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March 17 2016

Commentary by David Fuller

How GE Exorcised the Ghost of Jack Welch to Become a 124-Year-Old Startup

It’s part of a much larger transformation at GE orchestrated by Jeff Immelt, Welch’s successor as chief executive officer. Most notably, GE is moving its headquarters from suburban Fairfield, Conn., land of golf and bonuses, where it’s been since 1974, to Boston, the Athens of America. The company is selling off its division that makes refrigerators and microwave ovens. Now it’s focused on electric power generators, jet engines, locomotives, and oil-refining gear. And it’s made a significant bet on developing software to connect these devices to the Internet. There’s a term for this trend of adding network connections to hardware not usually considered computers: the Internet of Things. GE believes its opportunity lies in what it calls the Internet of Really Big Things.

In the past five years, GE has hired hundreds of software developers, created its own operating system, and fashioned dozens of applications that it says will make planes fly more efficiently, extend the life of power generators, and allow trains to run faster. GE’s plan is to sell this software to other manufacturers of Really Big Industrial Things, and to be a top 10 software company by 2020. That would put it in the same category as Microsoft, IBM, and Oracle, an ambition that some have difficulty swallowing. “Top 10? No way,” says David Linthicum, senior vice president of Cloud Technology Partners, a consulting firm in Boston.

And:

Inevitably, an activist took an interest in the struggling conglomerate. Last October, Nelson Peltz’s Trian Partners revealed that it had purchased $2.5 billion in GE shares, becoming its ninth-largest investor. In an 81-page analysis, Trian said GE had previously been an unfocused, overly bureaucratic muddle. But rather than call for a breakup of the company as Peltz has done in the past with DuPont and PepsiCo, he instead endorsed Immelt’s strategy.

A year earlier, this would have been hard to believe, but by last fall, Immelt’s program was beginning to succeed. He had announced a plan to shed $200 billion of GE’s problematic financial assets, which have weighed down its share price. The company says it had software sales of $5 billion in 2015, a sign that the Internet-of-really-big-things approach must be taken seriously. And, by all accounts, Immelt’s campaign to remake the company’s intrinsically rigid culture is working. In the past year, GE’s stock has outperformed the Standard & Poor’s 500-stock index. “A lot of people didn’t think this management team would drive an aggressive transformation of the business,” says Steven Winoker, an analyst at Sanford C. Bernstein & Co. “But that’s exactly what’s happening.”

David Fuller's view -

Jeff Immelt is ambitious and creative but what he and many other CEOs lack is that incisive business brain which a long-term activist such as Nelson Peltz of Trian Partners can provide.  He is probably the best activist investor in the business and for sentimental reasons I would like to see this sole surviving original Dow Jones component flourish with its comparatively new business plan.

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March 11 2016

Commentary by David Fuller

Wall Street Oldie But Goodie

David Fuller's view -

If you conclude that Wall Street is still in its bull market, and S&P Capital IQ and WSJ.com, believe so, then it is the third longest bull market, presumably in modern history.  Of course many commentators disagree and it has certainly not felt like a bull market since at least mid-2015.  The Dow Jones industrial Average has fallen 21.69%, the Dow Jones Transport Average by 21.69%, the Russell 2000 fell 27.25% and the Nasdaq 100 Index just qualifies for the arbitrary 20% bear market with a decline of 20.01%.  However, the Nasdaq Composite Index has only fallen 19.54% while the S&P 500 Index is comparatively resilient having only lost 15.21% at its January and February lows. 

Well, apologies for sounding like a stats wonk, but to me what we have seen is more bearish than 2011 when the S&P fell just below 20% on an intraday basis, as I recall.  Moreover, this time iconic Apple and the previously sector-leading Nasdaq BioTechnology Index has fallen back from the sky.  

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March 09 2016

Commentary by David Fuller

Email of the day 1

On China’s economy:

Hi David, Regarding your comment on iron ore prices from March 7th and China's reduced demand due to migrating from importing industrial metals to consumer-led growth. Can you please explain, what is the tipping point for a country to make this transition? What forces the change; what does the transition actually mean in real terms? "Consumer-led growth" is a broad term; what does this specifically mean in Chinese terms? Why does China even need to change?

David Fuller's view -

Aspiration - is the main answer in a single word.  Over two hundred years ago, and for centuries before that, China was often one of the leading countries of the world.  However, invasions, warring factions, climate problems and appalling governance ended China’s eminence.  It became a seriously impoverished third world country under Chairman Mao’s reign.   

Deng Xiaoping put China on a recovery path commencing in 1978 and it soon became the fastest growing developing economy in history.  Today, many of China’s citizens are much more highly educated and it has a large middleclass, estimated at well over 300 million people.  They do not want to remain metal bashers.

China is currently engaged in that challenging transformation between a developing and a developed economy.  Not every country with potential succeeds in doing this – Brazil, for instance, due mainly to governance problems and overdependence on natural resources. 

I believe China is succeeding, and its middleclass consumer-led growth helps it to develop higher-end, more profitable products which can also be exported to other countries.  This is more lucrative and less polluting than manufacturing and selling steel and other building materials.  In other words, China would rather build a railroad or nuclear power station for its own use, and then export this Technology, rather than import it.  



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March 09 2016

Commentary by Eoin Treacy

US agency reaches 'holy grail' of battery storage sought by Elon Musk and Gates

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

But the biggest breakthrough is in the area of energy storage. “I think that’s one area where we have delivered big time,” Williams told the Guardian.

The battery storage systems developed with Arpa-E’s support are on the verge of transforming America’s electrical grid, a transformation that could unfold within the next five to 10 years, Williams said.

The most promising developments are in the realm of large-scale energy storage systems, which electricity companies need to put in place to bring more solar and wind power on to the grid.

She said projects funded by Arpa-E had the potential to transform utility-scale storage, and expand the use of micro-grids by the military and for disaster relief. Projects were also developing faster and more efficient super conductors, and relying on new materials beyond current lithium-ion batteries.

The companies incubated at Arpa-E have developed new designs for batteries, and new chemistries, which are rapidly bringing down the costs of energy storage, she said.
“Our battery teams have developed new approaches to grid-scale batteries and moved them out,” Williams said. Three companies now have batteries on the market, selling grid-scale and back-up batteries. Half a dozen other companies are developing new batteries, she added.

 

Eoin Treacy's view -

Battery Technology is the missing link in the supply chain between generating electricity via wind and solar and meeting requirements for base load. Until the last decade investment in batteries was puny compared to what has gone into other sectors. However the high oil price environment created an incentive to develop more efficient ways of generating and storing energy. Some of that is now coming to fruition and it is likely to have a transformative effect on electricity costs and the potential for electric cars. 



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March 07 2016

Commentary by David Fuller

Iron Ore Jumps Most on Record as Market Goes Berserk

Here is the opening of this interesting article on another recovering commodity, from Bloomberg:

Iron ore soared the most ever after Chinese policy makers signaled their willingness to buttress economic growth, boosting the outlook for steel consumption in the top user and igniting speculation that some investors who’d bet against the market had been caught out.

Ore with 62 percent content delivered to Qingdao jumped 19 percent to $63.74 a dry metric ton, Metal Bulletin Ltd. data show. That’s the biggest gain in daily data going back to 2009 and the highest price since June. The surge was preceded in Asia by a rally in futures, with the most-active contract on Singapore Exchange Ltd. climbing 21 percent to $60 and prices on the Dalian Commodity Exchange rising by the daily limit.

“The iron ore and steel markets have gone berserk -- they’ve departed from fundamentals and are heavily driven by sentiment,” Zhao Chaoyue, an analyst at China Merchants Futures Co. in Shenzhen, said before the Metal Bulletin price was published. “Investors are expecting further monetary easing by the Chinese government to boost steel demand.”

Australia’s Fortescue Metals Group Ltd. jumped 24 percent in Sydney trading, where Rio Tinto Group and BHP Billiton Ltd. also climbed after futures prices jumped. Gains in London were muted. Rio, the second-biggest mining company, rebounded from an earlier decline in London trading and was up 2 percent by 1:04 p.m. local time, while BHP rose 1.1 percent.

U.S. producer Cliffs Natural Resources Inc. climbed 21 percent in pre-market trade by 9:11 a.m. in New York. Vale SA gained 6.7 percent in Brazil trading.

And:

Recent gains in iron ore probably won’t last, Goldman Sachs Group Inc. said in a report received on Monday, forecasting a drop back to $35 a ton in the final quarter. This year’s rally has been driven by rising steel prices in China, a reversal of the normal relationship seen between the raw material and the manufactured product, Goldman said.

‘Short-lived’

“We expect the current rally to be short-lived,” analysts Christian Lelong and Amber Cai said in the note, which was dated March 6, predicting further growth in iron ore supply in the quarters ahead. “The causality will revert sooner rather than later, and steel raw materials will one again drive steel prices rather than the other way around.”

David Fuller's view -

One does not discount a Goldman Sachs forecast lightly, especially when they are participants in the market in question.  However, iron ore is doing what we are also seeing in most other industrial commodities.  The big miners geared up production several years ago because they were experiencing a post-2008 boom in prices on strong demand from China, which they mistakenly assumed would persist indefinitely.  Moreover, the efficiency of mining had improved dramatically, thanks to an unprecedented leap in mining Technology

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March 07 2016

Commentary by Eoin Treacy

In JPMorgan Fintech Bunker, Coders Are Too Focused for Foosball

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

The bank has overhauled its website -- an unveiling is planned for Wednesday -- to make it easier and more intuitive to use. It consolidates about 300 pages from the old site so a visitor doesn’t have to hunt around to get things done. It also features a newsfeed with articles about personal finance. JPMorgan is slowly adding users to the new platform to gauge their reactions. It expects to add the rest starting this month and later release a new small-business banking website.

Tech competitors such as LendingClub Corp., On Deck Capital Inc. and Wealthfront Inc. threaten to disrupt banks’ relationships with clients by making transactions easier or cheaper. Traditional financial firms are responding by building their own Technology in-house, including robo-advisers that give automated investment advice, partnering with the financial Technology companies or purchasing them outright. New York-based JPMorgan will spend $3 billion on Technology investments this year.

“All the startups, all the fintech guys are pushing very hard because they see opportunity,” said Parsey. “We have to take the banking world up to the same level as the rest of the digital industry. Beyond that, there are exciting ways to innovate how people feel about their finances.”

 

Eoin Treacy's view -

Consumers are no longer willing to take their lunch break or precious after work time to go to the bank, or other such mundane chores that could so easily be accomplished online. That represents a major challenge for companies reliant on bricks and mortar locations to conduct their business. The Millennial generation overtook Baby Boomers as the largest US demographic last year. It will be an increasing priority for companies to aim products directly at this group not least as they enter their prime earning years. 



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March 04 2016

Commentary by David Fuller

Payrolls in U.S. Surge While Wages Drop in Mixed Jobs Report

Here is the opening of this topical report from Bloomberg:

Employers added more workers in February than projected but wages unexpectedly declined, dashing hopes that reduced slack in the labor market was starting to benefit all Americans.

The 242,000 gain followed a 172,000 rise in January that was larger than previously estimated, a Labor Department report showed Friday. The jobless rate held at 4.9 percent as people entered the labor force and found work. Average hourly earnings dropped, the first monthly decline in more than a year, and workers put in fewer hours.

A job market in good health will reinforce job security and encourage Americans to spend, buffering the U.S. from the ill-effects of global economic weakness. At the same time, stronger wage growth, which will play a role in deciding the race for the White House, would help move inflation closer to the Federal Reserve’s goal.

“It indicates the resilience of the economy,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The labor market doesn’t appear to be hurt by financial market volatility. Wages were a bit disappointing.”

The median forecast in a Bloomberg survey called for a 195,000 advance. Estimates of 92 economists ranged from gains of 70,000 to 245,000. January was initially reported as a 151,000 increase. Revisions to prior reports added a total of 30,000 jobs to payrolls in the previous two months.

The unemployment rate, which is derived from a separate Labor Department survey of households, showed that the labor force expanded by more than a half million people and almost all found work. Joblessness was projected to hold at 4.9 percent, an eight-year low, according to the survey median.

The Election

The labor market is coming off its best two years for job growth since 1998-1999. While leading Democratic presidential candidate Hillary Clinton can point to economic progress under her party’s leadership, Republican front-runner Donald Trump may steer voters to focus on limited wage growth and companies moving operations overseas because of high corporate tax rates.

David Fuller's view -

The US economy is gradually improving, led by Technology and lower gas prices which are a byproduct of technological innovation.  There is also a gradual improvement in depressed commodity prices and this has lessened deflationary recession fears. 

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March 04 2016

Commentary by David Fuller

Oil Companies Turn to Solar

Here is a latter section of this interesting and informative article by Nick Hodge of Outsider Club:

But perhaps the most convincing evidence that solar is here and it's competitive is that oil companies are now using it to make oil extraction cheaper and cleaner.

Late last year news began coming out that the oil industry was turning to solar to help it pump crude.

Royal Dutch Shell (NYSE: RDS), Total (NYSE: TOT), the Kuwait State Oil Company, and Oman's sovereign wealth fund have teamed up to create a solar company called GlassPoint.

It is building a massive solar installation in the Oman desert to create steam to help pump oil. That one project will save more carbon than all electric cars sold so far by Tesla (NASDAQ: TSLA) and Toyota (NYSE: TM) combined.

What's more, using solar to help power an oilfield makes total economic sense. Up to 60% of the operating expenses at heavy oil fields are for fuel purchases.

So at a time when oil companies are cutting costs — curtailing exploration and laying off tens of thousands of workers — they are still interested in spending for projects that can reduce costs.

And that means solar.

Petroleum Development Oman, which is partly backing GlassPoint, accounts for 70% of the nation's oil production and 100% of its gas supply.

It is highly indicative that it is turning to solar to complement its fossil fuel operations.

This is only going to continue through 2030, as solar continues its march toward becoming the world's dominant source of electricity.

As that happens, the companies that improve solar Technology and reduce its costs are going to be the biggest winners for investors.

 

David Fuller's view -

Fuller Treacy Money has long maintained that solar power would dominate not only renewable energy but also prove to be more successful than any fossil fuel, due to its unique advantages.

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March 04 2016

Commentary by Eoin Treacy

Tesla's Getting More Rivals as VW Scandal Clouds Diesel Outlook

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

Volkswagen, meanwhile, has made electric vehicles a linchpin of its plan for recovering from the crisis, accelerating a push to add 20 additional plug-in hybrid and battery-powered cars to its lineup by 2020. That includes the first battery-powered vehicle for the Porsche sports-car brand as well as an electric Audi crossover. And it’s promising new leaps in Technology, including ranges of more than 500 kilometers (310 miles) by the end of the decade.

“Charging will only take as long as a coffee break,” instead of hours, Volkswagen CEO Matthias Mueller said in Geneva. “And in the long term, an electric car will cost less than a car with an internal combustion engine.”

Such Technology advances will help electric cars eventually. But in the meantime, demand is tepid, with the clean-running vehicles accounting for just 0.68 percent of sales in western Europe, according to Automotive Industry Data Ltd. Much of that demand comes from Norway, where electric cars enjoy generous perks such as tax exemptions and free charging. In Germany, where there are limited benefits, just over 30,000 have been sold to date. Cheap oil prices provide little incentive for consumers to take the leap.

Eoin Treacy's view -

Tesla, more than any other company, has succeeded in making electric vehicles desirable. I personally have very little interest in cars but I have to admit that their marketing is having an effect on me and there is no denying I see a lot more Tesla’s on the road today than a year ago. News last week that Tesla is outselling other luxury cars in the USA is a wake-up call for its German competitors. This lends additional support for the argument that companies need to compete in the electric vehicle sector.  



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March 01 2016

Commentary by Eoin Treacy

Experts predict robots will take over 30% of our jobs by 2025

You might remember this article from May last year quoting a Gartner report predicting a large number of jobs will be lost to machines by 2025. Here is a section:

There's a BakeBot robot whipping up fresh cookies at MIT; hospitals are now employing medical robots to assist their doctors; and a robot named Baxter can beat any human at the popular logic game Connect Four, among many other tasks.

"Historically what we thought was that robots would do things that were the three D's: dangerous, dirty, and dull," explains Ryan Calo, professor at University of Washington School of Law with an expertise in robotics. "Over time, the range of things that robots can do has extended."

Their abilities will only continue to expand. Ray Kurzweil, director of engineering at Google, anticipates that by 2029 robots will have reached human levels of intelligence.

Many people fear a jobless future — and their anxiety is not unwarranted: Gartner, an information Technology research and advisory firm, predicts that one-third of jobs will be replaced by software, robots, and smart machines by 2025.

 

Eoin Treacy's view -

I am referring to it now because I had the pleasure of speaking with the CEO of Softwear, HP Reddy, on Friday. I first saw mention of the company when they broke out of Georgia Tech to commericalise the operation and wrote about it most recently last July in the context of how many jobs could potentially be displaced by their sewbots. Softwear produces the first suite of robots that can displace humans in the manufacturing of clothing.  



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February 26 2016

Commentary by David Fuller

Energy Price War Spreads to Gas as US Shale Storms Global Market, Stalks Russia

The US has exported its first shipment of natural gas in a historic move that shifts the balance of power in the global energy market and kicks off a struggle with Russia for market share. 

Surging US supply over the next five years threatens to break the Kremlin's dominance over Europe's gas market, and is already provoking talk of a "Saudi-style" counter attack by Moscow to drive US shale gas frackers out of business before they gain a footing.

At the very least, it sharpens a global price war as liquefied natural gas (LNG) bursts onto the scene, and closes the chapter on the 20th century system of pipeline monopolies. Gas is starting to resemble the spot market for crude oil, with the same wild swings in prices and boom-bust cycles.

A seven-year, $11.5bn project by Cheniere Energy finally came to fruition this week as the first LNG cargo left Sabine Pass in Louisiana - in a special molybdenum-hulled ship at -160 degrees Centigrade - destined for Petrobras in Brazil. "It is a big day for our natural gas revolution," said Ernest Moniz, the US energy secretary.

Speaking at the IHS CERAWeek summit in Texas, he said the emergence of the US as a gas superpower is a geopolitical earthquake, though he has always been coy about the exact intention. "It is a change in the energy security picture," he said.

The US is ramping up LNG exports to almost 130bn cubic metres a day (BCM) by the end of the decade, roughly equal to Russia's gas exports to Europe. This may rise to 200 BCM and possibly beyond as the shale industry keeps finding once unthinkable volumes of gas.

Mr Moniz said the world had been expecting the US to be a huge importer of LNG before the shale shock. The mere fact that this is no longer the case turns the market upside-down, and is a key reason why LNG prices have been in free-fall across the world.

The shift to net exports is something that almost nobody expected. Mr Moniz predicted that the US will match Qatar, and possibly exceed it to become the world's biggest exporter of LNG by 2020. 

The US is still a net importer of natural gas but that is because Canadian pipelines supply New York and Detroit. However, it does not alter the overall picture.

Martin Houston, chairman of Parallax Energy, said the US may account for a quarter of the world's LNG market within a decade, and is so efficient that it can deliver gas to Europe for as little as $5 per million British thermal unit (Btu) despite the high cost of liquefaction and shipping.

David Fuller's view -

This article is well worth reading in full because it is about a monumental development – cheap energy forever – at a time when investors are agonising over China, the EU and negative interest rates.  That is not a misprint; I did say cheap energy forever, thanks to Technology

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February 25 2016

Commentary by David Fuller

Modi and Rajan: Unlikely Allies Battling Indian Oligarchy

Here is the opening of this interesting article from Bloomberg:

In the months after Prime Minister Narendra Modi’s landslide 2014 victory, speculation swirled of a rift with central bank Governor Raghuram Rajan.

Members of Modi’s party saw Rajan, a former International Monetary Fund chief economist, as a loyalist of the ousted Congress-led government that appointed him to run the Reserve Bank of India eight months earlier. One even called for him to be fired if he didn’t cut interest rates.

Yet when the pair joined together in Mumbai last April to celebrate the central bank’s 80th anniversary, Modi lavished praise on Rajan. The prime minister called him “the best teacher" thanks to his ability to simply explain complex ideas, adding: “He makes me understand them so perfectly that I don’t need to question anything."

The positive working relationship -- featuring moves to control inflation, narrow the fiscal deficit and boost foreign reserves -- is helping counter the narrative of disappointment since Modi took office. While investors remain frustrated with failures including a delayed tax overhaul, India isn’t currently gripped by the sense of panic that struck in 2013, when emerging markets last came under pressure.

‘Fundamental Reset’

And while joint efforts to clean up banks, end power shortages and curtail corruption face substantial obstacles, they have the potential to upend a growth model that funnels wealth to a small elite. In the process, that would empower a younger generation with lower business costs and a more level playing field.

“Modi and Rajan as attackers of vested interests -- and Technology as a tool for a new generation of entrepreneurs to change the system -- is creating a fundamental reset on how India works," said Saurabh Mukherjea, chief executive officer of institutional equities at Ambit Capital Pvt. in Mumbai. “I don’t think foreign investors have fully understood the scale of how dramatically India has been changed by these three forces.”

