior support from the October 2011 and June 2012 lows but a clear upward dynamic followed by a rally back above 1500 are the minimum required to indicate that demand beyond short covering is returning. This is unlikely while the global stock market correction continues.

Brazil's performance is even worse (historic monthly & weekly), sliding beneath the psychological 50,000 level to test the 2011 lows, but with more overhead supply evident this time. Here also an upward dynamic and push back above 57,500 are the minimum required to remove downward pressure. Peru is even weaker. Colombia and Chile are holding up somewhat better within lengthy ranges but all of these markets will need very clear upward dynamics to check the current downward bias.

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June 12 2013

Commentary by David Fuller

Japan embraces era of Abenomics

This is another informative article from The Times (UK), this time by Lucy Alexander (will require subscription registration, PDF provided). Here is a sample
"Ever since the new government took control, it feels as though Japan is filled with the spirit for economic revival", said Toyota's senior managing officer, Takehiko Ijichi, last week, as he announced the carmaker's first profit in five years.

Takehiko Nakao, the top currency official at Japan's finance ministry, said: "Last year all the focus was on the euro and the fiscal cliff. Now Japan's successful economic policies are receiving all the attention."

Abenomics do appear to be working. Data this week showed that December's figures for machinery orders, a key indicator of capital spending, rose by 2.8 per cent, confounding expectations of a decline. Japan's service sector sentiment index also jumped, and the December "Economy Watchers' Survey", which measures the mood in companies and households, showed
growing confidence in every area.

Even trade with China, Japan's biggest trading partner, is improving, after a boycott of Japanese products last year. On Friday, Chinese customs figures showed that imports from Japan rose by 15.4 per cent in January, for the first time in six months.

Most economic analysts believe that Japan probably exited recession in the already bottomed out and is showing a recovery", said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

Perhaps the most significant trend of all is that wages are showing signs of rising. One of the country's biggest convenience store chains, Lawson, said last week that it would raise salaries by a deflation-busting 3 per cent.

Jesper Koll, head of Japan equity research for JP Morgan, said: "Japan is running out of labour, so businesses now need to breed loyalty among their staff. Watch for wage inflation to generate a real feel good factor in Japan."
David Fuller's view - The article also points out that the "hard part will be deregulating the Energy, healthcare and agriculture sectors." Sure, and agricultural reform, long resisted in Japan, will face opposition within Mr Abe's own party. Nevertheless, he has most of the public behind him because people can sense the positive change.

Japan remains the most interesting major market opportunity that I have seen for a long time (historic monthly, weekly & daily). The recent sharp reaction, albeit to scale, has created another buying opportunity.

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June 11 2013

Commentary by Eoin Treacy

Big bang measures to fight air pollution

Thanks to a subscriber for this insightful report covering potential measures to improve China's air quality. Here is a section
Among the many policies, we believe the following two sets had made the most visible impact:

1. Emission control: The Clean Air Act in 1956 instituted “smoke control area” in cities where only smokeless fuels could be burnt. It also promoted clean coal heating in households and relocated power plants away from downtown. The 1968 Clean Air Act reinforced the provision for abating sulphur dioxide emission, by introducing tall chimneys for coal burning factories to disperse pollution. The Control of Pollution Act in 1974 finalized the cap of sulphur content in fuels. As vehicle exhaust pollution became serious after 80s, the catalytic converters, devices designed to reduce nitrogen oxides emissions, have been required in all new cars in UK by The Road Vehicles Regulations since the early 90s.

2. Energy diversification and upgrade: Coal accounted for 76% of primary Energy consumption in the UK in 1958. The British government has directed a successful structural shift by encouraging the switch from coal to oil, gas and later on renewable Energy. Thanks to joint efforts of government R&D expense and private sector exploitation, sufficient gas reserve was discovered in North Sea in mid-60s, which was later commercialized in 70s. The increased popularity of natural gas (40+% of total consumption today) has squeezed the coal consumption to less than 20% of total Energy usage;


These figures show that massive structural changes in the UK economy during the two decades were fundamentally responsible for the improvement of the air quality. The logic is simple: only when the industry sector shrinks relative to the size of the economy, Energy consumption would decline; only if cleaner Energy consumption as % of total Energy consumption rises sharply, can the sulfur dioxide emission be controlled. These mean that, in China, the tasks for improving air quality are not merely the job of the MEP, but much more the responsibility of the top policy makers who can shape the direction of the overall economic and Energy structure.
Eoin Treacy's view - While anyone who has visited Beijing in the last decade may despair that the air quality can ever be improved, London's experience from the 1950s argues otherwise. With the right set of policies, significant inroads into the nation's pollution problems can be made. However, these will only be put in place with sufficient political will and against a background where the consumer and services sectors are healthy enough to take up some of the slack from the rationalisation of heavily polluting industries.

Since the utility, steel, materials and Energy sectors represent significant vested interests within the upper echelons of the Communist Party; the case for reform is likely to meet stiff internal opposition. It remains to be seen if the new administration has the wherewithal to push through such reform. This will become clearer as the year progresses and some key posts are filled.

From an investment perspective, the consumer, healthcare and information technology sectors are likely to continue to benefit from this migration of official emphasis.

Natural gas demand remains a clear beneficiary both of China's continued development but also of any measures that will be put in place to improve air quality. This suggests that in addition to efforts to boost domestic supply, the outlook for LNG demand growth is likely to remain on an upward trajectory.

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June 11 2013

Commentary by David Fuller

Email of the day

On the US continuing to outperform
"Hope you had a great holiday. Been quite volatile in bond mkts. What is your take on the view that the US is due to outperform EM over the next five years? I have heard this several times the past week."
David Fuller's view - We had a great time, thanks.

This is an interesting question and the US is currently outperforming most emerging markets. That certainly gives some validity to the question, although a lot can obviously happen over the next five years.

I do not wish to make a political point but my view is that US outperformance prospects over five years would be more certain if Mitt Romney had won the presidency. However, he did not and I understand why lots of Americans do not like Republicans in this era. Too many of them have an off-putting streak of provincialism and social intolerance, unlike the Eisenhower or even Nixon era Republicans.

I maintain that the US economy will not do as well under President Obama's leadership, although some redistribution of wealth is justified, in terms of fairness and social cohesion. I do not think that Obama has Romney's interest in or grasp of economic issues. Instead, he is more concerned with helping poor people by subsidising them.

Additionally, there is too much regulation in the US economy, in my opinion, and I was interested to see Jack Welch making the same point on CNBC this morning. Irresponsible and dishonest executives should be held accountable by either political Party but this does not mean that everyone else has to be held back by bureaucratic 'red tape'. I also think that US corporate tax rates are too high, causing many of America's Autonomies to keep considerable cash reserves off shore.

Nevertheless, the main reason for the USA's current outperformance is its huge advantage in Energy costs relative to Europe and Asia, thanks to fracking technology. This is a triumph for US innovative private sector capitalism. It was initially opposed by the White House which favoured green Energy for understandable atmospheric reasons, but regardless of the costs, inefficiencies and health hazards that we have seen with windmills.

The USA is building on its Energy advantage and beginning to reverse its long industrial decline. American companies are beginning to increase their US divisions, and overseas firms are making inward investments in the USA. Consequently, the USA is now attracting more skilled workers. This is a virtuous cycle and the US is enhancing its lead in the crucial field of technology.

As a consequence of these developments, the USA is likely to remain highly competitive for at least a number of years. Nevertheless, other countries can also lower their Energy costs by adopting the latest technologies. Good governance is the long-term key to outperformance, and where we see it in emerging markets, they too are likely to outperform.

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June 10 2013

Commentary by David Fuller

American Expansion Lasting Longer Than Most as Muted Growth Deters Excess

Here is the opening from this interesting article from Bloomberg, for which the headline keeps changing
The modest pace of the U.S. economic recovery has a silver lining, as the expansion shows signs of lasting almost twice as long as average.

Four years into the upswing, the economy isn't seeing many of the excesses that often presage the start of contractions. Inflation is slowing, not quickening. Household debt is shrinking, not expanding. The labor market is slack, not tight.

Pent-up demand also bodes well for the longevity of the recovery, which has averaged annual growth of about 2 percent since its start in June 2009. Confronted by elevated unemployment and a depressed housing market, Americans put off forming families, buying homes and acquiring cars. Now, with house prices rising and payrolls expanding more rapidly, their behavior is changing.

"The current expansion can continue another four to five years," said Robert Gordon, a professor at Northwestern University in Evanston, Illinois, who's a member of the National Bureau of Economic Research committee that determines when recessions begin and end.

That would make this upswing the second longest on record, behind only the 10-year period that spanned the 1990s. The average since the end of World War II is just shy of five years, at 58 months.

Reflecting the slow, steady pace of the recovery, payrolls rose 175,000 last month, in line with the average over the past year, Labor Department figures released on June 7 showed.
David Fuller's view - The US economy's growth rate is in line with the aftermath of credit crisis recessions. Economic evidence previously cited by Fullermoney states that it takes at least 5 to 7 years before GDP growth returns to what most commentators would describe as normal. If we take the end of 2008 as the approximate nadir for the USA's economic contraction, it is currently in the 6th month of the 5th year of this process.

On a global comparative basis, the US economy has two distinct advantages during this recovery phase and beyond.

1) Technology - The US is experiencing a resurgence in its pace of technological development. Powerful corporate Autonomies are at the forefront of this innovative process but they are also assisted by American universities and the US Government. Moreover, the entrepreneurial and democratic USA remains a magnet for global talent.

2) Energy costs - Thanks to private industry and cutting-edge experience in the extraction of fossil fuels, the USA was the first country to develop an effective technology for extracting shale gas and oil. While this process remains controversial, not least given the debate over fossil fuels versus so-called green Energy, fracking technology has considerably lowered Energy costs in the USA relative to other large industrialised economies. This has made the USA more competitive and its increased use of natural gas has lowered the country's atmospheric pollution.

These two developments have been beneficial for the US stock market and should remain so over the longer term. However, the bull market to date has discounted gradual economic recovery and the growth in corporate profits. Both have been considerably helped by massive quantitative easing (QE) from the Federal Reserve. Anticipation of a reduction in the amount of monthly QE, and its eventual removal as the US economy continues to recover, will cause some stock market turbulence over the lengthy medium term.

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June 06 2013

Commentary by Eoin Treacy

The Autonomies

Eoin Treacy's view - From early 2011 we began to identify large multinational companies that were exhibiting both relative strength and temporal leadership. As the commonality among this group became clearer a number of shared characteristics were evident. These are large internationally diversified companies that dominate their respective niches and had in many respects outgrown their domestic markets. They often had solid records of dividend increases and have balance sheets strong enough to sustain them. They tend to benefit from superior corporate governance and have some of the most recognisable global brands. From August 2011 we began to refer to these companies as Autonomies.

The Autonomies reflect the confluence of three important themes that are likely to persist for much of the next decade if not longer. The Greatest Urbanisation in History represents the fact that the global population moved from being mostly rural to mostly urban in the last few years. Increased urbanisation generally leads to higher standards of living, greater productivity and increasing per capita consumption of just about everything.

We are also living through one of the most exciting golden ages of technological development in the history for our species. The capacity for innovation in technology and healthcare represent important potential for productivity gains over the next decade. The pace of patent filing alone suggests that this theme has considerably further to run.

The advent of unconventional oil and gas production in the USA represents a game changer for the Energy sector which is still in its early stages. While these new methods have so far been most successfully employed in North America, the capacity for advanced drilling techniques to be employed elsewhere remains undiminished. Energy market tightness is likely to be less of an issue from later this decade.

The original list of 66 companies I compiled was heavily weighted by consumer, healthcare and technology shares. In the last few months I have expanded the list to include more service, industrial, materials, chemicals, mining and Energy companies so that it has swelled to 145 shares.

Another characteristic shared by this expanded list of Autonomies is the high number of monopolies and oligarchies represented. For example Coca Cola and Pepsi dominate the global soft drinks market. Linde, Air Liquide and Praxair dominate the global compressed gases sector. WPP, Publicis and Omnicom dominate the global public relations, lobbying and conventional advertising sectors. Experian is the most globally present credit checking company. BHP Billiton and Rio Tinto, with VALE dominate the global iron-ore market while Potash Corp of Saskatchewan is the largest producer of potash in the world. .

On a click through of this list mean reversion is a common characteristic. A substantial number have already returned to their trend means, represented by their 200-day MAs If medium-term uptrends are to remain consistent, they will need to demonstrate support in the current region. Coca Cola, Nestle, Colgate Palmolive, Mattel, Diageo, SAB Miller, Anheuser Busch, ARM Holdings, Heineken, Eli Lilly, Intertek Group, Unilever and Mondalez International are among those who have returned to test the region of their MAs.

Johnson & Johnson, Biogen, Bristol Myer Squibb, International Flavours & Fragrance, Kimberly Clark, Compagnie Financiere Richemont, Walt Disney, Google, Rolls Royce, Berkshire Hathaway and Ecolab exhibit some of the largest overextensions and are therefore some of the most likely to experience mean reversion.

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June 05 2013

Commentary by Eoin Treacy

Miners Face Slow Asset Sales as Buyers Seek Bargains, PwC Says

This article by David Stringer for Bloomberg may be of interest to subscribers. Here is a section
Rio Tinto Group., the world's second-largest miner, and its peers face longer negotiations over about $48 billion of asset sales as buyers seek bargains amid weak commodity prices, PricewaterhouseCoopers LLP said. There are few takers for mines and resources on offer as companies trim spending because of lower prices and rising costs, said Jock O'Callaghan, the Energy, utilities and mining leader for PwC Australia. The size of mining assets for sale is almost double last year's $23 billion of completed and pending deals, according to data compiled by Bloomberg. “In these conditions, the deal cycle is much longer,” O'Callaghan said yesterday in an interview. “Many have said they are not going to divest unless it's divesting at value.”
Eoin Treacy's view - Over the last couple of years mining shares have come under pressure as industrial metal prices fell towards the marginal cost of production. Industrial prices generally are rallying from depressed levels but remain in overall base formations. When they eventually complete these congestion areas sentiment towards the sector is likely to improve, not least among those who are in the market for resource assets. In the meantime, patient investors such as sovereign wealth funds have the opportunity to pick up attractive resources at comparatively low prices.

Rio Tinto continues to test the lower side of its 18-month range and will need to hold an upward dynamic beyond a few days to confirm more than temporary support in this area.

BHP Billiton encountered resistance in the region of 2000p three weeks ago and pulled back sharply today on news of a fine incurred by one of its Peruvian operations. It will need to find support above the 1700p area if the two-year range is to be sustained.

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June 04 2013

Commentary by Eoin Treacy

Intel's Power-Saving Chips at Computex Help Fight PC Slump

This article by Ian King and Dina Bass for Bloomberg may be of interest to subscribers. Here is a section
From the start, Haswell was designed with mobility in mind. Intel streamlined manufacturing for this chip and built it to maximize power gating, a technique that turns off transistors that aren't in use and revives them only when needed. With on-chip power management and voltage regulation, Haswell has 20 times the Energy efficiency in standby mode that Intel achieved with a processor released two years ago.

“The massive reduction in power does not come at the expense of compromised performance,” said Rani Borkar, a vice president of Intel's architecture group. While Haswell will bring mainstream laptops closer to tablet performance in terms of battery life and thinness, Intel is also readying the Silvermont mobile-processor design to go directly into smartphones and handheld machines. Silvermont will deliver three times the performance and is as much as five times more power-efficient than its predecessor, Intel said May 6.
Eoin Treacy's view - The advent of the tablet computer brings us that much closer to the standard of living many dreamed of when watching Star Trek. However even as sales of portable computers continue to set new highs, the microchip sector has set its sights on another under exploited market. ARM Holdings made more money in the fourth quarter of 2012 from embedded processing than mobile devices. Intel is hot on ARM's heels with its own suite of low Energy / high efficiency chips.