David Fuller's view -

 

India’s promising GDP growth rate but fiendishly bureaucratic political system are recipes for stock market volatility, which we have certainly seen.  Nevertheless, if you agree with the mantra - Governance is everything – Prime Minister Narendra Modi and Central Bank Governor Raghuram Rajan are a powerful and capable combination.

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February 25 2016

Commentary by Eoin Treacy

JPMorgan Quietly Tests Blockchain With 2,200 Clients

This article by Emily Glazer for the Wall Street Journal may be of interest to subscribers. Here is a section:

Mr. Dimon has been increasingly vocal on Technology. Last year, he warned in his annual shareholder letter that “Silicon Valley is coming,” with “hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.”

Later last year, he said at an investor conference that while bitcoin probably doesn’t have much of a future, the blockchain Technology that supports it “might very well be very useful” in tracking ownership of some securities and cutting down the time it takes to transfer a loan.

In its new blockchain plan, J.P. Morgan plans to expand its testing to real trades as soon as the third quarter for certain corporate and investment bank clients including some hedge funds, said Sanoke Viswanathan, chief administrative officer at J.P. Morgan’s corporate and investment bank. That also requires regulatory approvals, which could take months.

J.P. Morgan is also participating in several industry groups that are focused on developing blockchain as a way to improve efficiency in lending and trading, among other things. Those groups include R3, the nonprofit Linux Foundation and Digital Asset Holdings, which is led by former J.P. Morgan executive Blythe Masters.

 

Eoin Treacy's view -

A link to the full article is posted in the Subscriber's Area. 

It isn’t just start-ups in Silicon Valley that are looking on banking as a sector ripe for disruption. Fees are high, service is slow and the online experience provided by most banks leaves a lot to be desired. For too long banks have relied on rules and regulations they helped to create a shroud of protection that stifled competition. 



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February 25 2016

Commentary by Eoin Treacy

Lloyds Soars on Dividend Bump as Bank Signals End for PPI

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

Chief Executive Officer Antonio Horta-Osorio, 52, is making a virtue of the bank’s focus on lending to U.K. consumers and businesses, as other major European lenders are pruning investment banking operations amid concern over global economic growth and market volatility. He increased the dividend to 2.25 pence a share from 0.75 pence, added a 0.5 pence special payment, and set a higher target for the bank’s lending margins this year.

“This is real, it’s a clean story,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London with a buy rating on shares. “We don’t see any earnings downgrades which are going to be a theme for western-world banks globally. One of the major headwinds for this company has been PPI. That drag is now removed in our opinion.”

Horta-Osorio is eliminating jobs, closing branches and investing in Technology as he says the firm can respond to persistently low interest rates and a potential slowdown in the British economy. The bank’s cost ratio improved in 2015, and the company forecast its loan impairments will remain muted this year.

“Our low risk, U.K.-focused business model continues to be a source of competitive advantage,” he said on a call with reporters. “The future of Lloyds and the future of the U.K. economy are inextricably linked.”

Eoin Treacy's view -

Payment Protection fines have been a major headwind for UK banks and the removal of this issue represents a powerful bullish factor. The contraction of Lloyd’s valuation from an historic P/E of 45 to an Estimated P/E of 9.42 brings it in line with that of some of the better capitalised US banks such as JPMorgan, Bank of America and Citigroup. 



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February 25 2016

Commentary by Eoin Treacy

Email of the day on cyanobacteria and biofuel

Have you' received any comments on developments with Cyanobacteria? The website of Joule Unlimited is intriguing. There is a short video which is worth watching. It is early days with this Technology but I wonder if any of your subscribers have any realistic ideas about the potential

Eoin Treacy's view -

Thank you for this question which I suspect is of general interest to the Collective. If subscribers have any additional information we would be glad to see it.

You might remember Exxon Mobil invested about $600 billion in algae experiments in 2009 only to lose interest after a couple of years, as fears about peak oil faded. Using algae as the catalyst for producing biofuels was a popular idea almost a decade ago but the problem for companies like Joule is their process is only efficient when oil is above $50. That is just not low enough for widespread roll out in the current environment. 



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February 23 2016

Commentary by David Fuller

Sea Levels Are Rising Faster Than They Have in 2,800 Years

Sea levels on Earth are rising several times faster than they have in the past 2,800 years and are accelerating because of human-caused global warming, according to new studies.

An international team of scientists dug into two dozen locations across the globe, including a salt marsh and coastal wetland in Newfoundland, to chart gently rising and falling seas over centuries and millennia. Until the 1880s and the world's industrialization, the fastest seas rose was about three to four centimetres (1 to 1.5 inches) a century, plus or minus a bit. During that time global sea level really didn't get much higher or lower than eight centimetres (three inches)  above or below the 2,000-year average.

But in the 20th century the world's seas rose 14 centimetres (5.5 inches). Since 1993 the rate has soared to 30 centimetres (a foot) per century. And two different studies published Monday in the journal Proceedings of the National Academy of Sciences, said by 2100 that the world's oceans will rise between 28 to 131 centimetres (11 to 52 inches), depending on how much heat-trapping gas Earth's industries and vehicles expel.

David Fuller's view -

Most of us do not want to believe this because it is too frightening.  However, it makes sense to me that the climate is warming and I see more evidence to confirm rather than refute this view.  I hope I am wrong or that Technology provides a solution, because the long-term economic consequences of rising sea levels are appalling.   

(See also: Bill Gates Q&A on Climate Change: ‘We Need a Miracle’ – This is an excellent article and video, in my opinion.)



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February 23 2016

Commentary by Eoin Treacy

Inside the New Microsoft, Where Lie Detection Is a Killer App

This article by Dina Bass for Bloomberg may be of interest to subscribers,. Here is a section:

Microsoft truly embraced the Technology when it started Bing in an attempt to catch up with Google. Satya Nadella ran engineering and technical strategy for the search division before becoming chief executive officer two years ago and has been sprinkling machine learning like fairy dust on everything his company touches. "Microsoft is now in this place where they have machine learning very deeply embedded," Domingos says. "They’re investing a lot in making machine learning less Wild West."

Like Google and Amazon, which have both used the Technology to improve their own products, Microsoft is weaving machine learning into its own operations. This isn't simply about helping the company save money and function better; the more Microsoft uses the Technology itself, the easier it is to explain and sell. "Customers are confused," says Joseph Sirosh, lured from Amazon in 2013 to oversee engineering for Microsoft’s machine learning efforts. "Cutting through that noise has been a bit of a challenge. It has been also hard for our own field and sales people to go talk to customers and educate them about all the use cases."

CFO Amy Hood’s finance department has come to rely on algorithms—using them to help forecast sales and how many licenses the company will sell in a given period. "It turns out to be very, very accurate for that application," Sirosh says. "Amy Hood is a big fan of this. She can sleep nicer knowing that a machine learning model predicted her quarter."

 

Eoin Treacy's view -

Major Technology companies are investing heavily in machine learning with the aim of answering questions we have not yet learning how to ask. It’s hard to take the ego out of decision making. Strong personalities generally tend to get their way not because what they want is the most appropriate course of action but because they can shout loudest, have the best connections or the most persuasive argument. Machine learning holds out the promise of creating data driven business models with reduced influence of big personalities. We might someday hope that governments adopt the same data driven methods.



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February 22 2016

Commentary by David Fuller

How Technology Could Unwind a Decade-Long Trend in Global Trade

Here is the opening of this informative article from Bloomberg:

Two of the biggest forces influencing global economic activity over the past three decades—globalization and automation—have had polar-opposite effects on workers in emerging markets.

The former pushed multinationals to move production to countries with cheaper labor costs than advanced economies, while the latter effectively substitutes capital for labor in the production process.

In a note to clients, analysts at the Goldman Sachs Group Inc. led by Senior Asia Economist Goohoon Kwon discuss how these trends have affected the global trade picture.

To the extent that robots become a less expensive input than labor in the production process, multinationals will be encouraged to "onshore" output to move it closer to their customer bases. This would mark an unwind of the long-standing trade formula, which had the growth of global supply chains at its heart, and it is a net negative for global trade that would have far-reaching consequences.

There are nascent signs that this process may be in the works, as emerging market nations in Asia have seen export volumes nose-dive despite continued growth among their major trading partners:

David Fuller's view -

This is a hugely important development, and one that this service has discussed occasionally over the years.  Briefly, developed economies suffered during the earlier years of globalisation because their labour costs and currencies were too high, relative to developing economies.  This hollowed out industries in developed countries, as jobs and production facilities were moved overseas, with the Asia Pacific region being the biggest beneficiary. 

This item continues in the Subscriber’s Area.



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February 19 2016

Commentary by Eoin Treacy

NYSE Embarks on High-Stakes Technology Shift for its Exchanges

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

NYSE will take its time to move all its markets on to Pillar. NYSE Arca begins the migration on Monday, a delay from the original launch date in the third quarter of 2015. The other markets owned by NYSE Group Inc., including the New York Stock Exchange, won’t get the Technology until much later with the final market probably adopting Pillar in 2017.

The slow approach shows the firm’s caution after it had to halt trading on NYSE for more than three hours last July. A botched Technology upgrade was responsible for that outage.

“It will take a while to put everything on Pillar,” ICE’s chief executive officer, Jeff Sprecher, said on the company’s fourth-quarter earnings call. “We’re going to be relatively slow and deliberate.”

NYSE needs the upgrade to work. Its equity exchanges each run on different systems, unlike its main competitors -- Bats Global Markets Inc. and Nasdaq Inc. -- which use a single platform for all of their venues.

 

Eoin Treacy's view -

The shutdown of the NYSE in July jolted investor confidence in the Technology they require to execute trades and the breakdown of BNY Mellon’s ETF pricing engine in August resulted in a massive dislocation which acted as the catalyst for the ongoing correction in stocks. NYSE Arca, a major trading venue for NYSE and Nasdaq shares as well as a considerable number of options migrate on Monday. 



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February 12 2016

Commentary by Eoin Treacy

China Could Have a Meltdown-Proof Nuclear Reactor Next Year

This article by Richard Martin for the MIT Technology Review may be of interest to subscribers. Here is a section:

Construction of the plant is nearly complete, and the next 18 months will be spent installing the reactor components, running tests, and loading the fuel before the reactors go critical in November 2017, said Zhang Zuoyi, director of the Institute of Nuclear and New Energy Technology, a division of Tsinghua University that has developed the Technology over the last decade and a half, in an interview at the institute’s campus 30 miles south of Beijing. If it’s successful, Shandong plant would generate a total of 210 megawatts and will be followed by a 600-megawatt facility in Jiangxi province. Beyond that, China plans to sell these reactors internationally; in January, Chinese president Xi Jinping signed an agreement with King Salman bin Abdulaziz to construct a high-temperature gas-cooled reactor in Saudi Arabia.

“This Technology is going to be on the world market within the next five years,” Zhang predicts. “We are developing these reactors to belong to the world.”

Pebble-bed reactors that use helium gas as the heat transfer medium and run at very high temperatures—up to 950 °C—have been in development for decades. The Chinese reactor is based on a design originally developed in Germany, and the German company SGL Group is supplying the billiard-ball-size graphite spheres that encase thousands of tiny “pebbles” of uranium fuel. Seven high-temperature gas-cooled reactors have been built, but only two units remain in operation, both relatively small: an experimental 10-megawatt pebble-bed reactor at the Tsinghua Institute campus, which reached full power in 2003, and a similar reactor in Japan.

Eoin Treacy's view -

Regardless of the cost, China needs to import fossil fuels. From a national security perspective that’s a problem. Despite the fact the pace of growth is moderating the requirement the country is going to have for energy means they have little choice but to fund any and every potential Technology to supply their market. Nuclear is a big part of that and China is now the largest test bed for new reactor designs in the world. They will inevitably seek to capitalise on that investment and China is going to be a major competitor in the construction of nuclear reactors globally. 



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February 10 2016

Commentary by Eoin Treacy

Musings From the Oil Patch February 10th 2016

Thanks to a subscriber for this report by Allen Brooks for PPHB which may be of interest. Here is a section:

One aspect of the presentation we found interesting as a sign of Saudi Arabia’s thinking about the long-term outlook for the oil business was a discussion of research efforts underway at the company’s newest research center located in Detroit. That facility was opened last November. Its focus is fuel Technology and improved engines, but also strategic transport analysis. The latter effort involves scenario analysis of future transportation markets including ultimately issuing white papers on the topic.

With respect to their core Technology focus, they are targeting passenger and commercial fuels and engine technologies. From descriptions of some of their research efforts, it seems they are focused on autonomous vehicle development, although that term was never used. Mr. Al-Tahini said that the over-arching research goal is to produce the most fuel-efficient vehicle with the lowest emissions.

Our take-away from that part of the presentation was that at some point in the past, Saudi Arabian officials began considering the forces at work reshaping the transportation business, a market dominated by crude oil. One broad trend impacting that market is demographics, but there is little Saudi Arabia can do to change the impact. Understanding these trends and their impact on the market is critical for long-term planning.

In recent years, the environmental movement has aggressively targeted the fossil fuel industry, which has resulted in a tightening of fuel-efficiency and carbon emission standards, the elimination of fuel subsidies in a growing number of countries around the world, and a strong push to urbanize the population and increase transportation alternatives. All of these forces will impact the growth of the transportation fuels market.
Given those forces, we have concluded that Saudi Arabia believes that oil demand may be closer to a peak than previously thought. This does not mean that the oil industry is going out of business anytime soon, but rather that its growth will slow in the future. Market share growth for Saudi Arabia will need to come from someone else’s share, which means increased price competition. It also means trying to slow the development of alternative energy sources. Knocking out future oil sands and deepwater oil output as well as marginally shrinking shale oil opportunities will all benefit Saudi Arabia’s long-term market potential. Any negative impact on the oil output of other significant producers such as Russia, Iran and Iraq, coupled with boosting demand would all help Saudi Arabia. Lastly, technological developments that enable Saudi Arabia to reduce the cost and extend the life of its oil fields would also help the kingdom’s future. While none of this is new to our thinking, Mr. Al-Tahini’s presentation provided confirmation of what we think is motivating Saudi Arabia’s actions.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

How Saudi Arabia views the market for its products matters. If they truly believe that the peak in demand growth has been reached that would help to explain the beggar thy neighbour approach that has been adopted over the last year. Major oil companies have responded by shelving expansion plans, Alberta put off its desire for more royalties from its producers and we can expect to hear a lot more about refracking in the unconventional supply sector. 



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February 10 2016

Commentary by Eoin Treacy

Powering the EV growth

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

Promising outlook for lithium; initiating coverage on Tianqi with a Buy
Rapid commercial EV sales in China triggered the lithium carbonate price to jump 160% in the past six months. We believe the momentum of strong EV sales, especially commercial EV, will continue driving lithium demand in the coming years. In the EV/battery supply chain, we believe lithium is in a sweet spot, enjoying a tight demand/supply balance and favorable industry structure with the top four suppliers controlling c.86% of global supply. Tianqi is global No.3 lithium supplier and will likely be the major beneficiary of the favourable trend. We thus initiate coverage of Tianqi with a Buy.

Strong EV sales will to drive demand for lithium batteries 
In 2015, China sold 172,641 units of commercial EV, implying six-fold growth. We believe double-digit growth for commercial EV in China will likely continue as: 1) subsidies remain meaningful in absolute terms, 2) the subsidy policy now covers the whole country and more types of commercial EVs, and 3) the EV penetration for public buses has reached the critical scale to pull the sales momentum. We believe passenger EVs’ growth will also be strong in the coming five years, due to the government’s supportive policies. We believe overall Chinese EV sales (commercial plus passengers) will grow at 42% in 2016 and 30% in the next two years, and will drive lithium demand to post a 7-8% CAGR in the coming years.

Lithium as the upstream of EV/battery supply chain might be a sweet spot
Our investigation into the EV/battery supply chain suggests that lithium should be the sweet spot of the whole supply chain. Mid-stream producers might be facing technological uncertainty and aggressive capacity expansion. Downstream producers will need to continue to cut the cost of batteries and EVs to ensure greater end-customer adoptions. Only upstream lithium producers will fully benefit from this trend, regardless of Technology options. Meanwhile, the supply increase process of upstream players has been very slow. We also see c. 86% of market supply controlled by the top four suppliers as a major positive for lithium producers. Market concentration should sustain the lithium up cycle longer.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

From early in the last decade David characterised the developing bullish case for commodities as Supply Inelasticity Meets Rising Demand. The emergence of China onto the global market was creating outsized demand growth for industrial resources and companies were inhibited in their ability to increase supply following a generational long bear market. They invested hundreds of billions in increasing supply while China’s demand growth has tapered off leading to prices falling back to earth.

Lithium prices are not liquid but they have been inert for three years suggesting the relatively high price environment has not acted as a headwind for demand. With so much of global supply concentrated in the hands of only five companies their decisions on when to increase supply are likely to have a significant influence on the supply inelasticity argument as it pertains to lithium.  



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February 08 2016

Commentary by David Fuller

Let There Be Light in U.S. Markets

Here is the opening of this topical editorial from Bloomberg:

Renewed volatility in the U.S. stock market raises a question: If a freak event like the 2010 “flash crash” occurred again, would regulators have a better view of what was happening than they did back then?

Not really. And therein lies a crucial challenge for the Securities and Exchange Commission.

Periodic market glitches show how far the speed and complexity of trading has outpaced regulators’ capacity to monitor it. Over the past decade and a half, the daily volume of trade-related electronic messages has increased dramatically -- by one estimate, 500-fold. Meanwhile, regulators still rely on an outdated patchwork of surveillance systems lacking even basic information, such as reliable time stamps and customer identification.

At best, these systems can show only a partial picture of what happened, months after the fact. One tech executive says it’s like using bicycles to catch Ferraris.

After the flash crash, the SEC proposed a solution: Record all the activity in the stock and options markets, and have the data available for analysis fast. This “consolidated audit trail” would let regulators analyze anomalies and shed light on the causes of puzzling bursts of volatility. Better understanding could lead to better system safeguards -- and more sensible policing of the markets.

The project is complex, but not mainly because it requires the processing of 58 billion records a day. The bigger problem is the number of different organizations with a stake in the outcome -- and the fact that nobody has taken charge.

David Fuller's view -

Bloomberg’s Editorial Board has identified the problem but not the solution.  Outside regulators from the SEC or anywhere else will remain permanently behind in the learning curve, even if they employ a few people who have left the financial institutions. 

Financial regulation is unlikely to improve significantly unless a sufficient number of investment managers across the industry decide to work with each other and also with regulators, to create a level playing field.  I am not holding my breath because there is little precedent for such cooperation.

 

Note: for my comments on the bear trends for most stock markets, please listen to the Audios.   



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February 05 2016

Commentary by David Fuller

Tech Rout Caps Week of Reversals as Economy, Earnings Hit Stocks

Here is the opening of this topical report from Bloomberg:

Investors expecting the American economy to jolt equities out of their 2016 funk saw those hopes dashed this week as fresh signs of sluggishness sparked a selloff in Technology and consumer shares with the highest valuations.

The Nasdaq 100 Index plunged 6 percent in the week, with declines on Friday sparked by a mixed labor report that sent 90 percent of the gauge’s members lower for the five days. Disappointing results from LinkedIn Corp. to Tableau SoftwareInc. fed fears that momentum shares are hitting a wall at the same time economic data showed growth slowing in the services and manufacturing industries.

The selloff in U.S. stocks pushed the S&P 500 down by 8 percent in 2016, as investors fled riskier assets amid renewed concern that China’s weakness and a rout in oil are slowing the world’s largest economy. Damage was heaviest in the Nasdaq Composite Index, where losses now stand at 13 percent this year after the gauge outperformed the Standard & Poor’s 500 Index in every year since 2011.

“We are seeing some softening in the economy and until that reverses or there is more central bank accommodation, I think the market is going to continue to be vulnerable,” Russ Koesterich, global chief investment strategist at BlackRock Inc., said by phone. “It’s going to be hard for the market to go back to the old highs in the near future.”

David Fuller's view -

I think this is a cyclical or technical bear market – a stronger version of 2011 – rather than a far more serious secular bear such as 2008, in response to what we eventually learned was the worst credit crisis recession since the 1930s. 

However, the current bear trend is worse than 2011 because valuations on Wall Street are higher; leverage is greater, and most importantly, sovereign wealth funds in commodity exporting countries from Norway to Saudi Arabia are forced sellers.  Previously, when commodity prices were considerably higher, leading exporters of resources had positive cash flow and were channelling more money into their sovereign wealth funds.

These factors, and also the one sector which is performing, are discussed in greater detail in the most recent Audio.      



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February 05 2016

Commentary by David Fuller

The Rich Are Already Using Robo-Advisers, and That Scares Banks

Here is the opening from this informative article from Bloomberg:

Banks are watching wealthy clients flirt with robo-advisers, and that’s one reason the lenders are racing to release their own versions of the automated investing Technology this year, according to a consultant.

Millennials and small investors aren’t the only ones using robo-advisers, a group that includes pioneers Wealthfront Inc. and Betterment LLC and services provided by mutual-fund giants, said Kendra Thompson, an Accenture Plc managing director. At Charles Schwab Corp., about 15 percent of those in automated portfolios have at least $1 million at the company.

“It’s real money moving,” Thompson said in an interview. “You’re seeing experimentation from people with much larger portfolios, where they’re taking a portion of their money and putting them in these offerings to try them out.”

Traditional brokerages including Morgan Stanley, Bank of America Corp. and Wells Fargo & Co. are under pressure to justify the fees they charge as the low-cost services gain acceptance. The banks, which collectively employ about 46,000 human advisers, will respond by developing tools based on artificial intelligence for their employees, as well as self-service channels for customers, Thompson said.

“Now that they’re starting to see the money move, it’s not taking very long for them to connect the dots and say, ‘Whatever I offer for a fee better be better than what they’re offering for almost nothing,”’ Thompson said. Technology will “make advisers look smarter, better, stronger and more on top of the ball.”

 

David Fuller's view -

Robo-Advisers are an inevitable development and they are not just a fad that will pass with time.  Consider this – a smart computer programme can monitor every listed share on the planet, if that is the field which you or any other investor would like to survey.

This item continues in the Subscriber’s Area.



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February 05 2016

Commentary by David Fuller

Robot Drones Could Print Buildings and Disaster Shelters, Says Researcher

My thanks to a subscriber for this fascinating report from Imperial College London.  Here is the opening:

Drone swarms that can print emergency shelters for survivors of natural disasters are just around the corner, says Mirko Kovac in an interview.

Colin Smith visited Imperial College London’s flight arena, buried deep in the bowels of the Department of Aeronautics, to speak to Dr Kovac. In between carrying out tests on a prototype aerial robot for repairing oil pipelines, Dr Kovac spoke about his research and the future benefits aerial robotics could bring in construction.

Dr Kovac and his team have received more than £3.4 million in funding from the Engineering and Physical Sciences Research Council and industrial partners. His project will push forward the development of aerial construction-bots, equipped with 3D printing Technology, which excrete materials that can be used to repair or build structures.

One potential application is in disaster relief, says Dr Kovac. These types of emergencies can throw up all types of physical obstacles such as landslides and floods, which prevents teams from reaching those in need in a timely way. Dr Kovac says the aerial drones he is developing could fly to a disaster zone, scan and model the landscape using Building Information Management (BIM) systems, design temporary shelters, and print them on the spot. This could give those in need a place to live until emergency services personnel can reach them.

This process, called Additive Building Manufacturing (ABM), is already being trialled in many parts of the world by the construction industry. It involves the use of large robots on a building site that extrude building materials to construct buildings, similar to a 3D printer. This process has the advantage of reducing construction times, material and transport costs and easing traffic and environmental impacts. 

David Fuller's view -

This is by far the most exciting era of technological innovation, and the rate of achievement is accelerating.  



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February 03 2016

Commentary by David Fuller

This Man Wants to Upend the World of High-Frequency Trading

My thanks to a subscriber for the link to this article from MarketWatch.  Here is a brief section:

Exchanges began embracing electronic trading about three decades ago. Electronic trading enabled some companies to use market-moving information milliseconds before their competitors, sparking a technological arms race.

Over the past 15 years, meanwhile, the global financial market has fragmented: Where there were once three main U.S. exchanges, there are now more than 40 exchanges and alternative trading systems.

And high-frequency trading companies have largely replaced traditional broker-dealers, using algorithms instead of human traders to make decisions in milliseconds, mostly in response to orders made by other algorithms.

Technology has made trading faster and more efficient. But the system is also more opaque, and some wonder whether high-frequency trading companies are profiting at the expense of institutional and retail investors.

“There are probably about 5,000 people who know how the trading system works but none of them will speak about the way these high-frequency firms make money,” said a financial industry insider, who spoke on the condition they not be named because their employer had not authorized them to discuss the matter publicly.

On May 6, 2010, the Dow Jones Industrial Average plummeted nearly 1,000 points, then its biggest intraday point drop ever. A government investigation blamed a big order that triggered a selloff for the “Flash Crash,” but couldn’t identify the structural problem that led to markets plunging 10% in 20 minutes before rising again.

Hunsader’s research, published that June, suggested that high-frequency trading companies responded to the first big order by flooding the market with orders that were withdrawn before they were filled, overwhelming the central feed of pricing information other investors needed to complete trades.

The practice, Hunsader says, created illusory liquidity that led to the “Flash Crash” and other dramatic market events that followed. (He coined the term “quote stuffing” to describe it.) “It was a bit like a denial-of-service attack on a website,” said Hunsader. “The system can’t handle it and crashes.”

Hunsader, sure he’d identified a core structural issue, later published more than 2,000 more reports — some a few sentences, others more detailed explanations of how he says markets are manipulated.

“I peeked behind the curtains and did not like what I saw,” said Hunsader.

In the reports, and on social media, he criticizes high-frequency traders, which he says use Technology to break Securities and Exchange Commission trading rules; exchanges, which he says benefit from immunity from prosecution and turn a blind eye to wrongdoing; and regulators, who he says don’t do enough to protect investors.

David Fuller's view -

For a number of years high-frequency trading firms have been operating computer driven, predatory, front-running systems which should be illegal but too often are not.  This tells us that many of our market officials and regulators are amoral at best. 



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February 01 2016

Commentary by David Fuller

China in Crisis? Another Credit Crunch in the West Is Far More Likely

Bad, yes. But getting worse? Recent movements in stock markets have been dominated by precipitous falls in China. China bears predict that the current issues will deepen, turning into troubles similar to those that caused the financial crisis of 2008-09. I do not think this will be the case.

In the past 20-odd years there have been three periods of bubble-like conditions globally: the Technology boom of the late 1990s, the credit binge in the mid-2000s and a bubble in commodities in the last decade. The first boom led to overbuilding of cable infrastructure and permanent loss of capital in the Technology sector.

The second boom led to over-borrowing and the default of several banks. The commodity bubble bursting is likely to lead to the default of commodity-producing businesses – and perhaps of some Chinese banks too – and to a glut of excess productive capacity.

If the primary result is cheap commodities, then many consumers and developing nations (such as India) will benefit.

Secondly, while the fragility of the financial system was exposed in 2008-09, I do not expect a rerun: especially in Britain and America, banks are much stronger and have learnt many lessons.

Crises rarely repeat themselves exactly, but investors naturally recall the last crisis and re-predict it, even if they almost certainly didn’t see it coming last time. There are too many vocal bears out there now compared with 2008. For example, RBS recently urged investors to “sell everything”. I cannot recall any such warning in 2007 or 2008.

• Time to 'sell everything'? No, this is when 'hold everything' works

My greater concern is that while looking for troubles in the East, investors are neglecting unsolved problems in the west. In the context of poor growth, the high levels of sovereign debt in many developed nations are unsustainable. This has been masked temporarily by the actions of central bankers, who have suppressed interest rates to historical lows and in turn made borrowing costs appear manageable.

David Fuller's view -

 

This is a sensible article, in my opinion, and I think it will interest subscribers. 



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February 01 2016

Commentary by David Fuller

Big Biotech is Still Compellingly Valued

Veteran investors will remember the first boom in bioTechnology shares in the late Nineties. Prices crashed and brave backers vowed never to go there again.

But biotech is hard to ignore given the incredible gains of the past decade, driven by an ageing population and demands for better health care. Leading the charge has been the Biotech Growth investment trust. It has been run by Geoffrey Hsu of OrbiMed Capital since 2005. He also runs theWorldwide Healthcare Trust.

At its peak in July, Biotech Growth’s returns equated to more than 20pc a year over a decade. Even after falling hard since then, the five-year return still stands at 282pc, turning £1,000 into £3,820.

Have biotech shares become overvalued?

There are some pockets of overpriced stocks in emerging biotech but big biotech still has compelling valuations.

The sell-off we have seen since the start of the year really can’t be justified. It’s to do with the slowdown in China and the falling oil price. Biotech has no exposure to any of that.

Our chart (see below) shows that previously when the big biotechs have been cheaper, on price-to-earnings ratios, than the S&P 500 index it has turned out to be a good time to buy, which is the case now.

We believe the possibility of mergers provides a “valuation floor” for biotech. Single-product companies valued at $5bn to $10bn are in the sweet spot. We saw in 2015 that companies were still being bought at huge premiums of up to 140pc.

David Fuller's view -

The bubble for the Nasdaq Biotech Index has certainly burst, so what happens next?

This item continues in the Subscriber’s Area, where a PDF of The Telegraph article is also posted.



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January 29 2016

Commentary by Eoin Treacy

Microsoft Cloud-Fueled Revival Persists as Azure Sales Jump

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

The gains add to optimism that Chief Executive Officer Nadella can revitalize growth by focusing on Web-based services and productivity applications. More than 70 percent of Fortune 500 companies are now using at least two different Microsoft cloud services, Nadella said on Thursday. His plan to focus on apps for rival platforms is also attracting users, with 340 million downloads of Office apps on Apple Inc.’s iOS and Google’s Android.

While Nadella pushes expansion, Chief Financial Officer Amy Hood is reining in costs.

“They have two things going for them -- one, the belief that Nadella is driving innovation towards the cloud, and No. 2, Amy Hood has had a blowtorch out on expenses," said Brent Thill, an analyst at UBS AG, referring to Microsoft’s chief financial officer. “It’s a totally different vibe coming out of that place that it was three years ago."

 

Eoin Treacy's view -

Governance is everything has been a refrain veteran subscribers will be familiar with. Microsoft offers a powerful example of how a newly energised board can have a transformative effect on earnings and perhaps more importantly perceptions of further potential. 



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January 28 2016

Commentary by Eoin Treacy

The Agony & The Ecstasy

Thanks to a subscriber for this report from JP Morgan Asset Management which may be of interest. Here is a section:

As mentioned in the Health Care section on page 23, while 2000-2001 was the peak distress period for biotech and life science companies, there has been a steady drumbeat since, with over 100 biotech and life science catastrophic loss events since 2002 (see bar chart). We referenced earlier research showing that even when a drug finally gets to Phase 3 trials, the probability of failure can still be as high as 50%. One possible emerging challenge for the biotech industry: patent trolls. For funding and other reasons, some universities are under pressure to monetize their patents by transferring rights to “assertion entities”. As per a 2014 paper from the University of California Hastings College of Law, as these patent sales take place, the risk to biotech and pharmaceutical companies with existing products on the market increases dramatically. Such patents can cover active ingredients of drugs, methods of treatment, screening methods to identify new drugs, manufacturing methods and dosage forms.

In the table, we show some of the more recent catastrophic losses (companies reaching the 70% decline threshold in 2012 or 2013). Biotech companies can experience periods of depressed stock prices as trials fail or have to be rerun, with some surging when/if success eventually occurs, or when they are bought by larger companies. As a result, the table below captures catastrophic loss at a point in time (Spring 2014), and does not represent a final assessment of each firm’s future prospects.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

This is a useful report laying out the argument for a diversified approach to long-term investing while also highlighting just how much leaders outperform. A central part of the thesis we developed following the credit crisis was to rely on leadership and to favour pre-eminent companies within their respective sectors. Part of the reason for this is because capitalism trends towards concentration. This favours large companies that have the wherewithal to acquire emerging Technology and the best assets of troubled competitors. As the report details, the majority of shares perform unremarkably while the leaders lead by a considerable margin. That is why we created the Autonomies theme. 



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January 21 2016

Commentary by David Fuller

The World Has Discovered a $1 Trillion Ocean

Here is the opening of Bloomberg’s article by Eric Roston on this significant development:

As chairman of investments at Guggenheim Partners, Scott Minerd thought he had a realistic view on how big an economic challenge climate change poses.

Then, at a Hoover Institution conference almost three years ago, he met former U.S. Secretary of State George Shultz. Minerd recalled him saying: “Scott, imagine that you woke up tomorrow morning, and the headline on the newspapers was, 'The World Has Discovered a New Ocean.’” The opening of the Arctic, Shultz told him, may be one of the most important events since the end of the ice age, some 12,000 years ago.

And while Shultz’s spokesman couldn’t confirm the conversation, there’s no doubting the melting of the Arctic ice cap, and the unveiling of resources below, presents mind-boggling opportunities for energy, shipping, fishing, science, and military exploitation. Russia even planted its flag on the sea floor at the North Pole in 2007.

Energy and shipping have been first up. Norway made its national fortune drilling in northern waters, and Arctic fossil fuel exploration has become a more prominent part of U.S. energy policy. Melting ice means that in summer months, cargo can travel approximately 5,000 km from Korea to New York, rather than the 12,000 km it takes to pass through the Panama Canal. Warming waters also open up access to commercial fish stocks, making the Arctic a growing source of food.

David Fuller's view -

The headline and text of Eric Roston’s article clearly view the opening of the Arctic for commercial ventures as a huge opportunity.  Well, trade routes through the Arctic will be convenient for some but technological advances already ensure that we have more than enough oil, gas and minerals.  This is confirmed by today’s low prices for these resources.  That may change some day but I think the continued and even accelerating advance of Technology will provide the industrial resources, or even better substitutes, that the world will require. 

The melting of Artic ice is also further confirmation of climate change in the form of global warming.  This will have some very negative consequences, most likely starting with an increase in the rate of rising sea levels.  The article mentions fishing but not any of the negative consequences.  The last thing our dwindling fish stocks require is the plundering of their last refuge as factory ships sweep up critical supplies.       



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January 20 2016

Commentary by Eoin Treacy

Email of the day on new nuclear

This article recently published by Bloomberg caught my eye.   Do you have any insight into the Technology and its potential? 

Eoin Treacy's view -

I’ve been watching the Small Modular Reactors (SMR) sector for a number of years because it has the potential to drastically change the way the nuclear sector is perceived. With smaller designs and generation IV Technology many of the issues associated with nuclear can be avoided. In additional the plan to build them in a factory in a process that can be repeated should help to control costs. 



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January 19 2016

Commentary by David Fuller

Better Living Through Robots

Here is the latter section of this interesting article from Bloomberg:

Brynjolfsson says companies are in the early stages of figuring out how to retool their processes to take advantage of digital tools such as big data and machine learning. He also says our current method of measuring gross domestic output, and by extension productivity, does a poor job of capturing the value of free goods. “If you’re giving an app away for free that does something you used to pay for, then it’s going to initially make GDP smaller,” Brynjolfsson says.

Hal Sirkin, a senior partner at Boston Consulting Group, points out that robots currently perform only about 10 percent of manufacturing tasks. “We project that over the next 10 years, that might increase up to 20 or 25 percent. So there is a long way to go on that productivity curve.” Sirkin and his colleagues at BCG forecast that by 2025, wide-scale adoption of advanced robots will increase productivity as much as 30 percent in some industries, including machinery and appliance manufacturing, and lower total labor costs 18 percent.

Whatever you believe about Technology’s role in productivity, there’s broad consensus that the outlook for unskilled workers isn’t good. In a speech this November, Bank of England Chief Economist Andy Haldane said he and his staff had modeled the effects of automation on the U.S. and U.K. labor markets and concluded that 80 million jobs in the U.S. and 15 million in the U.K. were at risk.

A BCG report from September 2015 that examined the impact advanced Technology could have on Germany’s manufacturing sector concluded that if 50 percent of companies adopted new tools such as autonomous robots and 3D printing by 2025, industrywide revenue could rise 1 percent, leading to an additional 350,000 jobs. If revenue were to rise only 0.5 percent, however, the result would be a net loss of 40,000 jobs. “It’s a real possibility that if we do nothing, that inequality can get worse and more people end up getting left behind,” Brynjolfsson says. “But it’s not inevitable, and it comes down to a set of policy decisions we make. If through Technology we can create more and more wealth for less and less work, then shame on us if that’s a bad thing.”

David Fuller's view -

New technologies are disruptors, at least initially, especially in the way they reduce costs.  There are endless examples which we can recall, and that sentence from Erik Brynjolfsson above provides a useful example:

“If you’re giving an app away for free that does something you used to pay for, then it’s going to initially make GDP smaller.”

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January 13 2016

Commentary by Eoin Treacy

Email of the day on molten salt nuclear reactors

Some encouraging news from the advanced nuclear sector. I am pleased to see that Terrestrial Energy (disclosure: I own shares) has successfully raised the equivalent of USD 7m in equity. Albeit modest, it is an important step forward. The company is making steady progress in its task to finalize its Molten Salt Reactor design, while the next step is to work with Canadian authorities with the aim to license the Technology. Commercialization in the first part of the 2020’ies is still some years ahead, but this Technology should, as I hope and believe, prove to be an important tool to reduce carbon emissions in the future.

Eoin Treacy's view -

Thank you for this update and the MIT review articles which gives additional insights on the development of new nuclear. Perhaps the greatest challenge facing the nuclear industry is that despite the fact Technology continues to improve quickly, regulatory change is moving at a glacial pace. With sufficient government backing there is credible scope for new nuclear to flourish but it is dependent on political will to make it happen.



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January 07 2016

Commentary by David Fuller

Beware Biotech Secondary Swarm

Here is the opening of this informative article from Bloomberg:

Monday was a possibly record-setting day for biotech IPO announcements. Tuesday looks to have been the same for secondary offerings in the industry.

Eight different biotechs announced equity financing efforts that day, and another three announced on Wednesday. We only have pricing for some of the offerings, but Bloomberg puts the total amount firms hope to raise so far at more than $1.2 billion. 

The market was less than enthused: Every single one of the companies that filed on Tuesday traded lower on Wednesday, several of them down as much as 20 percent. No one quibbles with the idea that biotechs need to raise money to develop drugs or operate. But the timing seems off: These secondaries come in the middle of a nasty selloff in the broader market -- not exactly the most favorable environment. It is a far cry from the early part of 2015, when biotechs often saw big price gains after a secondary. 

It is at least slightly better timing than last autumn, when pharma and biotech were getting hammered. And the filings come just ahead of JPMorgan's health care conference next week, a good time to talk up a company trying to raise money.

David Fuller's view -

This week’s slide by the Nasdaq BioTechnology Index provides further evidence that last year’s runaway stock market success story has an extended top formation, which will bring valuations for its more expensive shares closer to Earth.  

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January 05 2016

Commentary by David Fuller

Email of the day

In reply to Allister Heath’s article in The Telegraph: The Collapse in the Price of Oil is a Challenge to the Old World Order, 31st December 2015, which I posted and commented on: 

As a keen amateur historian I was very interested in the piece by Allister Heath on Thomas Malthus. I would like to play the role of Devil’s advocate here and suggest that things might not be quite so rosy regarding our future comfort on the planet. Malthus was plainly wrong in not considering the incredible capacity of humans to innovate and develop technologies regarding supplies of essential commodities. In one respect however he may still be correct in his basic proposition, namely population growth of our species outpacing our resources at some point. In 1800 there were about 1 billion people on the planet. Today 7.3 billion rising to 11 billion in 2050. While it is true rabbits cannot control their birth rates and we can. The fact is we don't. The control that women have over their bodies is reserved for a privileged few in well-educated western style economies. For vast areas of the globe women are, for cultural or religious reasons totally subservient to men, having no control whatsoever over their bodies. I have just been reading the latest statistic concerning teenage pregnancy here in South Africa. Whereas there were 60 thousand teenage pregnancies in 2011, last year this figure was more than double. Many of these girls are under 15. The whole matter of population of course, impacts directly on climate change and our use of fossil fuels. The development of China over the last 30 years has changed everything. All our talk of green energy is all very well but China still relies on fossil fuels for 85% of its energy needs. On official statistics it burns 3.5 billion tonnes of coal as compared to the US one billion tonnes Last year extreme weather events made headlines again, the main one being a record breaking El Nino currently wreaking havoc in the UK and here in South Africa causing a year long drought and record high temperatures. I think we have at least to consider the possibility of global warming entering an acceleration phase.

David Fuller's view -

Many thanks for your interesting and thoughtful email, covering many points.  

Regarding the forecast of 11 billion people in 2050, which I have also heard, I am wary of such extrapolations that far into the future.  It could be right, for all I know, but if we consider the possibility of global warming entering an acceleration phase, as you suggest, subject to severity that could easily reduce populations.  More likely, I hope, education and greater prosperity, leading to a larger middleclass in the world’s poorer regions would also reduce or at least slow population growth.

Regarding air pollution, I have long maintained that we need a little luck, mainly in terms of time, to successfully curb this problem before it is seriously out of control.  Thereafter, Technology is the key and fortunately the world is increasingly focussed on this challenge. Great strides have been made and China’s government is now engaged in the effort to reduce CO2 emissions. So I am hopeful, but far from complacent.   



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January 05 2016

Commentary by Eoin Treacy

The Last Innings

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

While it is hard to gauge the extent to which these three factors have slowed this recovery we believe that they have had some impact. The long-term benefits of information Technology will likely more than offset such short-term disruptions to fixed asset investments. Similarly, we think the drag from offshoring to China has run its course as China has become a less competitive exporter.

With respect to the excess capacity from China and the drag on global growth, we believe that China’s ongoing investments in new industries such as airplanes and arms will affect the profitability of other multinational companies, reduce their prospective growth trajectories and indirectly lower growth in fixed asset investments.