Embedded processing is the practice of introducing computing power, sensors and transmitters to industrial machinery. This greatly improves their utility and lowers maintenance costs. The rapid pace of development in this sector has been dubbed "Industrialising the Internet" bt General Electric. (Also see Comment of the Day on March 25th).

Intel (DY 3.49%) found support in the region of $20 from December which represents the lower region of its decade long base. It is now mid-range and a sustained move above $30 would confirm a return to medium-term demand dominance.

ARM Holdings posted a large downside weekly key reversal three weeks ago and has fallen back to test the region of the 200-day MA. The 900p area represents a potential area of support but some consolidation is probably required before the medium-term demand dominated environment can be reasserted.

Elsewhere in the chip sector Qualcomm continues to range with an upward bias. Seagate Technology is becoming increasingly overextended relative to the 200-day MA. Symantec is currently unwind ing an overextension relative to the 200-day MA.

Broadcom, Texas Instruments, Cisco Systems, STMicroelectronics, Micron Technology, CA Inc., Xilinx, Linear Technology, Akamai Technology and Fairchild Semiconductor have all firmed within their respective lengthy bases and continue to represent some of the companies most likely to benefit from demand growth for high efficiency chips.

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June 03 2013

Commentary by Eoin Treacy

Continuous Commodity Index

Eoin Treacy's view - I corresponded with the Bloomberg help desk in April in an attempt to have the CRB Continuous Commodity Index updated. They told me that it was no longer possible because related futures trading on NYBOT were no longer trading. However, after a hiatus of a few weeks, the Index is updating once more, probably because of complaints such as ours. This is a welcome development since it has such a lengthy back history and offers such a good benchmark for the commodity markets. (Also see Comment of the Day on April 24th).

The Index encountered resistance in the region of 600 from September and has held a progression of lower rally highs since. It has lost momentum somewhat over the last month but a sustained move above 550 would be required to confirm a return to medium-term demand dominance. Let's take a close look at the constituents:

Within the Energy sector, Brent Crude fell back from $120 to test the $100 area by April and continues to pause in that region. A sustained move below $97.50 would be required to question current scope for continued higher to lateral ranging. Heating Oil has a relatively similar pattern. WTI Crude Oil firmed above $90 and looks likely to range with an upward bias. Natural Gas broke successfully above the psychological $4 area in March and has been ranging mostly above it in a steady reversion towards the mean. A sustained move below the 200-day MA would be required to question medium-term potential for additional higher to lateral ranging.

Within the metals sector, gold continues to steady above the April lows but will need to sustain a move above $1500 to begin to question the medium-term progression of lower rally highs. Silver continues to firm from $22 but needs to sustain a move above $24 to question its progression of lower rally highs. Platinum continues to rebound from the lower side of its more than 18-month range. Copper rebounded impressively from the $3 area to close its overextension relative to the 200-day MA. A sustained move above $3.50 would confirm more than a temporary return to demand dominance. While not constituents of the CCI lead, zinc and nickel are all rallying from the lower sides of more than yearlong ranges.

Within the agriculture sector, there is a large “step” in the continuation chart for corn because of the backwardation between the July and December contracts. Prices steadied above 500 ¢ from late May and have since rallied to break the medium-term progression of lower rally highs. Provided it finds support above the recent low on the next pullback, potential for additional upside can be given the benefit of the doubt. Soybeans rallied from the lower side of its more than six-month range to break back above the 1500 ¢ by late May. It continues to consolidate in that area and a sustained move below 1465¢ would be required to question medium-term scope for additional upside. Wheat lost downward momentum from early April but will need to sustain a move above 750¢ to suggest a return to demand dominance beyond the short term. Live Cattle prices have been drifting below $125 since April but will need to sustain a move above that level to question potential for continued lower to lateral ranging. Lean Hogs encountered resistance near $1 from April 2011 and has spent much of the last two years ranging below 96¢. It has rallied back to test that level over the last month but will need to sustain a move above it to confirm a return to medium-term demand dominance.

In the soft commodity sector, Orange Juice has held a progression of higher reaction lows since January and a sustained move below 140¢ would be required to question medium-term scope for continued upside. Cocoa remains confined to a more than 18-month range. Cotton encountered resistance below $1 from March and has returned to test the region of the 200-day MA. Following nine consecutive days to the downside it posted a large upward dynamic today suggesting an unwind of the short-term oversold condition is underway. Arabica Coffee has trended consistently lower for two years and a break in the medium-term progression of lower rally highs, currently near 150¢, would be required to confirm more than temporary steadying. Sugar has a similar pattern.

While the general perception expressed by the media is of commodity sector weakness, the reality is much more nuanced. What appears clear is that the grain, bean and industrial metals sectors have returned to positions of outperformance. This is particularly noteworthy since most of the industrial metals are not constituents of the CCI which might explain why their recent rally is going largely unremarked in the media. If the US Dollar's weakness continues beyond the very short-term this should also act as a tailwind for the sector.

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May 30 2013

Commentary by Eoin Treacy

China: Climbing the Wall of Worry

Thanks to a subscriber for this interesting report focusing on China's oil sector. Here is a section
Given conventional production in China has peaked, the government is encouraging foreign investment and technology to help unlock unconventional gas potential (tight, sour, CBM and shale) to provide the next leg of production growth. As illustrated above, foreign company production remains marginal in the overall Chinese and global context.

ExxonMobil has no current production in China but in July 2011, signed a Joint Study Agreement covering 900k acres in the Sichuan Basin and is working with Sinopec to evaluate shale gas potential on the block.

Chevron has four operated PSCs in China – Chuandongbei natgas project in the onshore Sichuan Basin and three deepwater/shallow water blocks in South China Sea – and four non-operated PSCs. The company's net acreage in the country has fluctuated in the past four years, ranging from 294k acres at YE09 to 4,766k at YE10. Chevron held 921k acres at YE12. In 2012, CVX produced 20kb/d of liquids and 9mmcf/d of natgas in China, flat yoy, and commenced a shale gas drilling program in the Qiannan Basin in Guizhou province.

ConocoPhillips produced 39kb/d of liquids and 3mmcf/d of natgas in China last year, with Peng Lai operations (COP 49%) being conducted under the so-called reservoir adjustment and management plan supplement following the 2011 Bohai Bay spills. In December 2012, COP entered a two-year joint study agreement with Sinopec for the 1 million-acre Qijiang shale gas block in the Sichuan Basin.

Hess, which does not have production in the country, signed a joint study agreement with PetroChina in 2010 on enhancing output at the mature Daqing oil field in the Songliao Basin in NE China. Hess signed two agreements with Sinopec in 2011 to study tight oil and shale oil/gas at the Shengli oil field in the Bohai Bay Basin. And in 2012, Hess signed another joint study agreement with PetroChina to evaluate unconventional oil and gas resource potential covering 200k gross acres in the Santanghu Basin in Xinjiang province.
Eoin Treacy's view - As the world's largest Energy consumer, China has little choice but to attempt to secure international supplies but also to do whatever it can to increase domestic production. Considering the technological finesse required to efficiently develop unconventional oil and gas reserves, the potential for US oil companies to benefit from China's production growth are considerable. (Also see yesterday's piece on LNG companies).

Chevron (P/E 9.79, DY 3.19%) broke successfully above the psychological $110 area in January and continues to find support in the region of the 200-day MA on pullbacks. While somewhat overextended at present, a sustained move below $115 would be required to question medium-term scope for continued upside.

PetroChina (P/E 11.67, DY 3.81%) has dropped to test the lower side of its more than two-year range. A clear upward dynamic will be required to check the downward bias and suggest a return to demand dominance.

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May 29 2013

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks' ever interesting report for PPHB. Here is a section from a detailed exposition of the global LNG market
A sub issue related to the U.S. LNG export battle is the question of regulation of hydraulic fracturing, which is a critical component of successful shale gas exploitation. If that technology is regulated or outlawed, the domestic E&P shale gas industry will be forced to reconsider its future, along with the potential American re-industrialization. At the present time two LNG export terminals have been approved with several others close to being approved.