Finally, we conclude with some data from the seminal work on financial crises by Carmen Reinhart and Kenneth Rogoff, This Time is Different: Eight Centuries of Financial Folly, which shows that the recoveries from financial crises are systematically more muted.44 What is most relevant in the context of our cautiously optimistic outlook for growth and financial markets is the fact that in the 10-year windows following severe banking crises that Reinhart and Rogoff examined, growth picked up substantially in the second five year period relative to the first. In the post-WWII era, on average, developed economies grew 2.1 percentage points faster in the second five-year period relative to the first five years after the onset of the crisis. Similarly, emerging market economies grew an average 3.2 percentage points faster.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The news headlines are afire with tales of terrorism, war, environment disaster and human misery and yet the stock market has been rallying for more than six years. There is no doubt geopolitical tensions have increased and the Fed is raising rates, from incredibly low levels, for the first time in almost a decade.so there is some justification for anxiety. However that does not mean all stocks are performing in a similar manner. 



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January 05 2016

Commentary by Eoin Treacy

Gene-Editing Drugmaker Backed by Google, Gates Files for IPO

This article by Caroline Chen and Alex Barinka for Bloomberg may be of interest to subscribers. Here is a section:

Editas Medicine Inc., the drugmaker whose backers include Bill Gates and Google Ventures, filed to become the first publicly traded company to specialize in a new Technology to edit flaws in genes.

The company, which uses a gene-editing technique called Crispr, filed Monday for the IPO with an initial size of $100 million. That’s a placeholder amount used to calculate fees and will probably change.

Gene-editing startups have drawn more than $1 billion in private venture-capital investments since 2013, according to Boston Consulting Group, with investors hopeful that new, more precise DNA-editing capabilities will yield treatments for conditions as diverse as blood diseases, cancers, auto-immune disorders and inherited eye disorders. 

Cambridge, Massachusetts-based Editas has raised $163.3 million from selling preferred stock, its filing said. Venture capital firms Flagship Ventures and Polaris Partners each hold more than 15 percent of the company before the offering. Google Ventures -- the unit of Alphabet Inc. that goes by GV for short -- has also bought private shares, along with Gates and Khosla Ventures.

Rodger Novak, chief executive officer of Basel, Switzerland-based Crispr Therapeutics Ltd., has said he would consider an IPO this year. Both companies have said their first in-human trials won’t start until 2017. Other closely-held gene editing firms include Intellia Therapeutics Inc. and Poseida Therapeutics Inc. Bayer AG and Crispr Therapeutics also started a joint venture in December with a $335 million investment from Bayer.

 

Eoin Treacy's view -

There is still an ongoing emotive debate about the virtues of genetically modified food with North America championing the sector while Europe has taken a much more cautious and often aggressive opposing view. Despite fear of the unknown, which would appear to inspire much of the emotive commentary on genetics, the potential for truly life changing innovation is undiminished. 



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December 31 2015

Commentary by David Fuller

The Collapse in the Price of Oil is a Challenge to the Old World Order

It is one of life’s mysteries that being wrong about everything has never been much of a barrier to success. Take Thomas Malthus, the British theologian: his big idea was that the number of human beings would necessarily grow faster than the supply of food, leading to calamity. There was little difference, in his mind, between people and rabbits: both were doomed to over-breed, over-consume and starve.

Yet this theory, expounded in 1798 in An Essay on the Principle of Population, one of the most influential books ever written, and now also routinely applied to oil and other resources, is bogus. Unlike rabbits, who are powerless to control their environment, the more we need, the more we eventually find a way of producing: the availability of food and oil are determined by Technology and economics, not by some law of nature. Modern techniques (such as fertilisers, genetic selection or fracking) mean that agriculture and the extraction of commodities have become hugely more efficient.

The average British field yielded just over three tons of cereal per hectare per year in 1961; today, it is twice that. Thanks to the spread of free markets and knowledge, the world has never produced so much food, and the number of hungry people worldwide has dropped by 216m since the early Nineties, according to the United Nations.

Ditto oil production: in 2000, the Energy Information Administrationestimated that the world contained just over one trillion barrels of untapped oil; since then, proved reserves have shot up by 60pc, increasing every single year despite booming consumption from energy-thirsty emerging markets.

Malthus wasn’t just far too pessimistic about supply: he was also wrong about demand. Rabbits can’t control their birth rates; we can. As more countries embrace markets and globalisation, thus ensuring that their economies develop, global birth rates keep on falling. As to energy consumption, it is just a matter of time before improved battery Technology and ever-cheaper solar power finally lessen our dependence on the internal combustion engine and oil. We will eventually be able to feed and fuel the world’s population using significantly less land and fewer hydrocarbons than we do today.

Jesse H Ausubel, an academic at the Rockefeller University in New York, has calculated that an area the size of the Amazonian forest could be returned to wildlife when the average farmer around the world becomes as productive as their US counterparts. Ausubel calls this the Great Reversal: nature’s chance to restore land and sea to their original use. It is an intriguing and exhilarating prospect, made possible by the wonders of capitalism, innovation and human ingenuity.

The abject failure of Malthusianism was, in fact, one of the defining trends of 2015, especially in the oil market; it will continue to be one of the central forces of 2016, impacting everything from how quickly the Bank of England puts up interest rates, to the stability of the Middle East. The price of Brent crude oil, which briefly reached $147 a barrel in 2008, is now down to around $37. Some analysts even believe it could fall briefly to $20, especially if more Iranian supplies than expected hit the global markets.

David Fuller's view -

People are susceptible to Malthusianism because running out of what we need and want – food, companions, shelter, money – is a primal instinct. Fortunately, it motivates most people on a needs must basis.  However, it can also overwhelm some with feelings of anxiety and loss. 

As investors with a sense of history, we know that most markets have not only survived but also thrived after much more worrying events than we are witnessing today.  We also know that the world improves more often than not, in terms of GDP growth, technological innovation and life expectancy.  This is reflected by stock markets over time, to the benefit of sensible, worldly investors who buy low and sell high.   

A PDF of Allister Heath's article is posted in the Subscriber's Area.



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December 31 2015

Commentary by David Fuller

General Electric to Acquire Metem in a Small, But Significant Transaction

On December 28, General Electric (NYSE:GE) agreed to purchase Metem , a privately held company manufacturing based in New Jersey that specializes in making turbines last longer and operate more efficiently. The acquisition comes on the heels of GE's acquisition of Alstom in November.

The Alstom deal is expected to the crowning achievement of CEO, Jeff Immelt's management team, adding $0.05/share in 2016 and $0.15/share by 2018. Alstom will help GE achieve its re-industrialization strategy, eventually being 90% industrial and 10% capital.

The acquisition of privately held Metem, while small, is significant. It symbolizes a pro-active GE, willing to do what is necessary to 1) improve the efficiency of operations and 2) maximize profitability.

Metem is an example of the type of company that used to be widely prevalent across the United States, a manufacturing-oriented firm with strong, highly specific Technology. In Metem's case, the company, which was founded in 1962, has an expertise in turbine cooling.

"Metem Corporation has facilities globally that innovate, drill, and machine precise cooling holes and other advanced features into hard super-alloy turbine components using sophisticated machining processes. The processes range from EDM to STEM drilling and other ECM applications with a suite of supporting capabilities that includes CNC Milling and part assemblies. Through these fully-integrated diverse capabilities, Metem offers the flexibility to machine engine-ready components globally in high volumes. "

Metem, has developed (for a small company) a very nice Intellectual property ("IP") portfolio, and has been forward looking with respect to IP and manufacturing, establishing a production and R&D facility in Hungary in 2005 and acquiring 50% of ECM Technologies, an advanced precision electrochemical R&D machining company in The Netherlands in 2012. Overall, Metem has 280 employees.

David Fuller's view -

I bought General Electric for my medium to longer-term trading account back in April, because after a long period of underperformance it was in the process of selling off its GE Capital unit.  The next few months were inauspicious for GE and Wall Street, not least with the August meltdown, resulting in the S&P 500’s first correction of over 10% in over four years. 

However, GE began to perform when Nelson Peltz’s Trian made a big bet on the company.

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December 29 2015

Commentary by David Fuller

Saudi Riyal in Danger as Oil War Escalates

Here is a middle section from this highly informative article by Ambrose Evans-Pritchard for the Daily Telegraph:

Dr Alsweilem, now at Harvard University's Belfer Centre, said the Saudi authorities have taken a big gamble by flooding the world with oil to gain market share and drive out rivals. “The thinking that lower oil prices will bring down the US oil industry is just nonsense and will not work.”

The policy is contentious even within the Saudi royal family. Optimists hope that this episode will be a repeat of the mid-1980s when the kingdom pursued the same strategy and succeeded in curbing non-OPEC investment, and preparing the ground for recovery in prices. But the current situation is sui generis.

The shale revolution has turned the US into a mid-cost swing producer, able to keep drilling at $50bn a barrel, according to the latest OPEC report. US shale frackers can switch output on and off relatively quickly, acting as a future headwind against price rises.

The energy intensity of global GDP is falling rapidly. Renewable Technology and energy efficiency have both made huge strides. The latest climate accords in Paris imply some form of carbon tax that will ratchet upwards over time, slowly changing the cost calculus for oil use.

“There is an overwhelming feeling among many in Saudi Arabia that this crisis is just cyclical and that it will reverse soon, so everything will be OK. But the danger is that what is happening is structural, and that means a country like Saudi Arabia can’t just sit still,” said Dr Alsweilem.

The Saudi government may have unveiled an austerity package of spending cuts and increased taxes, and be looking to slash electricity and water subsidies for the wealthy. But Riyadh has to tread with care. The country’s cradle-to-grave welfare system is what keeps a lid on dissent and binds the country’s fissiparous tribal polity.

Prince Mohammed bin Salman, the 30-year old deputy crown prince now running the country, is trying to push through radical reforms, firing princelings from sinecure positions and bringing in an elite team of technocrats to transform Saudi Arabia’s archaic oil-based economy.

He is drawing on a McKinsey study – ‘Beyond Oil’ - that sketches how the country can break its unhealthy dependence on crude, and double GDP by 2030 with a $4 trillion investment blitz across eight industries, from petrochemicals to metals, steel, aluminium smelting, cars, electrical manufacturing, tourism, and healthcare.

David Fuller's view -

I do not know if Dr Khalid Alsweilem, the former head of asset management at the Saudi central bank, has much influence with King Salman.  However, 30-year old and highly influential Prince Mohammed bin Salman may understand, given the concluding paragraph above. 

However, Saudi governments remain compromised by their Faustian pact with the contemporary Wahhabis who have spread their intolerant faith far beyond the Middle East, in an effort financed by Saudi billions as the price of crude oil mostly rose from the 1970s until mid-2014.  With that stream of funding now inevitably reduced, one might hope that intolerant Wahhabism was now in decline, although the outcome may be less reassuring.  

This item continues in the Subscriber’s Area, where more charts and another article are posted, in addition to a PDF of AE-P’s article.



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December 29 2015

Commentary by Eoin Treacy

Musings From The Oil Patch December 29th 2015

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

California’s proposed rule that a driverless vehicle must contain a steering wheel and a brake pedal for emergencies, goes against the grain of the Technology industry that has been leading the development of these vehicles and cannot imagine a situation where the specified equipment would be necessary. It is akin to the continued existence of the emergency brake, a seldom used feature on a car, or directional signals, which many people seem to consider as unnecessary. The mandated equipment will certainly alter a passenger’s experience from that of a 21st Century, space-age vehicle to merely being a passenger riding in a modern automobile.

And   

Stretching out the transition time to a totally driverless vehicle fleet will also delay some of the anticipated economic and energy benefits envisioned. The world of a complete fleet of autonomous vehicles would allow them to be smaller and lighter, reducing the energy needed to produce them and power them. The absence of accidents would reduce the economic impact of injuries, physical damage and deaths, along with limiting or even ending the need for personal automobile insurance and the costs of accident litigation. If driverless vehicles could operate without human drivers, many families might also eliminate the need for second or third cars by being able to overlap their use of one vehicle, even though it would mean that vehicle would drive considerably more miles per year than the typical family’s current vehicles do. Net-net there should be an energy savings. Lastly, fewer vehicles would mean less need for expanded highways and parking spaces, freeing up urban land for alternative uses. California’s stance on driverless vehicles would seem to be slowing down the shift to our transportation nirvana and actually extending the petroleum age.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

California’s laws on what need to be inside an autonomous vehicle, including a driver for example, are likely to represent a brake on the sector’s progress. However as anyone who actually drives a car knows there is a difference between what the law says and what the experience of driving is. 



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December 29 2015

Commentary by Eoin Treacy

Email of the day on Bitcoin

The Reuters' report is encouraging but you say "Bitcoin may succeed or fail". I have heard that it is just another Ponzi scheme that will leave investors holding an empty bag. How likely is a failure? Does anybody know?

Eoin Treacy's view -

Thank you for this question as it helps to separate the ideas of how closely Bitcoin resembles a currency from the Technology that underlies it, which is called the blockchain. This is important from the perspective of an investor because while the value of bitcoin varies with supply and demand, the blockchain can be developed independently of the value of bitcoins. This is what major financial institutions are now doing and Nasdaq is already testing how to record ownership of some shares via blockchain protocols. . 



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December 28 2015

Commentary by Eoin Treacy

Hon Hai proposes deal to buy Sharp

This article from Taipei Times may be of interest to subscribers. Here is a section

According to the report, while Hon Hai — known as Foxconn Technology Group (???) outside Taiwan — has proposed acquiring Sharp at a high premium, it also wants Sharp’s current management team, including president and chief executive officer Kozo Takahashi, to step down.
Hon Hai would send a team to Sharp to manage the firm, the report said.

Hon Hai also plans to take over the debt shouldered by Sharp to help the firm address its financial problems, the report said.

However, the report also said that Hon Hai has yet to talk with Sharp’s bank creditors.

The report said that Sharp was shouldering about ?760 billion in debt as of the end of September.
Hon Hai is not the only potential suitor seeking to buy Sharp, the report said, adding that the Innovation Network Corp of Japan (INCJ), which is sponsored by the Japanese government, is studying a buyout of Sharp.

The report said that the INCJ still needs some time to map out a concrete acquisition deal, and the proposal is unlikely to come out until next year, so Hon Hai is taking advantage of the vacuum created to make a deal.

 

Eoin Treacy's view -

Hon Hai Precision is best known for assembling Apple’s iPhone as well as being one of the world’s largest employers. As a fabless manufacturer it generally does not promote its own brands so the potential acquisition of a manufacturer with global brand recognition such as Sharp is an interesting development. 



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December 24 2015

Commentary by Eoin Treacy

Record highs predicted for bitcoin in 2016 as new supply halves

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

The reason 2016 looks set to be different is that bitcoin's price is likely to be driven in large part by similar factors to a traditional fiat currency, following the age-old principles of supply and demand.
Instead of being controlled by a central bank, bitcoin relies on so-called "mining" computers that validate blocks of transactions by competing to solve mathematical puzzles every 10 minutes. In return, the first to solve the puzzle and thereby clear the transactions is currently rewarded with 25 new bitcoins, worth around $11,000 BTC=BTSP.

But when it was invented in 2008 by the mysterious "Satoshi Nakamoto", who has yet to be identified, the bitcoin program was designed so that the reward would be halved roughly every four years, in order to keep a lid on inflation. The next time that is due to happen is July 2016.
Bitcoin was also designed to emulate a commodity by having a finite supply of 21 million bitcoins, which will be reached in around 125 years, up from around 15 million today. Hence, also, the use of the term "mining".

Daniel Masters, co-founder of Jersey-based Global Advisors' multi-million dollar bitcoin hedge fund, started his career as an oil trader at Shell in the mid-1980s and spent 30 years trading commodities before crossing over to bitcoin.

Now he reckons the price of bitcoin could test its 2013 highs of above $1,100 next year and then pick up speed to rise to $4,400 by the end of 2017.

That would be due to a number of factors, Masters said, including an increased acceptance of payments in bitcoin by big companies and authorities, rapidly growing interest and investment in the "blockchain" Technology that underpins bitcoin transactions, and also more demand from China as its currency weakens and the economy slows.

But taken in isolation, the halving of the mining reward will increase the price of bitcoin by around 50 percent from where it is now, Masters reckons. That is despite the fact that the halving of the reward has always been inevitable - a factor that would already have been accounted for in pretty much every other market.

Eoin Treacy's view -

With the revaluation of Bitcoin set for July 2016 we can anticipate hearing much more about the cryptocurrency in the next six months. 

Perhaps more important is that large banks are attempting to register patents so that they can use the blockchain as an incorruptible filing system for recording ownership of assets such as stocks and bonds as well as transactions. Bitcoin may succeed or fail but the blockchain Technology it rests on is almost certainly going to be commercialised because it represents such an enormous potential cost saving apparatus for the financial sector. 

 



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December 23 2015

Commentary by David Fuller

OPEC Sees Demand for Its Crude Oil Falling for Rest of Decade

Here is the opening from this topical article from Bloomberg:

OPEC said demand for its crude will slide to 2020, though less steeply than previously expected, as rival supplies continue to grow.

The organization will need to pump 30.7 million barrels a day by the end of the decade, OPEC said Wednesday in its annual World Oil Outlook. That’s 1.7 million barrels more than projected a year ago, and 1 million less than the group pumped in November.

The forecast underlines the struggle faced by the Organization of Petroleum Exporting Countries as it seeks to defend market share against a surge in output from rivals such as the U.S. and Russia. While OPEC is slowly taming the expansion of competitors, the collapse in oil prices means the financial costs of its strategy are immense. Brent crude futures touched an 11-year low of $36.04 a barrel on Dec. 21.

“Although lower oil prices continue to foster some demand growth, their impact seems to be limited by other factors,” the group said. “The removal of subsidies and price controls on petroleum products in some countries and ongoing efficiency improvements will all likely continue restricting oil demand growth.”

David Fuller's view -

No disrespect to OPEC but I am not sure that long-term forecasts for oil prices are worth the paper (or the PDF) they are printed on.  Remember ‘Peak Oil’?  This myth is over 200 years old.  It also fooled everyone for a while, during the height of OPEC’s temporary control, before being swept away by Technology.    

There are two market adages which we should never forget.

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December 16 2015

Commentary by David Fuller

Kick OPEC While It Is Down

Here is the opening of this tough editorial from Bloomberg:

The Organization of Petroleum Exporting Countries is in disarray. The price of Brent crude fell to less than $38 a barrel on Friday, the lowest since 2008. If the cartel had been working, it would be cutting output to force prices back up. Its members chose to keep pumping.

Why? Because just as demand from emerging markets is slowing, Technology has changed the economics of oil. That's bad news for OPEC, but good news for everybody else -- especially if the U.S. government and others have the wit to kick OPEC while it's down.

The U.S. shale-oil revolution has greatly increased non-OPEC supply. At the same time, efforts to curb oil consumption as part of the fight against climate change are further limiting the cartel's power to set prices. Oil prices are notoriously hard to predict, but these forces aren't going away, and they mean that OPEC's troubles may not be temporary.

Shed no tears. If the cartel collapsed altogether, there'd be no need to reinvent it. Meanwhile, OPEC's weakness presents an opportunity -- and smart policy can make the most of it.

Cheap oil will directly boost growth in most of the world, but with side effects that need to be managed. The fall in oil prices will encourage oil consumption, both in the short term (people will use their cars more) and long term (they'll buy cars that are less fuel-efficient). This works against reducing carbon emissions, and over time could help to restore OPEC's market power. Later, if prices bounce back, the economic hit would be disruptive.

The answer is for governments to smooth prices by adjusting the tax on fuel. When prices are low, like now, a higher gas tax would barely be noticed. Almost painlessly, it would raise revenues to pay for tax cuts elsewhere -- while maintaining the incentive for energy efficiency and keeping OPEC on its heels. If and when prices go back up, governments can soften the blow to their economies by lowering the tax.

David Fuller's view -

Those are reasonable points but the big variable with crude oil or any other commodity is always supply.  Saudi Arabia is predictably calling the shots and it is hard to see any better outcome for them, or any other oil exporters, than Pyrrhic victories.

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December 08 2015

Commentary by David Fuller

Email of the day

On diamond mining at the mouth of the Orange River:

Note: Aside from my Email 2 reply yesterday, I separately asked this subscriber if attempts to change the name of the Orange River, which dates back over 200 years, were ongoing. That may not be of general interest, but I suspect this gem of an email below will be.

Hi David,

As with the issue of the location of the border between Namibia and South Africa, it seems the same wrangling applies to the naming of the river; it is also referred to as the Gariep.

What is interesting about the location of the border is that it is legally located on the northern bank of the river, not in the middle. As a marine diamond miner operating out of Alexander Bay under contract to Alexkor on the southern side of the mouth I am keenly aware of the ramifications of this matter as it determines the boundary between the De Beers (Namibia) portion and Alexkor (South Africa) portion of what is the world’s most valuable diamond placer. This issue has not attracted much attention before because the Technology to mine through the mud belt of the delta was not available. Now it is, in the form of mass flow mining, a method based upon the same underwater excavation Technology utilised extensively in the oil and gas industry by companies such as James Fisher and Sons Plc.

Furthermore, the ideal mineral processing Technology for recovering very large diamonds has also now emerged in the form of XRT sorting (X-ray transmission), a spectacular demonstration of which took place recently with the large diamonds recovered at Lucara. The largest diamonds in the sea are lying closest to the mouth of the Orange River under the mud belt of the delta and XRT sorting Technology will play a big role in developing this world class diamond play.

Two weeks ago I attended the International Hydrographic Society’s conference at the Cape Town International Convention Centre at which the key-note address was delivered by Mr Robert van der Poll, International Manager Law of the Sea at Fugro NV (Netherlands). To my surprise he spoke in some detail about this particular border issue and afterwards I had a fascinating chat with him on the topic, upon which billions of dollars are at stake.

I will keep the collective updated.

David Fuller's view -

Many thanks for this fascinating email which is very likely to be of interest to the Collective of Subscribers.

It is another example of technological innovation enhancing all forms of mining.

Good luck with your efforts which I hope are not too risky.  The occasional update on this venture would be appreciated.   



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December 07 2015

Commentary by David Fuller

Email of the day 2

On tech from the Orange River:

Greetings from offshore of the Orange River mouth on this fine Thursday evening. I believe this may be of interest to David; it is a link to an article on MSR (molten salt reactor) Technology.

David Fuller's view -

Many thanks for your email and the short article above from Machine Design on MSR Technology.  On this subject, I am just an interested observer, who has posted a few articles on molten salt reactors (MSRs) over the last several years.  It sounds very promising, in terms of relative safety and small compact units which would enable power to be both generated and transmitted more efficiently.  However, safety issues will always be a concern with nuclear power and the problem of highly toxic nuclear waste remains.

Alas, the holy grail of nuclear fission still remains beyond our grasp.   

(See also: Molten Salt Reactors from the World Nuclear Association, and Don’t believe the spin on thorium being a greener nuclear option



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December 07 2015

Commentary by Eoin Treacy

Cisco Midyear Security Report

This report covering a number of cybersecurity threats currently assailing corporate networks obviously focuses on Cisco’s response but may be of interest to subscribers. Here is the conclusion: 

The threats discussed in this report represent only a small sample of the cybersecurity challenges that organizations, their security teams, and individual users face. So far, 2015 is proving to be a year of unprecedented speed in the innovation, resiliency, and evasiveness of cyberattacks. Adversaries are intent on overcoming all barriers to their success. As fast as the security industry can develop technologies to block and detect threats, miscreants pivot or change their tactics altogether.

The innovation race between adversaries and security vendors is only accelerating, and organizations are at risk of becoming more vulnerable to attack if they sit back and watch. They need to be proactive about identifying and addressing cybersecurity risks that can affect their business and aligning the right people, processes, and Technology to help them meet those challenges.

“Security needs to be part of the way organizations think—holistically—about their business,” says David Goeckeler, senior vice president and general manager for the Security business group at Cisco. “There is a great deal at stake: their brand, their reputation, their intellectual property, and their customers’ data. All of these things are at risk. Organizations need to take a systemic approach to minimizing that risk through an appropriate security posture.”

Trustworthy products are an essential component of an effective security posture, says John N. Stewart, chief security and trust officer for Cisco. “Organizations no longer want to accept that compromise is inevitable,” he says. “They are looking to the security industry to provide them with products that are reliable and resilient, and capable of deflecting even the most sophisticated threats.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Cybersecurity is a cause celebre for those of us who have had our credit card details stolen or had to endure letters from corporations telling us our most personal data “may” have been included in that which was stolen during a multi-month breach they previously knew nothing about. The investment crowd has priced in a substantial amount of good news already and valuations have increased particularly for those spearheading the sector’s advance. 



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December 03 2015

Commentary by Eoin Treacy

December 01 2015

Commentary by David Fuller

COP-21 Climate Deal in Paris Spells End of the Fossil Era

Here is the opening of this informative article by Ambrose Evans-Pritchard for The Telegraph:

A far-reaching deal on climate change in Paris over coming days promises to unleash a $30 trillion blitz of investment on new Technology and renewable energy by 2040, creating vast riches for those in the vanguard and potentially lifting the global economy out of its slow-growth trap.

Economists at Barclays estimate that greenhouse gas pledges made by the US, the EU, China, India, and others for the COP-21 climate summit amount to an epic change in the allocation of capital and resources, with financial winners and losers to match.

They said the fossil fuel industry of coal, gas, and oil could forfeit $34 trillion in revenues over the next quarter century – a quarter of their income – if the Paris accord is followed by a series of tougher reviews every five years to force down the trajectory of CO2 emissions, as proposed by the United Nations and French officials hosting the talks.

By then crude consumption would fall to 72m barrels a day - half OPEC projections - and demand would be in precipitous decline. Most fossil companies would face run-off unless they could reinvent themselves as 21st Century post-carbon leaders, as Shell, Total, and Statoil are already doing.

The agreed UN goal is to cap the rise in global temperatures to 2 degrees centigrade above pre-industrial levels by 2100, deemed the safe limit if we are to pass on a world that is more or less recognisable.

Climate negotiators say there will have to be drastic "decarbonisation" to bring this in sight, with negative net emissions by 2070 or soon after. This means that CO2 will have to be plucked from the air and buried, or absorbed by reforestation.

Such a scenario would imply the near extinction of the coal industry unless there is a big push for carbon capture and storage. It also implies a near total switch to electric cars, rendering the internal combustion engine obsolete.

David Fuller's view -

One of life’s lessons in this era is never underestimate the influence of developing technologies and their ability to change the world.  Another is that most technological breakthroughs are achieved within capitalist economic systems.

Moreover, once new technologies become economically competitive, there is no stopping their development, including an ongoing series of previously unimaginable enhancements.  A good example in our era of accelerating technological innovation is the progress of solar power, discussed by Mark Lewis, the chief author of Barclays’ report on Renewables in a latter portion of the article above:

"The average cost of global solar was $400 a megawatt/hour worldwide in 2010. It fell to $130 in 2014, and now it has fallen below $60 in the best locations. Almost nobody could have imagined this six years ago," he said.  

This is immensely encouraging when considering the risks of manmade climate change.  However, we also need luck because no one knows how various climate change risks will play out over time, even if we could theoretically end our carbon emissions overnight. 

This item continues in the Subscriber’s Area, where a PDF of AE-P's article is also posted..



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December 01 2015

Commentary by David Fuller

The Silicon Valley Idea That Is Driving Solar Use Worldwide

Silicon Valley has something to offer the world in the drive toward a clean energy economy. And it’s not Technology.

It’s a financing formula. In a region that spawned tech giants Apple Inc. and Google and is famous for innovators and entrepreneurs like Steve Jobs, a handful of startups began offering to install solar panels on the homes of middle-class families in return for no-money down and monthly payments cheaper than a utility bill. This third-party leasing method -- which made expensive clean energy gear affordable -- ignited a rooftop solar revolution with annual U.S. home installations increasing 16-fold since 2008, according to the Solar Energy Industries Association and GTM Research.

The world is taking notice. Businesses in China, the biggest greenhouse-gas polluter, are so keen on replicating California’s success that Trina Solar Ltd.’s Head of Global Marketing Jing Tian said she had to come up with a rough Chinese translation for “third-party leasing.” Similar models are spreading to countries like Mexico and Japan and are being employed to sell other emerging clean energy technologies such as batteries and onsite waste-water treatment gear.

David Fuller's view -

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December 01 2015

Commentary by Eoin Treacy

The Silicon Valley Idea That's Driving Solar Use Worldwide

This article by Mark Chediak and Chris Martin for Bloomberg may be of interest to subscribers. Here is a section: 

SolarCity took the leasing model that SunEdison Inc. first developed for the solar industry by a graduate student named Jigar Shah. He founded the company and sold its first power purchase agreement with Whole Foods Market Inc. in 2003, according to his book, Creating Climate Wealth.
SolarCity adapted that model for residential consumers in 2008 and many more offered similar arrangements including Sunrun Inc., which developed the first one in September 2007, and Vivint Solar Inc. In August, SolarCity bought a developer in Mexico that was offering the first leases to businesses in that country and plans to expand it to homes there.

And now the idea is spreading to other industries trying to sell expensive capital equipment that reduce pollution and fossil fuel consumption. Cambrian Innovation, a startup out of Massachusetts Institute of Technology, has developed onsite wastewater treatment plants. While the high cost make them difficult to sell, when they combine all the benefits to a consumer like a brewery -- lower disposal fees, water use, energy use and carbon emissions -- they can finance leases and offer savings at no cost to the consumer.

“SunEdison developed the solar power-as-a-service that helped the industry take off,” Matthew Silver, chief executive officer of Boston-based Cambrian, said in an interview. “Now we’re offering clean water as a service that municipal utilities can or won’t do.”

 

Eoin Treacy's view -

With the COP21 conference beginning in Paris today, there are a large number of articles circulating on the advances already seen in the development of renewable sources of energy. Lease back agreements that have increased access to these solutions is certainly important, but I am curious how these will be structured when interest rates rise and the cost of funding such largesse rises. 

Renewable intermittency means industrial scale storage solutions need to get substantially cheaper and battery Technology needs to improve. Progress has been made on both fronts but we are still a long way from replacing fossil fuels. 

 



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November 23 2015

Commentary by David Fuller

Email of the day

On the solar industry:

Hi David, There has been some notable movement to the downside in the Solar industry in the last 2 weeks, particularly US based companies. Some of the movement screams capitulation. This is a sector you both regularly comment on, and David Brown, also supports investment in the sector. Do you see this as a buy opportunity?

David Fuller's view -

The main reason that Eoin and I comment on solar power, or David Brown to my knowledge, is because we are convinced that it will be the most successful of the renewable technologies.  However, I suspect that companies in the solar industry will remain highly speculative for many years to come.  The reason - it is all but impossible to know which will be the most successful and enduring companies in this comparatively new and rapidly evolving Technology.  Moreover, there will be many candidates but most will ultimately fail. 

The same can be said for companies which pioneer any other new technologies, and this has always been the case.  The best example concerns the US automobile sector.  Here is Wikipedia’s List of defunct automobile manufacturers of the United States.  There are hundreds of them, most of which I had never heard of.  Only a handful survived, including Ford, GM and Chrysler.   

This item continues in the Subscriber’s Area.



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November 19 2015

Commentary by Eoin Treacy

Time to add wind developers

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

After years of efforts, China achieved breakthroughs in nuclear export this year with two mega-size contracts signed with Britain and Argentina, respectively. In October 2015, China General Nuclear Corporation (CGN) reached an agreement with state-owned EDF Energy to co-invest in a Hinkley Point C nuclear project in England with respective 33.5% and 66.5% stakes in a deal worth GBP18bn. It is also worth mentioning that China will be able to bring its own Generation III nuclear Technology of Hualong One to a subsequent project Bradwell B.

In November 2015, China National Nuclear Corporation (CNNC) sealed a USD6bn deal with Argentina to build the country’s fourth nuclear plant. According to media reports, CNNC also reached a framework agreement with Argentina on a fifth plant, which will use Hualong One Technology if the deal is finalized. 

China’s first nuclear project based on Hualong One, Fuqing 5, achieved FCD in May. Its construction and operation, together with the recognition of developed countries with advanced nuclear tech and experience such as Britain, will help open doors to more markets for Hualong One. However, all these projects will take at least seven to eight years to complete, which suggests limited near-term upside potential for nuclear equipment exports. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The current low price of oil is a benefit to China. However the fact it has to import such large quantities of energy means building domestic capacity that does not depend on fossil fuel will remain a priority for the foreseeable future regardless of slowing infrastructure investment in other sectors. 

Such concerted investment in nuclear Technology has also enhanced China’s ability to compete internationally in what is among the most complex Technology fields. This is even more important for the future because so few countries are willing to commit the capital necessary to fund development of new nuclear. 

 



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November 18 2015

Commentary by Eoin Treacy

Best fitness trackers of 2015: Buying guide

This article by Simon Crisp for Gizmag may be of interest to subscribers. Here is a section: 

This is the big one: you need to seriously consider what aspects of your fitness and activity you want this wearable to measure and track. It might be that you just want to keep an eye on how many steps you take per day, the distance you cover or the calories you are burning. Other trackers also offer built-in heart-rate tracking which can be a great indicator of how hard you're working, and let you work-out in different zones for fat-burning, endurance, or speed.

Another feature offered by some trackers is the ability to log location via GPS. This is good for users who want more precise measurements of the distances they have run or cycled. While some trackers have GPS built-in, others can use the information from your phone (if you have it with you while you work-out).

In terms of activity tracking, not all devices can monitor all activities. While most cover things like walking, running and cycling, you can't always select exercises like yoga, gym-equipment based activity or sleep quality, and you will need to check a tracker's compatibility with your fitness schedule.

Eoin Treacy's view -

Many of us who have been involved in athletic activities over the last thirty years will have tried out heart rate monitors. My own experience was that I found the chest strap uncomfortable while sculling and chaffing while running so I never really adopted heart rate monitoring into my workout despite the potential advantages.

Apple’s Watch incorporates the same Technology as the Pulse Oximeter hospitals clip to your finger to measure oxygen in your blood. This has greatly increased interest in heart rate monitoring and while there are trade-offs with the chest strap variety, Technology is improving all the time. The number of products offering this functionality is proliferating rapidly and apps incorporating the data are improving at an even faster pace. 

 



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November 16 2015

Commentary by David Fuller

This Is What Will Happen When Robots Take Over the World

Earlier this month, Bank of America Merrill Lynch warned that 45pc of all manufacturing tasks would be automated within a decade, up from 10pc today.

 

The International Federation of Robotics says the number of robots in factories across the world rose by 225,000 last year, and will rise even further in the coming years – and it is not just in manufacturing.

 

The Henn-na hotel, which opened in Nagasaki, Japan, this summer, is the world’s first to be staffed by humanoid robots.

 

Even the great and good are paying attention. “Mastering the Fourth Industrial Revolution” will be the theme of the World Economic Forum in Davos, Switzerland, next year.

 

Of course, there were fears about the consequences of the previous three industrial revolutions. Lord Byron argued that “nothing but absolute want” would have driven the Luddites to smash the new machines in the factories of the 1800s.

 

John Maynard Keynes predicted that leaps in Technology would bring abundance and leisure, but also the threat of a “new disease” of what he called “technological unemployment”.

 

But it is not just mindless, repetitive jobs that are under threat from robots. Computers are demonstrating their ability to perform complex tasks.

 

IBM’s Watson supercomputer has beaten the brightest minds at the quiz show game Jeopardy!, and has now teamed up with oncologists to develop a system that could diagnose cancer.

David Fuller's view -

This is more of a popular than serious article on robots but interesting nonetheless. 

For instance, we already know that robots are fantastic at tasks which require endless identical replication from a stationary position, ranging from placing small cakes in packaging to handling many assembly line tasks for automobile manufacturing.  However, they are considerably more challenged by tasks which require mobility, and they currently lack the discretion for picking soft fruit.  

This item continues in the Subscriber’s Area where a PDF of The Sunday Telegraph article is also posted.



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November 13 2015

Commentary by Eoin Treacy

Autodesk's CEO of today on the machines that will be making things tomorrow

This article by Nick Lavars for Gizmag may be of interest to subscribers. Here is a section: 

"Back to the point of how things are made is changing, here's a small group of people who were able to use the most advanced manufacturing to do things," Bass says. "And I think that's really upsetting the apple cart, in terms of small companies and small groups of people, who are empowered in ways to do things that used to require huge amounts of capital."

The thought that these Darwinian machines can crunch through countless possibilities, mutating designs until they produces something resembling the perfect solution, is a fascinating idea. Bass does acknowledge that the Technology won't provide a one-size fits all approach, however, that there will be problems where generative design is an appropriate solution and problems that are better solved by human minds.

And as for the fabrication of future designs, both our own and those conjured up by computers? While 3D printing Technology is advancing all the time, Bass is of the view that it will only ever complement existing techniques like subtractive manufacturing, rather than completely snuff them out.

"Does 3D printing replace all manufacturing? It's another tool in the toolbox," he says. "There will be times when 3D printing is awesome, there will be times when manufacturing is awesome. What I think the future of making things is, is this combination of having powerful design tools in order to make them, and the powerful fabrication techniques to realize those designs."

 

Eoin Treacy's view -

3D printing or additive manufacturing is a revolutionary development but perhaps more important is the fact that the above article highlights how innovative solutions can be combined to accelerate the pace of development. Tools now being developed will enable infrastructure development at a lower cost, lower energy intensity and lower resource requirement which has the potential to greatly enhance the quality of life for many more people. As costs decline demand will rise to create a long-term growth trajectory.  



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November 12 2015

Commentary by David Fuller

Saudi Arabia Risks Destroying OPEC and Feeding the Isil Monster

The rumblings of revolt against Saudi Arabia and the Opec Gulf states are growing louder as half a trillion dollars goes up in smoke, and each month that goes by fails to bring about the long-awaited killer blow against the US shale industry.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff"

Helima Croft, RBC Capital Markets

Algeria's former energy minister, Nordine Aït-Laoussine, says the time has come to consider suspending his country's Opec membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. "Why remain in an organisation that no longer serves any purpose?" he asked.

Saudi Arabia can, of course, do whatever it wants at the Opec summit in Vienna on December 4. As the cartel hegemon, it can continue to flood the global market with crude oil and hold prices below $50.

It can ignore desperate pleas from Venezuela, Ecuador and Algeria, among others, for concerted cuts in output in order to soak the world glut of 2m barrels a day, and lift prices to around $75. But to do so is to violate the Opec charter safeguarding the welfare of all member states.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff. There could be a total blow-out in Vienna," said Helima Croft, a former oil analyst at the US Central Intelligence Agency and now at RBC Capital Markets.

The Saudis need Opec. It is the instrument through which they leverage their global power and influence, much as Germany attains world rank through the amplification effect of the EU.

The 29-year-old deputy crown prince now running Saudi Arabia, Mohammad bin Salman, has to tread with care. He may have inherited the steel will and vaulting ambitions of his grandfather, the terrifying Ibn Saud, but he has ruffled many feathers and cannot lightly detonate a crisis within Opec just months after entangling his country in a calamitous war in Yemen. "It would fuel discontent in the Kingdom and play to the sense that they don't know what they are doing," she said.

David Fuller's view -

For decades commencing in the 1070s we have lived through an era where OPEC controlled global energy prices, due to their enormous reserves of easily accessible crude oil.  In this dominant role, OPEC rulers in the Middle East and North Africa grew very rich, presiding over superficially stable countries, controlled by subjective interpretations of Islamic law, enforced by their authoritarian national regimes, and enormous government handouts to their citizens in an effort to buy loyalty.   

For over two thousand years there have been many similar regimes, albeit with different state religions.  Some of these ruled for centuries before mostly decaying from within.  Others became complacent and could not react to change with the pace of their rivals. 

OPEC countries of the Middle East and North Africa were more often religious rivals rather than allies, but maintained associations of mutual convenience due to their dominant role as the leading suppliers of crude oil.  However, in the last several years the long-held myth of dwindling oil supplies trading at ever-rising prices has been shattered by the march of Technology, undermining OPEC’s grip on the oil market from both ends of the spectrum.  

This item continues in the Subscriber’s Area, where a PDF of AE-P's article is also posted.  



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November 12 2015

Commentary by Eoin Treacy

MSCI index change massive for China markets

Thanks to a subscriber for this article by Laura Suter for fundstrategy.co.uk which may be of interest. Here is a section: 

The MSCI’s inclusion of Chinese American Depository Receipts (ADRs) into its indexes, which is expected to be announced tonight, is a “massive change” for the indexes, say experts.

The MSCI is expected to announce the inclusion of Chinese ADRs after US market close tonight.
The inclusion will occur in two stages: one at the end of November and another in May 2016.

The move is big for China, says Eng Teck Tan, senior portfolio manager at Nikko Asset Management, and will see the representation of Technology firms in the China index increase, while China’s share of the emerging market and global indexes will rise.

ADRs are predominantly invested in internet and Technology firms, such as Alibaba, Baidu and Netease. The inclusion of ADRs will take the Technology representation of the MSCI China index up from 13.5 per cent to 24 per cent by the end of May, says Mike Kerley, Asia fund manager at Henderson Global Investors.

 

Eoin Treacy's view -

This is an important development for Chinese companies because it unleashes a potent source of additional demand for their shares. Speculation MSCI would admit A-Shares to its global emerging markets portfolio contributed to the run-up in prices earlier this year and the expected announcement has contributed to speculative interest in Chinese ADRs on this occasion. Subscribers can review a comprehensive list of US listed Chinese companies in this section of the Chart Library. 



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November 11 2015

Commentary by David Fuller

Email of the day

On the 9th November seminar presentations:

Dear David Sadly I was unable to attend your 9th November jamboree, are you going to share with us non attendees what the delegates revealed. I am especially interested in closed-ended funds. Here is hoping Kind regards

David Fuller's view -

My own presentation was posted on Tuesday. 

I hope to receive guest speaker Bruce Albrecht’s excellent presentation on the Middle East, with permission to post it.

Iain Little’s presentation on Investment Trusts is posted in the Subscriber's Area.  