There are 19 additional export terminals in the approval pipeline, which if all were approved and operated at capacity would account for nearly 40 percent of current U.S. natural gas production. There is little likelihood all these export terminals will be approved given the conflict between industrial America and the E&P industry. But which ones will, or should be approved? Unfortunately, the history of regulation of the U.S. natural gas industry has been marked by missteps, which have contributed to periods of supply shortages or huge gas surpluses. Counting on regulators to get it “right” is a dangerous strategy.

At the heart of the LNG question lays the issue of the output performance of shale resources. The financial shambles the U.S. E&P industry finds itself in today is a reflection of poor resource performance coupled with overly optimistic financial expectations. This poor performance is leading to a restructuring of the U.S. E&P business. A lack of resource performance could also doom the American LNG export initiative with its knock-on effects for the global LNG business. A restructured U.S. gas producing industry will alter control over gas volumes available for export further impacting the dynamics of the global gas business. Five to ten years from now, we may find that the global LNG business has barely changed. That may be welcomed news for conventional gas exporting countries who may be worried about their future.
Eoin Treacy's view - It has been our view at Fullermoney since at least 2010 that unconventional natural gas represents a game changer for the Energy sector. As with any major development the impact has been far reaching with competing interests lining up to take advantage. Suppliers who are presented with marginal economics at today's prices and consumers who are benefitting from a significantly improved cost structure would both benefit from a balanced regulatory structure. Just how likely that is in the current highly charged political environment remains doubtful. What seems clear is that some degree of exports will be allowed but not nearly as much as suppliers might have been hoping for.

Conoco Philips (P/E 11.36, DY 4.21%) broke out of a two-year range earlier this month and has been consolidating mostly above $62 since. A sustained move below $60 would be required to question medium-term scope for continued upside.

Exxon Mobil (P/E 11.47, DY 2.75%) has paused in the region of its historical peak near $95 and would need to sustain a move above that level to confirm a return to medium-term demand dominance.

Royal Dutch Shell (P/E 8.21, DY 4.87%) has been ranging mostly between 2000p and 2400p since 2011 and is currently trading in the region of the upper boundary. A sustained move above 2400p will be required to confirm a return to medium-term demand dominance.

British Gas (P/E 17.96, DY 1.53%) found support near 1000p from November. It is currently unwinding the short-term overbought condition developed since April. The benefit of the doubt can be given to additional higher to lateral ranging provided it holds the majority of the recent advance during this consolidation.

LNG and LPG tanker operator Exmar is listed in Belgium (P/E 12.08, DY 10.56%) and continues to form a first step above its three-year base. It is currently testing the upper boundary and a clear downward dynamic would be required to check potential for a successful upward break.

US listed Teekay LNG Partners is also an LNG tanker company (P/E 18.1, DY 6.09%) and broke out of a two-year range earlier this month. A sustained move below $40 would be required to question medium-term potential for additional upside.

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May 28 2013

Commentary by Eoin Treacy

MLP Quarterly Monitor : Dancing on the Edge of the Yield Bubble?

Thanks to a subscriber for this highly informative, heavyweight 225-page report from Barclays dated November but no less relevant today. Here is a section on credit spreads which will become increasingly relevant as a reduction in QE becomes more likely
Credit indices have rallied to set new highs. Equity indices are nearing all-time highs. The AMZ has also just hit new highs. The macro backdrop is mixed. The S&P growth rate in earnings is decelerating with some calling for a decline in earnings in 2013. On the other hand, we estimate MLP distribution growth will modestly accelerate in 2013 driven by the large ramp in the sector's capital spending in 2012. The Fed has implemented QE3 with the intent of keeping rates low well into 2015. Fat tail risks (think fiscal cliff, Europe, a China hard landing, etc.) persist. As we will discuss in the valuation section of this report, despite hitting new highs in the AMZ, valuation is not stretched. This cannot be said for a wide swath of the credit market. Equity metrics are more mixed. As we will see in the performance section of the Monitor, the AMZ outperformed both equities and credit for the quarter. We think the answer to the question “Are we there yet?” is that credit and equities are closer than MLPs.
Eoin Treacy's view - By supporting government and mortgage bond markets central banks have suppressed yields to previously unimaginably low levels. This has forced fixed income investors to migrate down the ratings ladder in order to capture yield. The result is that spreads have compressed across and credit sector with many unwinding the majority of the expansion posted during the credit crisis.

Spreads from BB to AA continue to compress in a consistent manner and breaks in their progressions of lower rally highs would be required to question potential for an additional tightening. Over the medium-term, lower rated credit represents one of the sectors most likely to experience selling pressure when central banks begin to wind down quantitative easing. Logically, when the provision of liquidity eventually becomes less of a certainty, the need to price risk according to the individual merits of companies will rise commensurately.

The MLP sector represents an interesting proposition because of its relationship with Energy infrastructure and the continued boom in US unconventional oil and gas production. The JPMorgan Alerian MLP ETF continues to hold a progression of higher reaction lows and a sustained move below $46 would be required to question medium-term scope for continued higher to lateral ranging. (Also see Comment of the Day on May 2nd for a piece on MLP tax liability for foreign investors)

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May 24 2013

Commentary by Eoin Treacy

Email of the day (2)

on the effect of low natural gas prices and state-sponsored wind (no pun intended) on nuclear

“The bottom line - a significant portion of US nuclear power plants may be at risk of becoming uneconomical to operate - details in the article. I had not considered this aspect of the ongoing switch to gas fired generation for new power plants, coupled with the ongoing governmental subsidization of the mostly uneconomic alternative Energy projects.”
Eoin Treacy's view - Thank you for this educative article contributed in the spirit of Empowerment Through Knowledge. Here is a section:

Q3: Will the economic outlook for merchant nuclear plants improve in the long run?

A3: By the end of this decade, market analysts predict that about 50 GW of coal-fired capacity will retire from the grid because of EPA regulations and low efficiency. Further, if the EPA is successful in regulating greenhouse gas emissions from new and existing power plants, more coal plants will be driven from the market in increasing numbers.

We expect natural gas to benefit the most from the departure of coal from the grid, but fuel switching from coal to natural gas will increase prices for that feedstock, which will improve the outlook for nuclear in some merchant markets. Civil nuclear power will still face significant obstacles from government renewable mandates in all competitive markets, but particularly in states that are pushing for higher and higher levels of subsidized renewable penetration, as well as in states that are establishing challenging efficiency targets.

The advent of unconventional natural gas remains a game changer for the Energy sector and represents a disruptive influence on more established electricity production. While we tend to focus most acutely on the relative performance of natural gas prices compared to coal and oil, the political and regulatory environment are also powerful factors in this sector. Natural gas does not pollute to the same extent as coal. It does not have the waste issues of nuclear but it does provide base load which is a major challenge for wind.

Following the initial surge to acquire leases and to prove up reserves the economics of gas production have come back to the fore. In any market, when prices decline new sources of demand appear as the incentive to substitute proves too good to pass up. On the supply side, low prices put pressure on marginal production and the incentive to look elsewhere for profit potential eventually curtails supply.

As natural gas continues to hold above $4, medium-term potential for additional upside is likely to be held in check as more production becomes economic the higher prices move. The disadvantages of other Energy sources offer the commodity a tailwind as a fuel for electricity production at least for the next few years.

The potential for exports got a further boost earlier this week as another project to build an export facility cleared one of its final hurdles in Texas. However Cheniere Energy's Sabine Pass terminal is still the most likely to become the first to open and that is not expected until 2015. Eventual exports could help lift natural gas prices to a point where other fuels become competitive once more.

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May 23 2013

Commentary by Eoin Treacy

Email of the day (1)

the potential end of the Fed's quantitative easing

“This article shows that deflation remains a significant risk and QE exit may be further away than perhaps many are thinking. If so, what are the implications for various asset classes and indices?"
Eoin Treacy's view - Thank you for this interesting article and question which is sure to be of interest to subscribers. Here is a section from the article:

After a long period in which Fed economists were struggling to explain why inflation has remained so high, given the amount of slack which remained in the labour market, they now say that part of the recent decline in inflation has occurred for temporary reasons. No-one thinks deflation is very likely, but the doves will take the 18-month long slide in PCE inflation seriously, even though it has not yet unhinged inflation expectations from the 2 per cent target. In Mr Dudley's words, “deflationary expectations can be self-fulfilling in driving actual deflation outcomes.”

After yesterday's evidence, it is clear that the Fed's decision on tapering will be “data determined”. But the relevant data include inflation reports as well as employment reports. The Fed is now missing both parts of its twin mandate in the same direction. This will complicate, and perhaps delay, the decision on when to start tapering QE.

Let us take for granted that as money managers strive for relative performance they will use every tool available to achieve their goal. Since the Fed is engaged in increasing the supply of money and supporting the Treasury and mortgage markets via quantitative easing we can assume that at least some leveraged traders will have taken the most possible advantage of this situation. They are likely to maintain their positions until a change to the monetary environment is discernible. So how does this fit with the Fed's policies?

As I mentioned yesterday, the Fed has seen progress on the economic front. Much of this is not measured by unemployment or inflation. Asset prices, not least housing, have improved, the consumer has deleveraged somewhat and consumer sentiment is improving. The economy's competitiveness has been enhanced and the USA remains a favourable investment destination not least because of comparatively low Energy prices. Therefore the Fed is treading a fine line between the effect liquidity has on asset price inflation and the need to combat stubborn deflationary pressures and promote full employment.

The removal of QE1 resulted in a sharp pullback. The removal of QE2 resulted in an even sharper pullback. We should also remember that the introduction of QE on all three occasions resulted in powerfully persistent rallies. At present the Fed is not talking about removing QE but is considering reducing the amount added to the market on a monthly basis. From the perspective of leveraged trading strategies, the difference is mostly academic. They would need to adjust position sizes if the availability of the liquidity on which they depend for funding is curtailed.

If QE3 is to be tapered at least some leveraged traders will be pressured. The effect of a removal of QE, which is not a near-term prospect, would be greater. Without engaging in conjecture, if we focus on the chart facts, a short-term overbought condition is evident on a number of markets, not least the S&P500. The potential for a consolidation of recent powerful gains has increased but mean reversion probably represents the worst case scenario at this stage for the majority. A drop below 1600 will be required to confirm more than a near-term peak for the S&P

Euro-Area Services, Factory Gauge Rises More Than Estimated – This article by Svenja O'Donnell for Bloomberg may be of interest to subscribers. Here is a section:

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May 22 2013

Commentary by Eoin Treacy

China's pollution crisis and power Rationing

Thanks to a subscriber for this note from Deutsche Bank which may be of interest to subscribers. Here is a section
Reducing the extreme levels of air pollution in China has moved to the top of the political agenda for the new government this year. Without reform, China's air pollution could worsen by another 70% in 2015. Figure 1 illustrates that construction and industrial emissions contribute to 20% of PM2.5 levels. We expect measures to address this crisis may have important implications for industrial sector activity. In fact, the forthcoming power rationing in Hebei province highlights that provincial governments may step up their effort to tackle pollution crisis. According to Bloomberg, Tangshan city will shut 199 polluting factories by rationing their power supply from May 20t. Power supply for three ore-sintering lines at Tangshan Steel and two at Guofeng Steel will be cut. Operations won't be resumed until desulfurizing devices are added to satisfy environmental standards. Furthermore, outdated, unlicensed and illegal facilities in Tangshan will also be closed by May 31st. If these measures are implemented strictly, we expect this could support steel prices while depress iron ore demand.
Eoin Treacy's view - The caveat on whether these measures will be strictly implemented is one of the more relevant considerations in addressing China's ability to tackle pollution. The central government has had difficulty enforcing its will on provincial administrations not least when profit motivation is pitted against national interest. However, if they succeed in rationalising polluting industries such as steel production the outlook for the global sector could improve as oversupply is reduced.

Within the environmental sector China Everbright broke successfully out of a two-year range in February and continues to extend its advance. The potential for a reversion towards the mean has increased.

Most of the better performers in the steel sector concentrate on specialised products. (Also see Comment of the Day on May 7th). However it is also worth highlighting those which have performed worst because base formation characteristics are increasingly evident. Evraz, Arcelor Mittal, US Steel, Allegheny Technologies, Commercial Metals, Bao Steel and China Steel Corp have all at least lost downward momentum. Breaks in their respective progressions of lower rally highs would raise the possibility that demand is returning to dominance beyond the short-term.

A number of US coal companies in particular have lost downward momentum and an increasing number have base formation characteristics. Peabody Energy, Arch Coal, Consol Energy, Alpha Natural Resources, James River Coal and Oxford Resource Partners have all begun to exhibit signs of renewed demand dominance following a very difficult few years.

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May 21 2013

Commentary by Eoin Treacy

Economic Prospects for the Long Run

Thanks to a subscriber for this speech delivered by Ben Bernanke at a graduation ceremony at Bard College on the 18 th . Here is a section
Moreover, even as the basic technologies improve, the commercial applications of these technologies have arguably thus far only scratched the surface. Consider, for example, the potential for IT and biotechnology to improve health care, one of the largest and most important sectors of our economy. A strong case can be made that the modernization of health-care IT systems would lead to better-coordinated, more effective, and less costly patient care than we have today, including greater responsiveness of medical practice to the latest research findings.Robots, lasers, and other advanced technologies are improving surgical outcomes, and artificial intelligence systems are being used to improve diagnoses and chart courses of

treatment. Perhaps even more revolutionary is the trend toward so-called personalized medicine, which would tailor medical treatments for each patient based on information drawn from that individual's genetic code. Taken together, such advances could lead to another jump in life expectancy and improved health at older ages.

Other promising areas for the application of new technologies include the development of cleaner Energy--for example, the harnessing of wind, wave, and solar power and the development of electric and hybrid vehicles--as well as potential further advances in communications and robotics. I'm sure that I can't imagine all of the possibilities, but historians of science have commented on our collective tendency to overestimate the short-term effects of new technologies while underestimating their longer-term potential.
Eoin Treacy's view - We might expect a speech delivered to graduating students to be enthusiastic about the future. However, I share Mr. Bernanke's optimism about the potential productivity gains that are likely from the golden age of technological development we are living through.

As he mentions, financial markets, in their efforts to discount future cash flows, tend to exaggerate how quickly products can be brought to market. This often causes new companies to become overvalued before the market's correcting function kicks in. From a behavioural perspective, we can also conclude that when the majority are most pessimistic about the future, it is generally a good time to be contrarian.

The boom in biotechnology shares that occurred in the late 1990s was spurred by incredible optimism about the future. 13 years later many of the companies that survived the bear market are now delivering ground breaking products and treatments.(Also See Comment of the Day on October 28 th 2011).

The Nasdaq Biotech Index is becoming progressively more overextended relative to its 200-day MA. It has rallied particularly impressively over the last three months. The benefit of the doubt can continue to be given to the upside provided it holds a progression of higher reaction lows, but the potential for a reversion towards the mean has increased. Biogen continues to extend is remarkably powerful four-month advance while BioMarin Pharmaceutical posted a large downside weekly key reversal last week suggesting a least a pause is underway.

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May 17 2013

Commentary by Eoin Treacy

Health Care Reform and Impact on Employers

Thanks to a subscriber for this informative report from Deutsche Bank, dated November 2012 but which is just as relevant today. Here is a section
Taken together, all of these new provisions, fees and taxes are expected to push HC premiums significantly higher in 2014. The CEOs of two national health insurers told us recently that small business and individual health insurance premium rates may need to rise on average by +20-50% in 2014

Guaranteed issue (GI) and community rating (CR) are the primary drivers of expected rate increases. These new provisions only apply to small employers (<50 employees), individuals, and exchanges – meaning those who obtain insurance in these segments will be the hardest hit.

Larger employers will also likely see substantial rate increases; however, because most large employers already offer richer benefit packages (meeting EHB standards) and GI/CR will not apply, rate increases should be more in the10-15% range, in our view.
Eoin Treacy's view - – Health insurers continue to benefit from the fact that Obamacare ensures that they will have 30 million new customers without capping the price of the services provided. A great deal of commentary tends to focus on the high cost of Energy and its potential drag on the wider economy. However, the vast size and comparative high cost of healthcare in the USA is much less remarked on. While one can argue whether the absence of tort reform, lack of competition, lack of transparency and/or profit motivation of a private system conspire to preserve the elevated cost environment, the fact is that high costs act as an economic headwind, (Also see Comment of the Day on February 15th).