We hope to see you on Monday 28th January, when Iain and I will be speaking once again.  I am also pleased to say that Dr David Brown will be our guest speaker, talking about Technology and his investing methodology.   



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November 10 2015

Commentary by Eoin Treacy

Musings from the Oil Patch November 3rd 2015

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

Self-driving vehicles may be the answer. Researchers at the University of Texas have conducted a realistic simulation of vehicle use in cities that took into account traffic congestion and rush-hour use. They found that if our vehicle fleet was fully autonomous, every shared autonomous vehicle could replace 11 conventional vehicles. As their study showed, the world would only need 800 million vehicles to supply transportation services for nine billion people, or 200 million fewer cars than what already exists in the global vehicle fleet. That doesn’t sound like a bright future for either the automobile or petroleum industries.

The UT simulations showed that riders would wait for an average of 18 seconds for an autonomous vehicle to show up. Each vehicle would serve 31-41 travelers a day. Importantly, less than 0.5% of travelers waited for more than five minutes for an autonomous vehicle to arrive. Equally important, shared autonomous vehicles reduce the average cost of an individual’s travel by as much as 75% versus a conventional driver-owned vehicle.

A global vehicle fleet of autonomous vehicles could easily be electrified since they would be able to go off to be recharged and cleaned during periods of low demand without sacrificing service quality for travelers. We know that one of the key objectives of autonomous vehicles is for them to be able to travel faster, in tighter spacing and in smaller-sized units. This means that we will need less material for constructing these vehicles with a favorable impact on overall energy and material needs besides less fuel. Here is another example of savings from fewer vehicles due to an autonomous vehicle fleet. We would also have fewer vehicles needing to be parked, which means that upwards of 20% of urban land currently devoted to parking could be transformed into close-in housing and businesses. Increased urban density could further reduce overall energy demand by boosting the use of mass transit.

While Dr. Smil is concerned about the increasing cost of extracting energy and materials due to their capital intensity, which could doom our economy by subjecting it to increasingly more expensive fossil fuels for decades into the future, what would happen if our energy future follows a deployment path similar to that of information technologies? Several decades ago, prognosticators did not foresee how the world would skip over the building of landline telephone infrastructure and go directly to cellular phones. In 2014, there were only 1.1 billion fixed telephone landlines worldwide compared to more than seven billion cellular phones. Equally as impressive is how much the cost to make these phones has declined during the transition.  

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Let’s consider how supply and demand impact the market for a new Technology. I can own any number of cars I wish but I can only drive one at a time. Autonomous vehicles remove that limitation so I could send the car out to collect dinner while I go to the bank personally. Of course if Uber remains a viable business in a decade then I could simply have a roaming vehicle pick up my dry cleaning, have another pick up my lunch and another pick up my groceries. The car I choose to drive will be for comfort, style and cache while other vehicles will be the proverbial work horses. 



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November 10 2015

Commentary by Eoin Treacy

Lloyd George Advisory

Thanks to a subscribers for this report which makes a number of interesting points on the potential for Chinese overseas investment. Here is a section:

I have compared Shanghai in 2015 to Boston in 1970 with the genesis of the investment industry led by Fidelity and other major fund management houses. Apart from the US$3.5 trillion of China’s official reserves, there is another US$9 trillion in Chinese household bank deposits. In November, I expect that the IMF will certify the renminbi as one of the 5 global reserve currencies in the SDR (Special Drawing Rights). China must respond, by liberalizing its capital account over the next 12 months, and allowing its citizens to invest more overseas. Even if (a conservative estimate) 20% of the total savings in China were to be invested overseas, it will have the effect of a major wave of capital coming into global financial markets led by Hong Kong (which we see as the prime beneficiary), but followed by London, New York, and other major financial centers.

This time Chinese capital will not only target property, it will be invested in companies, in Technology, in western consumer brands, and in good quality dividend paying shares in the US, Canada, UK, Australia, and elsewhere. The example of Li Ka-shing is not irrelevant. He has been criticized by commentators for taking money out of China and investing it in these Anglo-Saxon jurisdictions, in telecom, water, and power utilities. In my view, he is a very smart, canny, and far-sighted investor. (This month, our research team visited Mr Li’s flagship company, CK Hutchison and were encouraged that their Watson’s pharmacy chain is opening 365 new shops each year in China.)

I believe that the liberalization of the Chinese financial sector is the biggest thing happening in the global capital markets in the next decade. Comparisons may be drawn with Japanese capital in the 1980s, but this Chinese wave is 10 times bigger and will last a lot longer. As yields on RMB deposits are steadily reduced (and the same in Indian rupee deposits), so the thirst for yield will bring Chinese investors, as it once did Japanese investors (the famous Mrs Watanabe) into western equities.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The announcement last month that the wide difference between the Chinese lending and deposit rates would be liberalised is a major step for financial sector but if the below spread is any guide there has been little progress so far.  

At a spread of 275 basis points the banking sector does very well from this situation but depositors are de-incentivised from holding cash. This has contributed to the casino nature of the stock market and also to the growth of the shadow banking system. Allowing banks to compete for deposits by raising interest rates would be a positive development for the economy and would help dispel some of the opacity that plagues the sector. 

 



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November 09 2015

Commentary by Eoin Treacy

Update on driverless tractor technology

Thanks to a subscriber for this Facebook post which may be of interest. Here is a section:

We also visited a contractor using the system for jobs such as GPS mapped precision drilling of new orchard plantings and composting as well as for spraying and mowing. His feedback was that with an Operator in the cab you have a limited amount of time at 100% accuracy and optimum ability, it then starts to decrease. With the ProbotIQ system the precision does not alter. He also said that problems with shortages of and unreliable labour were solved with this system. He has a second system on order.

We spent time operating tractors and using the 'Teach and Playback' Technology, programming routes and manoeuvres and such things as turning the sprayer on and off, PTO on and off and selecting engine speeds. It then replayed exactly what we had recorded of its own accord without anyone in the cab. We tested it in various ways such as putting an obstacle in the way which it detected once it was ten metres away and then stopped at 1.5 metres away. The system would have checked again at three minutes and restarted if the obstacle had gone, but as we were there we were able to set it going again remotely.

 

Eoin Treacy's view -

Autonomous vehicles have been in place at mining operations for quite some time and Technology has improved enough that they can now be used in the agriculture sector. As demand increases costs should fall which would make the Technology even more accessible. 



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November 06 2015

Commentary by David Fuller

Toyota Starts $1 Billion Center to Develop Cars That Do Not Crash

Here is the opening of this interesting article from Bloomberg

Toyota Motor Corp. is spending $1 billion to form a research institute focused on the artificial intelligence and robotics Technology it needs to make cars that can overcome driver errors and reduce traffic fatalities.

Toyota Research Institute Inc. will pitch in on the safety systems the automaker is developing to curtail car accidents that kill 1.25 million people per year worldwide. The company will also work toward making it easier for elderly drivers to hang onto their keys in aging countries including Japan and the U.S., Toyota’s biggest markets.

Getting an edge in this research would set Toyota apart from its Japanese peers, which have been pursuing fully autonomous cars under more conservative time frames than Google Inc. or Tesla Motors Inc. With Toyota President and racing enthusiast Akio Toyoda by his side, the newly-formed R&D unit’s chief executive said competing to put autonomous cars on the road will be an endurance contest, rather than a sprint.

David Fuller's view -

After the VW scam it is nice to focus on positive developments in the automobile sector.

I assume that every automobile manufacturer of any consequence is busily developing new safety features, including autonomous driving.  This is mostly due to Technology, of course.  Beyond any doubt we are now in the most exciting era ever for automobiles.



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November 04 2015

Commentary by David Fuller

Exxon Predicted the Present Cheap Solar Boom Back in the 1980s

Here is the opening and also a latter section of this interesting article from Bloomberg:

For more than a generation, solar power was a environmentalist fantasy, an expensive and impractical artifact from the Jimmy Carter era. That was true right up until the moment it wasn't. Solar silicon prices dropped 94 percent from early 2008 to the end of 2011. Crystalline silicon has since fallen an additional 47 percent, to $15.20 a kilogram. 

Many were caught off guard by the emergence of solar as a competitive power source. The scientist who led Exxon's research arm back in the 1980s wasn't one of them. 

Peter Eisenberger, now an environmental science professor at Columbia's Earth Institute, co-authored an internal report for Exxon projecting that solar wouldn't become viable until 2012 or 2013. The report, written before he left the company in 1989, suggested that Exxon would do best to sell its solar assets; not surprisingly, the company did just that. What is surprising is that Exxon's 25-year-old solar projections nailed the timing for the arrival of affordable solar power. 

And:

Eisenberger left for academia and in 2010 co-founded a alternative-energy company, Global Thermostat, at which he now serves as chief Technology officer. The company works to reduce the cost of capturing atmospheric carbon dioxide and rendering it useful for synthetic fuels and materials. "Almost all the people that are involved in founding this company—and in helping me get going—were from Exxon," Eisenberger said. "Every one of them. They're the only people who didn't think I was nuts."

David Fuller's view -

Exxon and the other large international oil companies are also working on the commercial capturing of atmospheric carbon dioxide, and understandably so.  Unless it can be effectively and cheaply removed and used profitably for something else, oil and other fossil fuels will increasingly be regarded as pariahs. 



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November 04 2015

Commentary by David Fuller

Saudi Wells Running Dry of Water Spell End of Desert Wheat

Here is the opening of this informative article from Bloomberg:

For decades, only a few features punctuated the vastness of the Saudi desert: oil wells, oases -- and wheat fields.

Despite torrid weather and virtually no rain, the world’s largest oil producer once grew so much of the grain that its exports could feed Kuwait, United Arab Emirates, Qatar, Bahrain, Oman and Yemen. The circular wheat farms, half a mile across with a central sprinkler system, spread across the desert in the 1980s and 1990s, visible in spring to anyone overflying the Arabian peninsula as green spots amid a dun sea of sand.

The shift toward imports, which started eight years ago, is reverberating beyond the kingdom, providing business opportunities for grain traders such as Cargill Inc and Glencore Plc as well as for farmers in countries such as Germany and Canada. 

"The Saudis are the largest new wheat buyer to emerge," said Swithun Still, director of grain trader Solaris Commodities SA in Morges, Switzerland.

Ahmed bin Abdulaziz Al-Fares, managing director of the Grain Silos and Flour Mills Organization, the state agency in charge of cereal imports, told an industry conference in Riyadh last month that Saudi Arabia will import 3.5 million metric tons in 2016. That’s a 10-fold increase from about 300,000 tons in 2008, the first year local crops were curtailed.  An agency presentation says the kingdom will rely on imports for "100 percent" of its wheat in 2016 for the first time.

By 2025, demand is forecast to rise to 4.5 million tons as population growth drives demand for flour, positioning Saudi Arabia as one of the 10 biggest wheat buyers worldwide.

The shift is propitious as the wheat market weathers the largestglut in nearly 30 years, with bumper harvests filling up silos from Russia to Argentina. Prices for high-quality wheat, which reached an all-time high in Kansas City of more than $13 per bushel in 2008, have fallen to less than $5 this year.

David Fuller's view -

Too low aquifers for irrigation of desert wheat; too low oil prices to balance the Saudi budget.  For many Saudi citizens used to the comfortable but rigidly controlled life this must feel like a plague. 

The Saudis were behind the slump in oil prices, by increasing production to lower prices deliberately in a desperate attempt to knock out the US shale industry.  However, in fairness to the Saudis, they were defeated by the advance of Technology.  Moreover, they inadvertently encouraged not only oil discovery and drilling technologies, from shale to deep water projects, but also the renewable energy industries by keeping oil prices high for as long as they could.

This item continues in the Subscriber’s Area.



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October 29 2015

Commentary by David Fuller

Paris Climate Deal to Ignite a $90 Trillion Energy Revolution

Here is the opening of this important and somewhat controversial column by Ambrose Evans-Pritchard for The Telegraph:

The fossil fuel industry has taken a very cavalier bet that China, India and the developing world will continue to block any serious effort to curb greenhouse emissions, and that there is, in any case, no viable alternative to oil, gas or coal for decades to come.

Both assumptions were still credible six years ago when the Copenhagen climate summit ended in acrimony, poisoned by a North-South split over CO2 legacy guilt and the allegedly prohibitive costs of green virtue.

At that point the International Energy Agency (IEA) was still predicting that solar power would struggle to reach 20 gigawatts by now. Few could have foretold that it would in fact explode to 180 gigawatts - over three times Britain’s total power output - as costs plummeted, and that almost half of all new electricity installed in the US in 2013 and 2014 would come from solar.

Any suggestion that a quantum leap in the Technology of energy storage might soon conquer the curse of wind and solar intermittency was dismissed as wishful thinking, if not fantasy.

Six years later there can be no such excuses. As The Telegraph reported yesterday, 155 countries have submitted plans so far for the COP21 climate summit to be held by the United Nations in Paris this December. These already cover 88pc of global CO2 emissions and include the submissions of China and India.

Taken together, they commit the world to a reduction in fossil fuel demand by 30pc to 40pc over the next 20 years, and this is just the start of a revolutionary shift to net zero emissions by 2080 or thereabouts. “It is unstoppable. No amount of lobbying at this point is going to change the direction,” said Christiana Figueres, the UN’s top climate official.

Yet the energy industry is still banking on ever-rising demand for its products as if nothing has changed. BP is projecting a 43pc increase in fossil fuel use by 2035, Exxon expects 35pc by 2040, Shell 43pc and Opec is clinging valiantly to 55pc. These are pure fiction.

The Intergovernmental Panel on Climate Change (IPCC) may or may not be correct in arguing that we cannot safely burn more than 800bn tonnes of carbon (two-thirds has been used already) if we are to stop global temperatures rising two degrees above pre-industrial levels by 2100. I take no view on the science.

David Fuller's view -

This article is controversial, although I certainly feel that it merits our attention. 

Solar energy is developing even faster than most people envisaged, thanks to ‘needs must’ and the accelerating rate of technological innovation which this service frequently mentions.  China has embraced solar energy because of its chronic pollution problems.  Less developed India has moved more slowly in this respect but has the same problem.  Additionally, even a small rise in global temperatures presents a huge risk for tropical India. 

This item continues in the Subscriber’s Area, where a PDF of AE-P's column is also posted.



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October 29 2015

Commentary by David Fuller

Action Replay: The Great Game, Ottomania and The Fatimids -

My thanks to Iain Little for his ever-interesting Fund Manager’s Diary.  This issue is devoted to a startling item of research from Charles Gave of Gavekal.  Here is a brief sample:

Russia and Turkey are at loggerheads as Moscow escalates military engagement in Syria. Turkey’s President Erdogan has threatened to find another gas supplier after Russian jets breached its air space, and Ankara has initiated legal action against Gazprom over the price charged for piped gas…..For the last 3 years, I have argued that Vladimir Putin’s strategic goal was to see the Sunni monarchies of the ME toppled, thereby crude oil prices at USD200 a barrel and a controlled market for Russia’s only real source of income.

David Fuller's view -

Did he really say crude oil at $200?  Yes, it is not a typo.  

Only a few years ago people feared that this was all but inevitable, in the mistaken belief that we were running out of crude oil.  Today, thanks to Technology it sounds more like Mr Putin’s pipe dream.  Nevertheless, the Middle East is the least stable region of the global.  Given all its wealth and oil, shock waves from this deeply troubled region can be far reaching.

Fund Manager's Diary is posted in the Subscriber's Area. 



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October 26 2015

Commentary by Eoin Treacy

Email of the day on mass production of graphene

A very interesting article appeared in our local on-line newspaper here in Cambridge. It describes a breakthrough method for printing with graphene, at much lower cost and higher speed than current materials and methods. 

This is the kind of breakthrough that will lead to the advances in real-time connected health monitoring that I will be discussing as part of my presentation at Markets Now on January 18.

 

Eoin Treacy's view -

Thank you for this illuminating article and here is an important section: 

Developed by researchers at the Cambridge University in collaboration with city Technology company Novalia, the method allows graphene and other electrically conducting materials to be added to conventional water-based inks and printed using typical commercial equipment. It is the first time that wonder material graphene has been used for printing on a large-scale commercial printing press at high speed.

 



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October 22 2015

Commentary by Eoin Treacy

Greenlight Partner Letter

Thanks to a subscriber for this interesting report from Greenlight. Here is a section on SunEdison:

In the weeks before the GLBL initial public offering, SUNE was at its highs and we contemplated trimming the position. Since we expected the UOI would trigger a further advance in the shares, we decided against it. Around the same time, oil and gas prices renewed their declines, causing the values of energy master limited partnerships to justifiably fall. We believed that TERP and GLBL would not be impacted, as neither is subject to commodity risk. We were wrong. Because the SUNE yield vehicles were relatively new to investors, the market did not distinguish them from other energy dividend flow through structures. In mi-July, TERP began falling along with the rest of the sector taking SUNE with it. GLBL IPO’d at a big discount a week later and traded poorly in the aftermarket. 

As GLBL and TERP continued to fall they effectively lost access to the capital markets, and SUNE collapsed as the market because worried that SUNE would be able to sell its projects and could even run out of money. Ironically, the market judged SUNE’s rapidly growing and massive backlog of attractive projects to be a liability. 

SUNE’s hard-to-decipher financial statements fed the stock collapse. SUNE consolidates both TERP and GLBL on its GAAP statements. The complicating result is two-fold. First when SUNE sells a project to TERP or GLBL it bears the operating costs but doesn’t get to book the revenue from the sale. The result is the appearance of an operating loss. Second TERP and GLBL use non-recourse project finance debt to fund the purchases and the debt appears on SUNE’s balance sheet. The result is that SUNE appears to be heavily levered and losing money. From a GAAP perspective that’s true, but from an economic perspective it is not. Nonetheless, this hasn’t stopped some wise guys from dubbing it “SunEnron”. 

SUNE responded to the deteriorating environment by raising additional equity, finding third parties to buy its products, and slowing it development pipeline. All of these actions have marginally lowered the company’s value, but have stabilized the situation. Taking into account the more conservative business plan, when we look through the complicated financials we believe that SUNE’s development business is poised to have economic earnings in 2016 of about $1.34 per share, assuming that TERP and GLBL do not regain access to the capital markets. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

In the movable feast of renewable energy breakeven estimates it’s hard to argue that lower oil and particularly natural gas prices skew the calculation. Solar Technology is advancing at a prodigious rate but not so fast that companies can compete with energy prices which more than halved in a year. This has weighed on the sector in the short term but it is hard to argue with government mandates that utilities have to buy energy from renewable sources. 



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October 20 2015

Commentary by David Fuller

Cheap, Simple Technique Turns Seawater Into Drinking Water

Here is a promising article from Gizmag on what has been an increasingly worrying problem for many regions:

Researchers from the University of Alexandria have developed a cheaper, simpler and potentially cleaner way to turn seawater into drinking water than conventional methods.

This could have a huge impact on rural areas of the Middle East and North Africa, where access to clean water is a pressing issue if social stability and economic development is to improve.

Right now, desalinating seawater is the only viable way to provide water to growing populations, and large desalination plants are now a fact of life in Egypt and other Middle Eastern countries.

Most of these plants rely on a multi-step process based on reverse osmosis, which requires expensive infrastructure and large amounts of electricity. These plants release large quantities of highly concentrated salt water and other pollutants back into the seas and oceans as part of the desalination process, creating problems for marine environments.

That’s why the race is on to find a cheaper, cleaner and more energy-efficient way of desalinating sea water.

In a paper published last month in the journal, Water Science & Technology, researchers Mona Naim, Mahmoud Elewa, Ahmed El-Shafei and Abeer Moneer announced that they have developed a new way to purify sea water using materials that can be manufactured easily and cheaply in most countries, and a method that does not rely on electricity.

The Technology uses a method of separating liquids and solids called pervaporation. Pervaporation is a simple, two-step process – the first step involves filtering the liquid through a ceramic or polymeric membrane, while the second step requires vaporizing and collecting the condensed water. Pervaporation is faster, cleaner and more energy efficient than conventional methods, not least because the heat required for the vaporization stage does not necessarily have to be electrically generated.

Pervaporation is not new – it has been in use for many years. But the membrane used in step one has been expensive and complicated to manufacture.

The breakthrough in this research is the invention of a new salt-attracting membrane embedded with cellulose acetate powder for use in step one of the pervaporation process. Cellulose acetate powder is a fiber derived from wood pulp and is, according to the researchers, cheap and easy to make in any laboratory.

According to the paper, the membrane can quickly desalinate highly concentrated seawater and purify even badly contaminated seawater. It can also be used to capture pollutants and salt crystals to minimize pollution of the environment. The membrane can be used in very remote situations using fire to vaporize the water.

The researchers have yet to prove the commercial viability of the product, but if they can, it could be a promising alternative for developing countries where water and electricity is a scarce resource.

David Fuller's view -

I find it encouraging that pervaporation was developed at the University of Alexandria.  Needs must remains a powerful motivation for development.  Many regions of the globe would benefit from this Technology, which sounds as if it has real commercial potential. 

It is at least a partial solution to California’s biggest problem of drought, having used up much of its groundwater.  In addition to the Middle East and North Africa mentioned in the article above, both China and India should be very interested in pervaporation.    