The S&P500 Insurance Index has held a progression of higher reaction lows since September 2011 and broke out to new 5-year highs in January. It continues to extend the advance and while somewhat overbought in the short-term, a sustained move below the 200-day MA would be required to question medium-term recovery potential.

Aetna, Cigna and Torchmark all continue to extend their advances as they lead the sector higher. While they are becoming increasingly overextended relative to their respective 200-day MAs, breaks in their progressions of higher reaction lows would be required to signal mean reversion is underway. WellPoint has rallied impressively of late and is closing in on the 2011 highs, below $80, which offer an area of potential resistance.

United Healthcare broke successfully above $60 in early April. It then returned to test the region of the upper side of the underlying range where it found support last week. A sustained move below $55 would be required to question medium-term upside potential. FBL Financial Group broke out of a medium-term range in March and spent six weeks consolidating the advance. It broke out again last week and a clear downward dynamic would be required to check potential for additional upside.

Humana has rallied to test the $80 area which has been a psychological area of resistance since July and a clear downward dynamic would be required check potential for a successful upward break.

WTI Crude Rises on Speculation Economic Growth to Bolster Demand by Mark Shenk and Brent Crude Oil Climbs for Third Day as European Car Sales Rise by Lananh Nguyen both for Bloomberg may be of interest to subscribers.

My view – The commodity complex remains under pressure not least as institutional investors rotate away from commodity tracking products. (Also see the chart on page 6 of Stuart Parkinson's report for Deutsche Bank posted in Comment of the Day on May 15th) However, the relative performance of oil contracts stands out as an anomaly. Both Brent Crude and WTI Crude continue to bounce. This helps to explain BHP Billiton's outperformance relative to Rio Tinto over the last few weeks since its Energy unit is its second largest revenue generator.

Among the oil and gas majors there is also evidence of renewed investor interest. In the US, Conoco Philips broke out of a two-year range last week to post its highest close since August 2008. Murphy Oil has been ranging with an upward bias since September and a sustained move below $60 would be required to question potential for a successful upward break. Marathon Oil is testing the upper side of an 18-month range. Chevron continues to exhibit a mild upward trajectory since breaking out in January. Exxon Mobil has been consolidating between $85 and $93 since September and is currently testing the upper side of its range. Occidental Petroleum has been building support mostly below $90 since September and pushed back above that level last week. Following an impressive rally in January Hess Corp has been consolidating above the 200-day MA.

In Europe, Italian listed ENI appears to be in the process of completing an almost five-year base. UK and Dutch listed Royal Dutch Shell retested the 2400p level earlier this week and posted an upside key reversal today. A sustained move below today's lows would be required to question potential for some additional upside. Spanish listed Repsol broke out to new recovery highs three weeks ago and a sustained move below the 200-day MA would be required to question potential for additional higher to lateral ranging. UK listed BP continues to range with an upward bias while France listed Total has rallied to test its medium-term progression of lower rally highs.

Norway's Statoil appears to be one of the few companies where the EU's price fixing probe has had an effect on investor sentiment. It dropped abruptly yesterday to extend its yearlong decline and while it is becoming increasingly oversold, a clear upward dynamic would be required to check the momentum.

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May 15 2013

Commentary by Eoin Treacy

Musing from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks' ever interesting report for PPHB. Here is a section on autonomous vehicles
The Energy industry and environmental movement see autonomous vehicles as a dramatic way for altering consumption and emissions. Vehicles that drive themselves and never have accidents can be built much lighter and designed to be more aerodynamic thereby reducing fuel consumption. We haven't even begun to deal with the social mores changes that autonomous vehicles would bring. Would texting and cell phone use restrictions, a.k.a. distracted driving, be relaxed? How about new rules for flirting while driving/traveling? Since the auto companies are determined to provide some of the systems to make driving more appealing and less stressful, we anticipate that over the next five years new vehicles will come equipped with these semi-autonomous driving features, but will allow the driver to choose whether he wants to use them or not, much like Active Park Assist and cruise control. Cars of the future will change and any change that makes them more efficient and safer will ultimately lead to a reduction in gasoline and diesel consumption, not necessarily good for the oil business. Only if these technological improvements encourage increased mileage per driver will it be good news for Energy companies.
Eoin Treacy's view - Technology is an easy subject to get excited about. As new technologies are invented and the prospect of commercialisation increases the potential for truly life enhancing innovation, productivity gains and associated profits appear to know no bounds. However, the lead time from idea to full scale rollout can often disappoint and one has to question whether outsized valuations are justifiable when prices are accelerating higher. The pace of technological innovation represents an important theme in our medium to long-term bullish outlook but related shares would be best purchased following reversions towards their means.

Google currently trades at an historic P/E of 25.35 and Estimated P/E of 19.19 and remains on an exciting growth trajectory. The share has rallied from the region of the 200-day MA near $750 in late March to test the psychological $900; developing a short-term overbought condition in the process. For as long as momentum lasts, the benefit of the doubt can be given to the upside but the first clear downward dynamic is likely to signal a peak of at least near-term significance and probably the onset of a reversion back towards the mean.

Tesla Motors has attracted a great deal of interest of late with the announcement of its first revenue positive quarter. The company currently trades on an estimated P/E of 558. The share had been trending with a mild upward bias for the last 18 months but exploded out of its range in late March and has since tripled. (Also see Comment of the Day on August 12th 2012). It paused just below $100 yesterday and potential for at least some consolidation of recent impressive gains has increased.

In the online gaming sector Japanese listed Gungho Online Entertainment has an historic P/E of 80 and estimated P/E of 27. In the last four weeks the share has rallied from ¥400,000 to ¥1.6 million. There is little doubt that gaming is experiencing a renaissance following the advent of handheld devices and touch screen hardware. However, the surge in related share prices over the last month represents acceleration and at minimum suggests caution is warranted.

In the 3-D printing sector David highlighted 3-D Systems yesterday which has surged of late. The ExOne Company Inc IPOed in February and the pace of its advance picked up over the last three weeks with a rally of more than 60%. The share trades on an estimated P/E of 373 and remains in a momentum fuelled rally. This is a situation where a trailing stop would be advisable for those with long positions.

Some would argue that P/Es are not that relevant for companies with such incredible growth potential. However, considering the extent to which some have accelerated and the degree to which enthusiasm has propelled valuations, a great deal of good news is already in the price. I am reminded of BYD. The share accelerated from HK$10 in 2008 to a peak six months later near HK$90. It gave up the entire advance in the subsequent bear before building support above HK$10 from 2010. The share has an historic P/E of 761 and Estimated P/E of 56. Prices have also surged of late and the risk of mean reversion has increased. A sustained move below the 200-day MA would be required to question medium-term upside potential.

Social media were last year's cause celebre. A number of high profile shares were listed following a great deal of excitement and hype but Facebook (P/E 1365, Est P/E 40) and Groupon (Est P/E 42) experienced sharp declines as expectations were reined in.

Facebook has stabilised above $25 over the last five months and a sustained move below that level would be required to question potential for some additional support building

Groupon trended lower until November when it found support in the region of $2.60 and has held a progression of higher reaction lows since.

LinkedIn (P/E 544, Est P/E 131) broke successfully above $150 in early February and has been consolidating below $200 for six weeks. A sustained move below the 200-day MA would be required to question medium-term demand dominance.

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May 14 2013

Commentary by Eoin Treacy

Email of the day (3)

on Whole Foods Markets and the Keystone Pipeline
“Wow, take a look at the upward dynamic in WFM - my favorite Whole Foods Markets :)

“I am attaching an excellent record of the recent testimony before the US Congress by Paul C. Chip Knappenberger regarding the potential climate impacts of the Keystone XL pipeline.  Despite Chip's excellent testimony and scientific research, I believe it is likely that Obama will veto the pipeline, leaving Canada with no choice but to increasingly partner with the Chinese in accelerating the construction of westbound pipelines to West Coast ports in British Columbia, where construction of port facilities is continuing apace.