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October 20 2015

Commentary by Eoin Treacy

NSA, Apple Chiefs Decode Encryption Views

This discussion highlighted by the Wall Street Journal may be of interest to subscribers. In particular, the second comment by Nathan LaFrance is in my view a good representation of how many consumers feel about the issue. Here is a section: 

Mr. Cook, appearing later, disagreed on the latter point. “I don’t know a way to protect people without encrypting,” he said. “You can’t have a backdoor that’s only for the good guys.”

Apple and federal officials have been at odds for more than a year, since Apple issued a new version of its mobile-operating system that it said safeguards user information, even from law enforcement. But the White House signaled recently that it won’t seek new laws to force tech companies to make products that allow law enforcement to eavesdrop.

 

Eoin Treacy's view -

The USA is finally introducing chip and PIN Technology and not before time. My credit card details have been compromised at least four times in the last two years. I’ve now got identity protection from ULCA Health, Anthem, Target, Home Depot but the letter I received yesterday was the one I was most surprised about. Experian, the firm other companies use to check the credit of a customer has been hacked with the loss of untold quantities of client data. In many respects I hope its Chinese government backed hackers since they have little interest in me specifically but after so many incidents one simply has to assume that our most personal data is out there in the public domain. 



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October 20 2015

Commentary by Eoin Treacy

Engineered viruses provide quantum-based enhancement of energy transport

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

While this initial result is essentially a proof of concept rather than a practical system, it points the way toward an approach that could lead to inexpensive and efficient solar cells or light-driven catalysis, the team says. So far, the engineered viruses collect and transport energy from incoming light, but do not yet harness it to produce power (as in solar cells) or molecules (as in photosynthesis). But this could be done by adding a reaction center, where such processing takes place, to the end of the virus where the excitons end up.

“This is exciting and high-quality research,” says Alán Aspuru-Guzik, a professor of chemistry and chemical biology at Harvard University who was not involved in this work. The research, he says, “combines the work of a leader in theory (Lloyd) and a leader in experiment (Belcher) in a truly multidisciplinary and exciting combination that spans biology to physics to potentially, future Technology.”

“Access to controllable excitonic systems is a goal shared by many researchers in the field,” Aspuru-Guzik adds. “This work provides fundamental understanding that can allow for the development of devices with an increased control of exciton flow.”

The research was supported by the Italian energy company Eni through the MIT Energy Initiative. The team included researchers at the University of Florence, the University of Perugia, and Eni.

 

Eoin Treacy's view -

Proof of concept is a big step and this is an enormously exciting field not least because of the enormous potential for artificial photosynthesis. However it could be a decade before we see commercial applications of this Technology



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October 16 2015

Commentary by David Fuller

The Little Gear That Could Reshape the Jet Engine

Here is the opening of this fascinating article from Bloomberg:

Pratt & Whitney’s new PurePower Geared Turbofan aircraft engines are impressive beasts. Scheduled to enter commercial service before the end of the year, they burn 16 percent less fuel than today’s best jet engines, Pratt says. They pollute less. They have fewer parts, which increases reliability. And they create up to 75 percent less noise on the ground, enabling carriers to pay lower noise fees and travel over some residential areas that are no-fly zones for regular planes. Airbus, Bombardier, Embraer, Irkut, and Mitsubishi have certified the engines for use on their narrowbody craft. JetBlue, Lufthansa, Air New Zealand, Malaysia’s Flymojo, and Japan Airlines are among the engine’s 70 buyers in more than 30 countries.

To people outside the aircraft business, what may be most remarkable about the engines is that they took almost 30 years to develop. That’s about 15 times as long as the gestation period of an elephant and unimaginably longer than it takes to pop out a smartphone app. Could Pratt have gotten the hardware out faster? Probably. But industrial innovation on the scale of a commercial jet engine is inevitably and invariably a slog—one part inspiration to 99 parts perspiration.

In Pratt’s case, it required the cooperation of hundreds of engineers across the company, a $10 billion investment commitment from management, and, above all, the buy-in of aircraft makers and airlines, which had to be convinced that the engine would be both safe and durable. “It’s the antithesis of a Silicon Valley innovation,” says Alan Epstein, a retired MIT professor who is the company’s vice president for Technology and the environment. “The Silicon Valley guys seem to have the attention span of 3-year-olds.”

David Fuller's view -

This is a fascinating story, which refutes the critical view that corporations are only focussed on short-term returns, or dependent on government financing and university research to achieve significant breakthroughs.  Those factors all help, of course, but corporations are also highly inventive on their own, from start-ups to Pratt & Whitney or Apple.  We remain a highly inventive species. 

This item continues in the Subscriber’s Area.  



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October 14 2015

Commentary by David Fuller

Cyberspace Becomes Second Front in Russia Clash With NATO

Russian computer attacks have become more brazen and more destructive as the country grows increasingly at odds with the U.S. and European nations over military goals first in Ukraine and now Syria.

Along with reported computer breaches of a French TV network and the White House, a number of attacks now being attributed to Russian hackers and some not previously disclosed have riveted intelligence officials as relations with Russia have deteriorated. These targets include the Polish stock market, the U.S. House of Representatives, a German steel plant that suffered severe damage and The New York Times.

U.S. officials worry that any attempt by the Russian government to use vulnerabilities in critical infrastructure like global stock exchanges, power grids and airports as pressure points against the West could lead to a broader conflict, according to two people familiar with the debate inside government and who asked to not to be named when discussing intelligence matters. When NATO officials met last week, they voiced alarm about Russia’s rapid involvement in Syria, including the firing of cruise missiles, and vowed the biggest reinforcement of their collective defense since the end of the Cold War.

David Fuller's view -

Cyber attacks are the rapidly escalating face of modern warfare.  They are low cost, difficult to trace, let alone prove, and increasingly damaging. 

(See also: Cyber-attack warning after millions stolen from UK bank accounts, from The Guardian) 



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October 13 2015

Commentary by David Fuller

The Ungoverned World

This is an interesting, albeit sobering visual tour of conflict zones from Bloomberg:

David Fuller's view -

The global economy is achieving so much, not least in the social sciences and bioTechnology.  Billions of people have been lifted out of poverty in the last few decades.  Nevertheless, parts of our world remain primitive and often in turmoil, with little education, subjugation of women, and no enlightened rule of law.  Governance is everything. 



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October 13 2015

Commentary by David Fuller

Iain Little: Fund Manager Diary

Mr Jeremy Corbyn, a Marxist time traveller from the 1970s trade union movement, has been elected head of the UK Labour Party. The UK, the world's 5th largest economy, now has as the head of its principal opposition party a man who has so far refused to kiss the Queen's hand in the time honoured tradition of members of Her Majesty's Privy Council. He has preferred instead to absent himself to Scotland, no doubt to kiss the less fragrant hands of his Comrades on Clydeside, where, in the 1860s, a third of the world's shipping was bolted together (sadly, no more). Mr Corbyn's influence on voting patterns should ensure that a Conservative led UK will prosper on a diet of European financial services primacy, Technology, pharmaceuticals and economic liberalism. This can only be good news for its stock market in the longer term.

David Fuller's view -

Don’t miss the photo and reported conversation accompanying the paragraph above.  



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October 12 2015

Commentary by Eoin Treacy

Cyberwar Ignites a New Arms Race

This article by Damian Paletta, Danny Yadron and Jennifer Valentino-Devries for the Wall Street Journal may be of interest to subscribers. Here is a section: 

“Cybercapability, especially offensive cybercapability, is a relatively inexpensive method that a country can exploit to ‘hit above its weight class,’ which North Korea is fully aware of and is attempting to leverage,” said Steve Sin, a former U.S. Army counterintelligence officer who now researches unconventional weapons and Technology.

Defense contractor Northrop Grumman Corp., meanwhile, has advertised for a “cyber operations planner” to “facilitate” offensive computer attacks with the South Korean and U.S. governments, according to a job posting it listed online.

 

Eoin Treacy's view -

A link to the full article is posted in the Subscriber's Area.

Cybersecurity is a multi-faceted theme where the majority of consumers and corporations focus on defensive capabilities. Governments on the other hand are much more interested in offensive cyber characteristics. Considering this an M1A2 Abrams tank cost about $6 million in 1999 and a Reaper drone costs about $12 million in hardware alone. So for the cost of one piece of high end military apparatus one could purchase a serious technological suite of tools and pay the programmers required to bring a project online. Against this background the relatively low barrier to entry means this represents a substantial growth trajectory. 



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October 09 2015

Commentary by Eoin Treacy

3D-printed Adidas running shoe should fit like a glove

This article by Stu Robarts for GizMag may be of interest to subscribers. Here is a section:

The Futurecraft 3D midsole was developed in partnership with 3D printing specialist Materialise. It is designed to provide the cushioning needs of the wearer, matching contours and pressure points of each individual foot. Adidas describes it as a "flexible, fully breathable carbon-copy of the athlete’s own footprint."

Gizmag has requested some additional info from Adidas on the specific materials and processes used to create the Futurecraft 3D, but has yet to receive a response. The sportswear manufacturer does say in a press release, however, that its ultimate aim for the Technology is for customers to be able to walk into a store, spend a short time running on a treadmill, then leave the store with a 3D-printed running shoe. 

Eoin Treacy's view -

There is nothing quite like finding a pair of shoes that fits just right. Nike was talking about scanning people’s feet in store and mailing them their shoes a few years ago but nothing has happened on that front just yet. Adidas’s solution would appear more workable because the consumer would be able to walk out of the store holding or wearing the product. It’s still in the future but it does help to exemplify the trend of customisation that physical locations need in order to encourage shoppers to leave their homes. 



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October 08 2015

Commentary by David Fuller

Email of the day 2

On bioTechnology and market timing:

Dear David

My name was mentioned in the email of the day yesterday on bioTechnology so I thought it would be timely to add some thoughts.

On the question does one buy and hold bioTechnology shares or funds, some interesting data was published earlier this year by Steve Sjuggerud, who is a very experienced and successful investor living in Florida. He back-tests market data extensively. His back-testing showed that from 1983 until his publication in early 2015 you would have made 21.5% a year on average following buy and hold in a bioTechnology index. I think that beats Warren Buffett. But is a very tough ride as there are large booms and busts. So he then went on to say that a simple trend-following strategy can help avoid the large busts and can improve returns significantly. He suggested using monthly data and buying biotech stocks when they close above their 6-month moving average, and selling when they close below their 6-month moving average. His back-testing indicated this strategy would have delivered a compound annual gain of 30.8% since 1983. One has to stomach many whipsaws, as with any trend-following strategy.

Personally, I add another nuance. This is a rule I follow in my own investing, and it featured in my Markets Now presentation in London on 15 June 2015. The slides are available on Fuller Treacy Money website. Look at slide 6 for the rules, and slide 7 for the data on which they are based. This concerns the market overall, not bioTechnology specifically. If the yield curve remains positive (as it is today) there is a strong probability that the overall bull market remains intact. Nevertheless, this has worked only about 70% of the time historically over the past 100 years. The other 30% of times when markets fell substantially have generally been during the market ‘weak season’ May-October which David mentions regularly. As a safeguard I go 50% cash during this time. I went 55% cash during May-June this year and sold about 90% of my bioTechnology holdings.

In addition to the market weak season, another factor that made me lighten my bioTechnology positions is that they had become significantly over-extended relative to the 200 day moving average. Mean reversion is highly likely when price gets 30-40% above the 200 day moving average. David and Eoin refer to this very often.

My own investing in quoted bioTechnology is guided by the three factors described here. I gave a lot more detail on bioTechnology in another presentation titled ‘The Third Industrial Revolution’, at Markets Now on 23 February 2015. Again, the slides are available on the website.

I hope this is helpful.

Best wishes David, and I hope to see you sometime in December or January, after my travels are finished at end November (I will be helping at the orphanage I support in South Tibet).

David

David Fuller's view -

My thanks to David Brown for this wonderfully educative email which he posted on the FTM site today.  I reproduce it here to ensure that subscribers see it. 

The advantage of an interactive website is that we can learn from each other, not least as the level of knowledge and experience within the Collective of Subscribers is enormous.  Thank you for sharing your thoughts.  



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October 07 2015

Commentary by David Fuller

Email of the day

On the First Trust NYSE Arca BioTechnology Index Fund (FTB):

Hi David

How very prescient you were about biotechs!  On the 13th March [Email of the day 4] you wrote about looking out for an upside tail on the weekly chart, and said "You could ride out the next mean reversion as a long-term investor but do not be surprised if it comes back to 100."

And what happened? The very next week there was an upside tail. That top was subsequently taken out, but now we ARE below 100!  Which indeed is much lower than I expected at the time.

I took the first course, riding out the mean reversion (and more) and am now holding on. Trusting that your long-term assessment - "I do not doubt for a second that bioTechnology has a terrific long-term future" - is as correct as your short-term one was!  In my decision to do this I was definitely influenced by the knowledge that that is what you habitually do with your long-term positions, even in critical situations like 2008, and that it has paid off for you in the long term. And that in my own trading I have always - through decades - made money on shares and lost on the trading.  So now I have only long-term positions, finally having seen the light.

Once again thanks to you and Eoin for being such marvellous guides to this choppy universe. 

David Fuller's view -

Thank you for your kind words and for raising, once again, such an interesting topic.  You are playing to your strengths, which makes sense for every investor.

Leveraged trading is exhilarating when successful but also traumatic when it goes wrong, as it inevitably does from time to time.  It is also much more difficult than unleveraged investing, because 10 to 1 gearing clearly involves short-term money control challenges.  Therefore sensible people either keep leveraged trades very small relative to their capital, or build-up positions on a Baby Steps basis, protected with in-the-money trailing stops.  However, this latter tactic needs the luck of significant and orderly trends to be profitable.  They are often the exception rather than the rule, so disciplined traders will often find that they are frequently stopped out with small profits or losses, even if they have anticipated the overall direction of the trend.

As for riding out your unleveraged FTB position, it is near $100 today but it briefly fell much lower on the August 24th temporary meltdown, probably due to high-frequency trading, although I have no confirmation of this having been on holiday at the time.  I hope you were similarly distracted from the markets on that day, because it would have been traumatic for many people.  For this reason I am repeating the tactical paragraph from my reply to your email posted on 13th March, for dealing with positions where the trend has accelerated in your favour:

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October 06 2015

Commentary by Eoin Treacy

Musings From the Oil Patch October 6th 2015

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

The new Imperial Oil Technology involves adding a solvent to improve the flow of oil to the surface as well as generators that burn less natural gas to supply the steam. What we understand about Imperial Oil’s new Technology is that currently proposed oil sands projects could produce 55,000 to 75,000 barrels a day in oil output compared to their presently planned output of 30,000-40,000 barrels a day according to Mr. Krüger. As he was quoted during the presentation,

“This is bigger on a per phase basis than we’ve talked about in the past.” From Mr. Krüger’s viewpoint, this Technology represents “a very large, long-term growth opportunity.” Even though the company seems satisfied with the new Technology, it is not ready to move forward with some of these planned oil sands projects while management assesses their cost, possible changes to Alberta’s regulatory policies and the outlook for global oil prices.

Citi Research has prepared a chart showing its assessment of the impact of technological and economic cost reductions of various oil outputs between 2014 and 2015, based on assumed 2020 output contribution, due to the industry downturn. Most of the decline since 2014 is about $5 per barrel, although Gulf of Mexico costs may have declined by $7 a barrel and the shale formations by $10 a barrel. If Mr. Krüger’s assessment of the impact on output from Imperial Oil’s new Technology is correct, then there would likely be a significant reduction in the cost of new oil sands output. According to the Citi Research chart, they estimate that oil sands currently cost between $80 and $100 a barrel. However, if the Imperial Oil claims are correct and can be implemented commercially, then a 30% output improvement might translate into $25-$30 per barrel cost reductions.

Obviously there are a number of assumptions that must be made in reaching this conclusion, including that the solvent-added SAGD process is not more costly than what is being done now and that additional output volumes require extensively larger facilities in order to handle them.
If you are Saudi Arabia and you have targeted new, large and long-term output sources such as oil sands and deep water oil in your price war, the prospect of their costs declining materially has to be unnerving. It has been our contention that Saudi Arabia’s target was these deposits, including Arctic output, and less about the domestic shale business. Why? The shale revolution is a “real-time” output, meaning that if producers are forced by economics to stop drilling, eventually oil prices will rise, drilling will resume, as will shale output, and the price cycle will start all over again.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Technological innovation continues apace and lower energy prices only increase the incentive to develop solutions in order to ensure survival. North America represents an exciting energy geography and the relatively low price of oil does not change that. On the other hand the continued development of new extraction methods may keep a lid on prices but will increase volumes. 



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October 05 2015

Commentary by David Fuller

Email of the day 1

On Markets Now, temporary corrections in bull markets, and Lyme Disease:

I really enjoyed Markets Now on Monday. I think that you were indicating that monetary policy will keep some semblance of equilibrium in markets but I will feel better if we see more evidence of markets settling. I don’t think I handle it all as well as I used to! I had to sit down at the American Bar.

The following chart did cheer me up though. I was reviewing a client portfolio ( smaller cos investment trusts as it happens) & was struck by just how much the long term chart below reminded me of what I read years ago by Edwards & Magee or Murphy or whatever – on the ‘formation’ of a ‘classical bull market’.

Turning to the next page in those books I think they would have then said that a retracement of 30-50 % is quite possible but thereafter at least 2 more bullish upswings. What do you think? Unfortunately because of the way regulation works (or doesn’t??), I cannot really indicate this to a UK ‘regulated’ client.

 On a completely separate matter, I hope you do not mind me asking this?

You may have seen that the business man John Caudwell & his family have been struck down by this terrible Lyme disease. I have a client (in fact I did bring him to Markets Now about a year ago) who has a grandson suffering very badly from this. I think that the family are desperate for any ‘cure’ & my client who is a scientist himself is trying to obtain as much information & ideas for treatment as possible. Lots of brickwalls, I gather.  

I was wondering if David Brown might have any suggestions or contacts on this – or any ideas as to what he might do? David might find this client interesting in any event as he is a leading patent attorney & with some fascinating stories on Technology.

To the next Markets Now

Very best

David Fuller's view -

Thank you for your detailed email and your considerable interest in our Markets Now seminars.

Market setbacks are often volatile, which can certainly make them more stressful, even if one has seen them coming.  The pressures encountered are inevitably increased if you have clients who are seeking guidance from you and you care for them, as you obviously do.

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October 02 2015

Commentary by David Fuller

The World Economy as we know it is About to Be Turned on Its Head

My thanks to a subscriber his comment that “Deflation may not be a decreasing threat”, and also for this interesting column by Ambrose Evans- Pritchard of The Telegraph.  Here is the opening: 

Workers of the world are about to get their revenge. Owners of capital will have to make do with a shrinking slice of the cake.

The powerful social forces that have flooded the global economy with abundant labour for the past four decades years are reversing suddenly, spelling the end of the deflationary super-cycle and the era of zero interest rates.

"We are at a sharp inflexion point," says Charles Goodhart, a professor at the London School of Economics and a former top official at the Bank of England.

As cheap labour dries up and savings fall, real interest rates will climb from sub-zero levels back to their historic norm of 2.75pc to 3pc, or even higher.

The implications are ominous for long-term US Treasuries, Gilts or Bunds. The whole structure of the global bond market is a based on false anthropology.

David Fuller's view -

Any column by Ambrose Evans-Pritchard is a good read, in my opinion. 

Most subscribers know my views on this topic so will just briefly say that wages in developed countries were held down by three factors: the 2008 economic crisis and its impact which still lingers today, globalisation, and Technology.

I think the global economy will be recovering over the next three years.  Globalisation has levelled the wages playing field somewhat, and Technology has made middleclass workers more efficient, not least in developed countries.  However, I also think that Technology will continue to replace jobs in many industries, although we will also see the creation of new jobs. 

A PDF of Ambrose Evans-Pritchard's article is in the Subscriber's Area.  



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September 30 2015

Commentary by David Fuller

Turn CO2 Into Cold, Hard Cash

Here is the opening of this interesting article from Bloomberg:

The world's biggest companies cite many reasons for cutting their climate pollution: It's good PR, it's even the law in many places, and not doing so contributes to the risk of global catastrophe. Here's one you don't hear so much. By blowing their carbon dioxide skyward, power plants are venting raw material and, by extension, a ridiculous amount of money. Waste is being wasted. All that carbon and oxygen must be good for something.

That's the premise of the XPrize Foundation's new Carbon Prize, a $20 million competition over five years to identify "high-value products" that can be made from captured power-plant CO2 emissions. The competition formally opened Tuesday with a six-month period for teams to register their projects that might involve biofuels, fabrics, pharmaceuticals, and building materials. Within prescribed limits, it doesn't matter what's made, as long as the CO2 is captured and turned into something people or businesses want to buy.

Competitors must make it through three judging rounds. The two main prizes of $7.5 million each will go to the teams that make the most of CO2 from coal and gas plants. A U.S. coal plant and Canadian gas plant will be named as the XPrize's test sites soon. The prize is sponsored by NRG Energy and Canada's Oil Sands Industry Alliance.