“I phoned the Cato Institute and received permission for republishing of this testimony to Fullermoney subscribers; with the proviso that we include a link back to their website (which should be already in the PDF).”
Eoin Treacy's view - Thank you for this informative common sense testimony, for seeking permission to reproduce it and for highlighting Whole Foods Market's recent strength.

Whole Foods remains on a growth trajectory and its ambitious international expansion continues to be funded by its domestic US success. The share lost momentum from October but its consolidation was limited to a relatively similar sized reaction to that posted in 2011. It surged last week to post a new high and a sustained move below $20 would be required to question medium-term scope for continued upside.

Much of the controversy surrounding the Keystone Pipeline has to do with the wider anti-fossil fuel agenda rather than the particular attributes of the project. It is looking increasingly likely that anti-tar sands lobbyists will succeed in blocking transit of additional Canadian Energy products through the USA. As mentioned previously, this is an issue of significant national interest to Canada and ensures that additional export markets for Canadian Energy resources will be developed.

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May 13 2013

Commentary by Eoin Treacy

The Chart Seminar review

Eoin Treacy's view - As ever last week's The Chart Seminar in London sparked some lively debates among delegates from the UK, Switzerland, Singapore and the USA. Some of the major topics of conversation included gold, commodities, consumer-oriented shares, Asia, Europe and the USA. The generosity of delegates who often share their vast experience of the market is one of the features most people highlight as a positive from the seminar. Additionally, I always look forward to The Chart Seminar because taking some time to drill through the disciplines of chart reading from a behavioural perspective usually improves my own trading subsequently.

The prospects for Japan's revival were a lively discussion point as the Yen dropped through ¥100. The re-rating of the country's equity markets continues apace and a significant strengthening of the Yen would be required to begin to question medium-term upside potential.

Gold represented an important topic of conversation not least because it has dropped so precipitously from its overhead top formation and has subsequently encountered resistance in the region of the lower side of that range. Total ETF Holdings of Gold which had been a source of demand for such a long time now represent a source of supply and have not rallied for more than a day or two since peaking in December. At a minimum, gold would need to sustain a move back above $1600 and the 200-day MA to confirm a return to demand dominance.

The consumer staples sector, from which some of the best performing Autonomies emanate, has become overextended following an impressive rally over the last 4 months. The SPDR Consumer Staples ETF has held a progression of higher reaction lows since December and has lost momentum somewhat over the last few weeks. A sustained move below 40 would indicate a swifter process of mean reversion is underway.

Most delegates were interested in the commodities sector and we spent a significant amount of time discussing prospects for related equities. The general conclusion was that the materials sector is bombed out and has recovery potential provided a suitable catalyst emerges.

The renewable Energy sector, particularly solar, was also discussed not least because so many of the relevant shares found at least near-term lows in January and have posted impressive rebounds since, albeit from very low levels. The performance to date suggests that the rationalisation of the industry which has been on-going for the last few years may have run its course. (Also see Comment of the Day on April 29th).

At The Chart Seminar we prefer to let delegates suggest the examples for discussion, believing that if the methodology works, it should be applicable to all markets. People generally ask for instruments they have an interest in or those that have performed notably over the previous few weeks or months. I make a point of highlighting the instruments they did not ask for in the second half of the second day to ensure we examine instruments that might be of future interest because they are currently out of favour.

At last week's seminar no one asked for a Chinese index. While the majority of stock market indices have been performing admirably since November, the Shanghai A-Share Index has been a wall flower for much of that time. However it continues to build support in the region of the 200-day MA and a sustained move below 2250 would be required to question medium-term potential for continued higher to lateral ranging.

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May 10 2013

Commentary by David Fuller

(U.S.) Shale Boom Is a Bust for Europe's Gas Plants

Here is the opening from this interesting article by Jan Hromadko for the WSJ (subscription required, PDF also provided)
FRANKFURT-The ripples of the North American shale boom continue to spread, as a growing number of European utilities are forced to mothball modern gas-fired power plants that can't compete with growing imports of cheap coal dislodged from the U.S.

Norwegian state Energy company Statkraft said Wednesday it has idled a gas-fired power station in Germany that couldn't compete with its coal-fired rivals, while German utility E.ON EOAN.XE -0.27% SE said it is seriously considering mothballing more gas-fueled plants, including a state-of-the-art facility in Slovakia.

Other European utilities have taken similar action, presenting policy makers with a dilemma-cheaper coal-fired power could provide some relief for the region's struggling economies, but might be incompatible with long-term goals for carbon emissions and renewable Energy.

The closures across Europe are another example of the far-reaching effects of the North American Energy-supply boom. Surging supplies of natural gas in North America, unlocked from shale rock by a new combination of technology known as hydraulic fracturing, have prompted many U.S. power generators to switch away from coal, pushing increasing amounts of the fuel into Europe as cheap imports.

In 2012, U.S. exports of coal to Europe rose 23% to 66.4 million short tons, according to data from the U.S. Energy Information Administration.
David Fuller's view - Those whom the gods wish to destroy they first make mad.' Europe's Energy policies remain in a mess, as Fullermoney has pointed out on many occasions, and always to our considerable regret. They top the list of ill-advised economic policies which continue to blight Europe's GDP growth prospects. The ongoing cost is higher unemployment and damaged aspirations among generally well educated and cultivated societies.

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May 08 2013

Commentary by Eoin Treacy

The Financial Engineer

Thanks to a subscriber for this edition of Evans & Partners' report which focuses on the Australian market and may be of interest to subscribers. Here is a section
A selective exposure to resources via BHP Billiton , Woodside Petroleum, AWE and Beach Energy. Valuations relative to the large-cap industrials are now looking attractive.

We favour the superior commodity diversity of BHP to the iron-ore dominated RIO . Global steel production grew by 1.3% in 2012. Looking into 2013, a similar outcome is likely as stronger output in China is countered by the ongoing drag from Europe, the CIS and Japan. The structural upswing in new supply will also gather pace. After a strong start to the year, bulk commodity prices have weakened over the past month – more-so coking coal.

The shaky foundations for the gold price have now been revealed but the ultimate test will come when US interest rates turn. In the meantime, the gold producers have been treated harshly by the market. We remain wary about the medium term outlook for the gold price but for those that aren?t we prefer Millennium Minerals and Doray.

The Australian Energy sector is poised to deliver a material step-up in production over coming years. Congratulations to Woodside Petroleum. Mining and Energy stocks would attract broader shareholder support (i.e. a lower cost of capital) and less volatility if shareholders were confident that they would profit from the good times via high dividends. In this regard, the special dividend and 80% pay-out ratio were welcome. We put Woodside into our discretionary Income Portfolio last July with this scenario in mind. While reluctant to chase the stock above ~$38 (the Shell overhang remains) we are happy to hold and receive the ~5% fully franked dividend.
Eoin Treacy's view - The RBA's interest rate cut yesterday has been welcomed by the stock market which remains willing to support higher valuations on the expectation that lax monetary policy will continue. The ASX/200 has been consolidating in the region of 5000 since March and hit a new closing high today. A sustained move below 4885 would be required to question medium-term recovery potential.

The resources sector has been particularly hard hit but a number of shares have returned to previous areas of support and valuations have improved. BHP Billiton is bouncing from the A$30 area and a clear downward dynamic would be required to check potential for additional higher to lateral ranging.

Woodside Petroleum tested the A$30 area on a number of occasions in 2011 and 2012 but has held a mild upward bias since July and a sustained move below A$34 would be required to question medium-term scope for continued higher to lateral ranging.

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May 07 2013

Commentary by Eoin Treacy

Will the WTI-Brent differentials disappear?

Thanks to a subscriber for this article by Gary Smith for Bloomberg which may be of interest to subscribers. Here is a section
The collapse in the price difference between the world's two most-traded crude oil grades is fulfilling a prediction Goldman Sachs Group Inc. has held for more than a year. Bank of America Corp. says it won't last.

Brent crude's premium to West Texas Intermediate slumped more than 50% to a 16-month low in the past two months, falling to less than $10 a barrel for the first time since January 2012. The differential narrowed to as little as $8.66 a barrel Thursday, after rising to a record $28.08 in October 2011. Brent was typically cheaper in the past decade, averaging $1.28 a barrel less than WTI, according to data compiled by Bloomberg.

The spread “has been extremely volatile, moving one way and then another,” said Olivier Jakob, managing director at consultant Petromatrix GmbH in Zug, Switzerland. “The question remains of where is the equilibrium price.”

The divide between Brent, a gauge for more than half the world's oil, and WTI, the U.S. benchmark grade, has narrowed as North Sea supplies resumed following oilfield maintenance, while a switched pipeline began relieving a glut of crude at America's oil hub at Cushing, Oklahoma. Credit Suisse AG and Barclays Plc said in 2011 that the Cushing gridlock had made WTI so cheap relative to Brent, that the U.S. grade was losing its relevance as a global benchmark.
Eoin Treacy's view - The wide spread between Brent Crude and WTI has been a clear depiction of the USA's Energy competitiveness over the last few years but it fell precipitously over the last few weeks as WTI surged from the lower side of its range.

WTI Crude is testing the psychological $100 level which has been an area of resistance for much of the last year. A sustained move above it would be required to question supply dominance in this area.

Brent Crude briefly dropped below $100 in April and has since rebounded. A sustained move below that area would be required to check potential for continued higher to lateral ranging.

The spread between Brent and WTI has steadied mostly above $7.50, which represents the upper side of the underlying base. Significant additional WTI strength would be required to check potential for some further expansion.

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May 07 2013

Commentary by Eoin Treacy

Plugged in

Thanks to a subscriber for this heavyweight report from CCB International focusing on Chinese utilities. Here is a section
Catalysts for coal-fired IPPs include
(1) achieving company targets of a decline in unit fuel cost, (2) capacity expansion coming back on track, and (3) stabilized power plant utilization. For wind IPPs, catalysts include (1) achieving annual newly installed capacity targets, and (2) substantial rebounds in utilization rates in 2013F.

Near-term upside risks.
Coal-fired IPPs: (1) weaker coal prices, (2) a stronger-than-expected recovery in utilization, and (3) weaker-than-expected hydropower generation that lifts coal-fired power utilization. Wind IPPs: (1) better-than-expected wind resources and the lifting of power grid curtailments, and (2) a rebound in CER prices that drives stronger-than-expected CDM income.
Eoin Treacy's view - More than a few of the reports that have crossed my desk are predicting continued oversupply in China's coking coal sector. Coal miners have experienced a significant headwind as natural gas displaced coal in the USA's utility sector which freed up supply for export. Concurrently, demand for steel and coking coal have been sapped by Europe's lengthy recession and China's change of focus from infrastructure development to fostering human capital.

As a result a high degree of variability is now evident in the steel sector. Arcelor Mittal is representative of the downward pressure on steel prices. The share trended lower for three months from late January before finding support near €8.50 three weeks ago. It has since rallied to break the progression of lower rally highs, as it closes the overextension relative to the 200-day MA.

Vertically integrated steel producers such as Russia's Evraz and Brazil's Cia Siderurgica Nacional have been particularly weak and remain deeply oversold relative to their respective 200-day MAs.

Speciality steel producers have tended to outperform, not least because they occupy niches within the sector that offer security to earnings. Worthington Industries produces canisters for compressed gases, not least for CNG vehicles among a wider range of other products. The share broke out of an almost 20-year base in January and continues to extend the advance. A break in its progression of higher reaction lows would be required to begin to question medium-term upside potential. (Also see Comment of the Day on December 31 st ).

US listed Nucor has benefitted from the USA's competitive position in Energy pricing and found support three weeks ago in the region of the 200-day MA.

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May 07 2013

Commentary by David Fuller

Email of the day

On Royal Dutch Shell A-shares in €
"I seem to detect a potential Sym Triangle forming between the 2007 -2008 highs and the 2009 low. This could soon be broken to the upside, as could the similar downtrend line from the aforementioned highs. Overhead resistance at 26 has been overcome, and the share is right on the 200d MA today, at around 26.5 €. The quarterly results have shown progress.

"Given the above, would you agree that the prospects for the share price have improved?"
David Fuller's view - You could be right and RDS has improved recently, which it needed to do as it had been a serial underperformer since last August. However, we know that choppy and predominantly ranging chart patterns are more difficult to predict, because they reflect unresolved uncertainty and disagreement among participants.

While the underperformance has been disappointing, it is not too surprising given the overall slowdown in global GDP growth during the last year. This has weighed particularly heavily on resources shares which are often cyclical performers. Moreover, a degree of additional uncertainty towards the Energy sector has resulted from the growing variety of different supplies.

RDS is one of the leading independent participants in shale gas and oil. I think this is a good position to be in but it is not without an additional degree of uncertainty, given the comparatively recent advent of fracking technologies. RDS has invested heavily in this sector, as you know. Meanwhile, I agree that the latest results have shown progress and the dividend near 5% is a consolation for our patience.

In terms of full disclosure, RDS B (LN) is one of the larger holdings in my personal long-term portfolio. I have built this position in recent years and will continue to hold it, not least because it is competitively valued at current prices and global demand for Energy increases almost every year.

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May 03 2013

Commentary by David Fuller

Fusion Scientists See Progress as Obama Shows No Ardor

This is a fascinating article on a longstanding goal, albeit too often under funded. Here is a sample
Bishop is a fusion evangelist. He has devoted six years to this corner of the Lawrence Livermore National Laboratory, wielding a laser that delivers 1,000 times more Energy than the U.S. electrical grid at any instant in time. If the laser can spark atoms to fuse in a self-sustaining reaction known as ignition -- the equivalent of a laboratory-scale microbomb -- scientists may be on their way to rewarding the planet with unlimited and nonpolluting Energy, Bishop says.

"Fusion is a rich source of power," he says.

Edward Teller, father of the fusion-powered hydrogen bomb, would agree. When he co-founded Livermore in 1952 for weapons research, he also sought a peacetime perk: abundant electricity. Scientists say fusion could provide the foundation for both. It seeks to combine deuterium and tritium, two variants of hydrogen, to form the heavier element helium. As the atoms fuse, a small portion of hydrogen is converted to Energy, as Albert Einstein's famous E=mc2 formula predicted.

Edward Moses, the principal associate director for the NIF and Photon Science Directorate, wants to harness that Energy for practical uses. He says Livermore could join with private companies to build an electricity-producing fusion power plant eight to 12 years after the NIF achieves ignition.

Moses, 63, wants to raise $1.5 billion, partially from utilities and suppliers, to get commercial fusion technology ready. In a possible prototype, Pacific Gas & Electric Co. (PCG) and others agreed in December to pay the Livermore lab $150 million to use its supercomputers for improving California's electricity grid. Wealthy individuals may contribute, and some have expressed interest, Moses says, declining to name them.

Detractors say cost estimates are meaningless because they involve technologies not yet invented.
David Fuller's view - Nuclear fusion is the Holy Grail of clean, self-sufficient, and unlimited Energy. I have been hearing about it my whole life.

As a young teenager in the 1950s, I can remember the excitement when Edward Teller addressed a school that I attended. He talked about nuclear fusion for Energy rather than weapons. As I recall, he said that it might be attainable within 35 years. Needless to say, this did not happen, partly because of a lack of funding, not least because of cheap oil.

That target date stayed in my head, and apparently the memories of many other people. I have tried to follow the very limited progress on fusion Energy ever since. Its achievable, commercial potential always seemed to be 35 years away, until perhaps today.

The biggest problem, in addition to scientific complexity, was the lack of 'needs must' motivation. This is slowly changing, for obvious reasons ranging from Energy security to reducing Energy pollution. We may not need the equivalent of another Manhattan Project for fusion Energy but I hope to see at least successful fusion ignition within my lifetime.

Meanwhile, the two most important drivers for the next secular bull market for equities, which Fullermoney projects could be apparent before the end of this decade, are: 1) the accelerated rate of technological innovation; 2) cheaper Energy in real (inflation adjusted) terms.

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