The guidelines rule out technologies that miss the spirit of low-carbon innovation. Trees, for example, have proven adept at catching carbon, but their core Technology—photosynthesis—isn't new. "Enhanced oil recovery" is energy-industry jargon for pumping CO2 into a well to drive up more oil. That's a marketable use of the gas, but in the service of burning more carbon. 

The Carbon Prize may be the most physically challenging competition yet. Not because it necessarily requires great exertion, but because of the actual physical chemistry of CO2 itself. Carbon dioxide is a very low-energy molecule. It's spent fuel—the molecular equivalent of passing out from exhaustion after a long run. So to make CO2 into anything useful, you need to use lots of energy. But producing energy typically emits CO2, which the XPrize wants people to make into useful products, which requires energy, which produces CO2 ….

David Fuller's view -

This competition is sponsored by the USA’s NRG Energy and Canada’s Oil Sands Industry Alliance.  They deserve any favourable publicity from this effort, and who knows, perhaps it will spark a sensible commercial idea which lowers CO2 emissions.  It is not a new idea – see Herbert Hoover’s sensible comments nearly a hundred years ago, quoted in the concluding paragraph of Bloomberg’s article.      



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September 30 2015

Commentary by David Fuller

Email of the day 1

On “worried”:

I'm writing you as a friend of the firm, and a worried one at that. I think it would be best not to publish this letter, but I will leave that completely up to you.

As you know, I have been a subscriber for some years, attended 3 full chart seminars plus 1 1-day seminar, and read Crowd Money 4 times along with providing some help on it. I've been doing TA since the mid-90's. I pay a LOT of attention to what you and Eoin write and say. Until now, I have always been pretty much in sync with your thinking, or was influenced by your thinking to get in sync.

Over the long term, I agree we will see a secular bull market propelled by Technology of all kinds.

But now, my read of the markets, using the methodology you and Eoin have so beautifully crafted, tells me that we have entered into a globally synchronized bear market. I look at over 100 charts every day. Very few cry out to be bought, very few show basing patterns, but most show tops that are already confirmed. And many are deep into declines that still show no sign of basing.

Your advice to buy during this time feels really really scary to me. I'm not scared for my portfolio - I'm net short by a lot. But I am scared for your firm and your reputation. If this is the beginning of a fairly serious cyclical bear market, it would seem to me that you face the risk of a major loss of subscribers if you encourage them to buy now. I am not speaking for myself, in this regard, as I plan to stay a subscriber forever. But others may not be so clear thinking. If buying now turns out to be a bad call, you will be perceived as having missed a critical top in the markets, and having not rigorously used the now famous Behavioral Technical Analysis to evaluate the price patterns.

I'm worried for you.

A serious friend of FullerTreacyMoney...

David Fuller's view -

Thank you for this detailed and thoughtful email.  I genuinely appreciate your interest in this service and am touched by your concern.

The short answer on market analysis is that we all have more to learn.

In response to your main paragraph just above, I have always tried not to give advice.  Instead, I offer my views and tell people what I am doing with my own investments.  This is an important distinction.  Few of our experienced subscribers wish to be told what to do.  They want to hear clear, unhedged and objective views, which help them to clarify their own thoughts.  Similarly, I spend a considerable amount of time reading and listening to different perspectives to help me clarify my own thoughts.  Most of our less experienced clients also wish to develop that same independence of thought, which can help them to think clearly during the crowd manias. 

For this reason I have always wanted to be in charge of my own thinking process.  I know it will not always be right – nothing ever could be in attempting to anticipate the future.  However, if you can observe markets objectively, trying to understand the psychology of fear and greed, in addition to the main fundamental economic factors, you have a good chance of being right more often than wrong, especially on the big calls. 

Fortunately, ever since late 1969 when I left a big firm, I have had the freedom to develop independent analytical thought which is exceptionally important to me.  In other words, people may agree or disagree but no one sensors my research output.  Additionally, I am not worrying about my reputation before providing a market view; otherwise I would wind up hedging everything and subscribers would hear fewer clear thoughts and opinions.

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September 25 2015

Commentary by David Fuller

Biotech Selloff Sinks U.S. Stocks; Dollar Gains, Treasuries Fall

Here is the opening of this report from Bloomberg:

A selloff in bioTechnology shares halted a rally in U.S. equities, while the dollar rose and Treasuries fell after Federal Reserve Chair Janet Yellen reassured investors the turmoil in emerging markets won’t kill off U.S. economic growth.

The Nasdaq BioTechnology Index tumbled more than 5 percent, sending the gauge of drugmakers into a bear market. Nike Inc. surged to a record, bolstering the Dow Jones Industrial Average. An index of global equities rose for the first time since the Fed policy meeting last week. The dollar strengthened toward its best week in two months, Treasuries led bonds lower and gold slumped.

Yellen managed to calm markets that had been shaken up after the Fed left rates unchanged last week amid concern that economic and financial turmoil could slow growth. A tweet from Democratic presidential hopeful Hillary Clinton suggesting there may be “price gouging” in the market for prescription pills sparked the selloff in drugmaker shares this week.

“We saw a rally come in and now the rally is getting questioned,” said John Stoltzfus, the New York-based chief market strategist at Oppenheimer & Co. “ It’s going to be all about earnings. The biggest thing here is: people are impatient. They want their answers now.”

Data in the U.S. today showed the world’s largest economy expanded more than previously forecast in the second quarter, boosted by gains in consumer spending and construction. A report on consumer sentiment indicated some households are starting to look beyond the recent turmoil in financial markets.

David Fuller's view -

Janet Yellen is right.  Turmoil in emerging markets, especially the commodity producers, will not kill off US economic growth.  In fact, US growth is benefitting from those depressed commodity prices represented here by the CRB Continuous Commodity Index (CCI) (weekly & daily) updated through Thursday. 

China’s slowdown gets most of the credit / blame for low commodity prices and that has been an important influence, particularly for industrial metals.  However, the even bigger story, by far, is increased production, helped by Technology.  This has boosted the production of all commodities and especially the industrial sector in recent years.  Consider unconventional production of crude oil via fracking and the almost fully automated mining projects run by some of the larger firms.  

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September 17 2015

Commentary by Eoin Treacy

Email of the day on Tesla

My hunch - but I may be wrong - is that electric cars are relatively easy to build... there is not much Technology in an electric engine, no complexity; as for the batteries (which I understand are Panasonic's in the case of Tesla, which assembles them together in very large modules) I understand that the know how is not really in the hands of Tesla or any other producer (even Renault/Nissan stopped developing in house Technology) and therefore someone else did the clever job. 

As a first mover Tesla has very competently built a good product, taking risk only where strictly necessary: luxury brand (low risk) with traditional, long bonnet, probably off the shelf design (low risk), an old chassis for the roadster, well tested batteries. Also, the complexity of electric power train - compared even with a small 1ltr engine - is little: there are fewer (almost none in fact) moving parts, no gear box. No way a new producer could enter the industry with its own internal combustion engines, but the electric car gives this opportunity.  A good demonstration of this is that Tesla's provisions for warranties are in line with those of a mature manufacturer with a well-tested line up of cars... probably Tesla know that there is so little in an electric car that can actually go wrong.

Traditional producers have held off from making a proper move into the sector not to cannibalize their current products and make all R&D and Capex in a probably obsolete Technology completely worthless. After all they can catch up quickly: the difference between a Tesla, and a BMW or Nissan Leaf or 500e is purely the size of the battery, whose development risk is not theirs... On paper, a Leaf may have the range of a Tesla simply by doubling the size of the battery. In the meanwhile, no necessity of taking the risk of killing their current baroque business model, made of V12, V6, boxer, in line 4 or 3 or 2 cylinder hyper complex engines that you have to service all the time and last 300k when of exceptional quality.

Traditional car manufacturers will "tolerate" Tesla as far as it does not build a too strong brand (ludicrous speed is genius by the way: intrinsic of electric engine, easy to do, but presented as cool high tech stuff), then move in and with their economies of scale and less vertically integrated structure quickly catch up... it will be dear, but unavoidable as Tesla made clear it is possible to achieve a usable and fun product with no petrol engine.? VW making its move,? but I guess everyone if working on something. 

What I think could get ugly in this story - from the point of view of Tesla shareholders - is the excessive use of dodgy accounting (there are examples), the glorification of the CEO and its ideas (never good in a plc), just to get hold of capital for a venture that is extraordinarily risky and liable to competitive pressures from corporations much larger and much more sophisticated. How far will the individual Musk go to keep the business going? He is very successful, people love him, Tesla S has been voted best car ever. Difficult to give that up, right?

Did not look at the other businesses of his, with Space X he is against defence and/or state run companies... difficult.

Anyway, just a thought, I may be completely wrong...

 

Eoin Treacy's view -

Thank you for this detailed email and I agree that with valuations as they currently stand Tesla does not have a great deal of margin for error. The company has lost money in every quarter since 2013 but less than analysts estimated which has helped support the massive run-up in prices. 



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September 16 2015

Commentary by David Fuller

China Stocks Jump in Last Hour of Trading on State Support Signs

Here is a margin trading section of this informative report from Bloomberg:

Guo Feng, an investment adviser at Northeast Securities Co., said stocks also rallied on speculation the government is succeeding in reducing risks associated with non-brokerage margin lending. The China Securities Regulatory Commission cleared 3,255 non-brokerage margin funding accounts, or 61 percent of the total, spokesman Deng Ge said this week.

Margin traders cut holdings of shares purchased with borrowed money on Tuesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling to a nine-month low of 587.1 billion yuan ($92.2 billion).

The Technology sub-index in the CSI 300, which has slumped 54 percent since its June peak, posted its biggest gain since September 2008. Yonyou Network Technology Co. rose by the 10 percent daily limit, rebounding from its lowest close since Jan. 5.Dr. Peng Telecom & Media Group Co. jumped 10 percent. Measures of health-care and industrial shares advanced at least 6.7 percent.

David Fuller's view -

Well, China certainly has both a command economy and stock market, in case anyone was in doubt.  The trouble with this micromanagement is that it is an on-the-job learning process.  Moreover, China’s proclivity for a casino environment creates global shock waves. 

Yes, China’s economy has slowed, probably to a GDP growth rate closer to 4% than the reported 7%.  Nevertheless, China certainly has the world’s second largest economy, and by some measures, including imports, it is the largest economy. 

For the world’s investors, whether domestically oriented or internationalists, China is the big elephant in the room.  Moreover, it is still growing, seldom a passive presence and often unpredictable.  We may or may not want to invest in China, but we certainly need to keep an eye on it, starting with price charts for China’s indices.   

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September 15 2015

Commentary by Eoin Treacy

Kuka AG: Ride the wave of Industry 4.0

Thanks to a subscriber for this educative report from SocGen focusing on the industrial automation sector. Here are some sections:

The fusion of the digital world with the real world of manufacturing, known as the fourth industrial revolution, has just begun. For decades, Kuka has been setting milestones in factory and production automation, but we think the real breakthrough is just ahead with smart factories, for which Kuka is providing key Technology that enables Industry 4.0. In our view, intelligent robotics, in particular human/robots collaboration is the heart of the digitised value creation chain as robots can be used as a versatile tool for unlimited production flexibility.

With its sensitive lightweight robots, mobile platforms, and smart platforms such as controllers and software, we think Kuka is well positioned to offer human/robot collaborative assistance systems, automation solutions, and production processes that mark the dawn of a new area for smart factories.

And 

Although industrial robots have been used for decades, their high cost only led to productivity improvements in industries that were using low skilled, but highly paid workers in the developed world, performing jobs that were dangerous, dirty and dull, like welding in auto production. In our view, we are now at a stage where robotics and the automation industry have started to “cross the chasm”, as early adopters such as the car industry have paved the way for a broader use of robots. Therefore, we think that other industries will catch up with the automotive industry to improve their efficiency and remain competitive, especially in regions of high wage inflation and an ageing workforce.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

As the above report highlights the automotive sector is where the robotics sector took root. However the potential for robots to be employed in additional high margin sectors such as healthcare, pharmaceuticals and logistics is where the major growth thesis lies. Demands for high quality manufacturing, wage growth and an aging workforce all represent encouraging themes for the sector. 



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September 14 2015

Commentary by David Fuller

In Japan, the Rise of the Machines Solves Labor and Productivity Here is the opening:

The rise of the machines in the workplace has U.S. and European experts predicting  massive unemployment and tumbling wages.

Not in Japan, where robots are welcomed by Prime Minister Shinzo Abe’s government as an elegant way to handle the country’s aging populace, shrinking workforce and public aversion to immigration.

Japan is already a robotics powerhouse. Abe wants more and has called for a “robotics revolution.” His government launched a five-year push to deepen the use of intelligent machines in manufacturing, supply chains, construction and health care, while expanding the robotics markets from 660 billion yen ($5.5 billion) to 2.4 trillion yen by 2020.

“The labor shortage is such an acute issue that companies have no choice but to boost efficiency,” says Hajime Shoji, the head of the Asia-Pacific Technology practice at Boston Consulting Group Inc. “Growth potential is huge.” By 2025, robots could shave 25 percent off of factory labor costs in Japan, according to the consulting firm.

Worker Replacement

Automation also has huge potential for distribution. Toho Holdings Co.’s 10 billion yen distribution center, which became fully operational in January, employs about 130 workers, roughly half the number at another one of similar size. Productivity per worker is 77 percent higher with robots handling 65 percent of item-picking, the drug wholesaler says.

“We wanted to lower manpower requirements by using robots because we already found it hard to recruit people, including part-time workers,” says Mitsuo Morikubo, the company’s executive managing director.

Inside a three-story gray building in Saitama north of Tokyo, about 28,000 items such as vaccines, liquid food and suppositories are stored. On the spotless second floor, a handful of people open cardboard boxes and take out items for the machines to handle.

The dexterity of the 16 robots is in evidence when one of them lowers its arm, stopping just above a rectangular box. Eight suction pads stretch down, latch on and drop it on one of the three narrow conveyor belts. “Swish, swish, swish,” its sound blends in with the clacking belts.

Depending on the type, size and weight of an item, the machine alters which pads it uses, how fast it moves and where it puts the item. The robots can pick up to about 10,000 items per hour with almost perfect accuracy. By adjusting the timing of the conveyor belts, the whole system can mix different products and make orders for individual customers.

David Fuller's view -

Japan was Asia’s first developed economy of the last century.  However, in the 1980s it created what was arguably the world’s biggest ever bubble, which burst in 1990 and undermined GDP growth for over a generation.

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September 11 2015

Commentary by Eoin Treacy

Tencents WeChat App to Offer Personal Loans in Minutes

This article by Juro Osawa may be of interest to subscribers. Here is a section: 

Using the new Weilidai feature, WeChat users can receive money in just a few minutes after submitting their applications. They apply for loans by giving their traditional bank account information and other basic personal data, and Weilidai assesses their credit based on its own data as well as individual loan status information from the People’s Bank of China, according to people familiar with the matter. The credit assessment process could take less than a minute. While interest rates vary based on the user’s credit levels, on average, the daily rate is 0.05%. The terms for the loans are up to 20 months.

In late July, WeBank said its outstanding personal micro loans amounted to 800 million yuan, without disclosing the number of borrowers.

Still, how far Tencent and WeBank can expand will depend in part on Chinese authorities. WeBank uses facial recognition Technology to verify users’ identities before allowing them to bundle their traditional bank accounts with WeBank’s online accounts. Because regulators are still concerned about the Technology, there are limitations to what users can do with the online accounts, a person familiar with the matter said. For example, users cannot transfer money from their online WeBank accounts to other people’s bank accounts.

“Internet finance is still at its early stage, and the regulatory framework is still evolving,” Ms. Meng said.

Eoin Treacy's view -

Both Google and Facebook have been investigating entering the banking sector. For Apple the logical next step from ApplePay would be to offer credit products not least because it would be a useful employment of the company’s substantial cash reserve. Well-heeled Chinese companies are further along in developing their own products. 



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September 07 2015

Commentary by Eoin Treacy

Yingli Fights to Survive as Another Solar King Dethroned

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

One of those investments was the 2009 purchase of Cyber Power Group Ltd. for $77.6 million, a company that makes polysilicon, the main raw material in solar cells. Yingli’s founder and Chief Executive Officer Miao Liansheng invested another $270 million to upgrade the plant. The project made more sense then, when the material sold for $400 a kilogram; today, it can be bought for less than $20, said Angelo Zino, an S&P Capital IQ analyst in New York.

Yingli spent aggressively on marketing as well, including sponsoring the World Cup. Its logo was prominent during matches in Brazil last year. “They spent on capacity, they spent quite a bit on marketing,” Sanganeria said. “They took everything to the extreme.”

Suntech and Q-Cells faced similar issues, borrowing to expand capacity and then finding themselves constrained by debt, said Raymond James’ Molchanov. Both struggled to cut manufacturing costs fast enough to keep up with the market. The challenge was exacerbated starting in 2011 when slowing demand in Europe led to a global oversupply of panels and falling prices.

Eoin Treacy's view -

The problem for solar cell manufacturers is that the primary bullish case for solar is that Moore’s law can now be applied because it is a Technology rather than an extractive resource. This means companies relying on producing legacy products, when Technology is advancing rapidly are being left behind and often with high debt loads. 



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September 07 2015

Commentary by Eoin Treacy

This Preschool Is for Robots

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

What makes Brett’s brain tick is a combination of two technologies that have each become fundamental to the AI field: deep learning and reinforcement learning. Deep learning helps the robot perceive the world and its mechanical limbs using a Technology called a neural network. Reinforcement learning trains the robot to improve its approach to tasks through repeated attempts. Both techniques have been used for many years; the former powers Google and other companies’ image and speech recognition systems, and the latter is used in many factory robots. While combinations of the two have been tried in software before, the two areas have never been fused so tightly into a single robot, according to AI researchers familiar with the Berkeley project. “That’s been the holy grail of robotics,” says Carlos Guestrin, the chief executive officer at AI startup Dato and a professor of machine learning at the University of Washington.

After years of AI and robotics research, Berkeley aims to devise a system with the intelligence and flexibility of Rosie from The Jetsons. The project entered a new phase in the fall of 2014 when the team introduced a unique combination of two modern AI systems&and a roomful of toys—to a robot. Since then, the team has published a series of papers that outline a software approach to let any robot learn new tasks faster than traditional industrial machines while being able to develop the sorts of broad knowhow for solving problems that we associate with people. These kinds of breakthroughs mean we’re on the cusp of an explosion in robotics and artificial intelligence, as machines become able to do anything people can do, including thinking, according to Gill Pratt, program director for robotics research at the U.S. Defense Advanced Research Projects Agency.

And

Part of why the robotics industry is so interested in the type of AI in development at the Berkeley lab is because, unlike with most emerging Technology, it already works really well, says Abbeel. “Everybody who tries something seems to get things to work beyond what they expected,” he says. “Usually it’s the other way around.” The work has piqued the interest of executives at Dyson, Fujitsu, Siemens, Toyota, and several startups, who have visited the lab, Abbeel says.

Eoin Treacy's view -

Technological innovation is proceeding at such a rapid rate that people depending on low skilled work are being replaced. This is particularly true of factory settings that do not require movement over potentially rough terrain. Education, upskilling, individual creativity and product customisation are more important than ever if individuals are to thrive in an environment where industrial automation is proving to be a powerful competitor. 



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September 01 2015

Commentary by Eoin Treacy

Blythe Masters Tells Banks the Blockchain Changes Everything

This article by Edward Robinson and Matthew Leising for Bloomberg may be of interest to subscribers. Here is a section:  

She then plumbed why the ledger could transmit assets without an intermediary, which would change everything she knew about the way the markets completed trades. Buyers and sellers, of course, can’t automatically trust one another. In the fixed-income market, for example, we need middlemen to draw up contracts between buyers and sellers that cover interest payments, terms, and collateral, plus clearinghouses to guarantee the exchange of cash for securities.

Through her research, Masters understood how you could input all that information into a digital “smart contract” on a distributed ledger. Conceptually, it’s similar to the way you can embed video in an e-mail. But the difference is that when you send that smart contract along, it doesn’t just contain data, it transfers ownership of the security. The value belongs to whoever possesses it. So a trade could be settled in minutes instead of days or weeks, Hirani says.

Anyone with access to the ledger can read the contract with a click of a mouse. That means regulators, who depend primarily on self-regulatory organizations to police the markets, could easily verify that a securities transaction didn’t violate anti-money-laundering rules or other laws. The blockchain, in essence, automates trust, Hirani says.

The clincher for Masters was how the Technology can affect risk. Every hour that a trade hangs suspended between sale and purchase, the chances mount that it won’t be fulfilled, she says. Institutions have to set aside capital to protect themselves from such failures. Since the 2008 crash, regulators in the U.S. and the European Union have directed banks to allocate ever-larger sums to cover their exposures. If the blockchain could shorten the settlement time for, say, syndicated loans, from 20 days to 10 minutes, this risk would be reduced and capital would be freed up.

Eoin Treacy's view -

Blockchain Technology is still immature but is advancing rapidly and what it could mean for back office efficiency is truly mind blowing. When I worked at Bloomberg I would often visit back office operations in Luxembourg where people were tasked with pricing some pretty obscure fixed income instruments. In an illiquid market it’s difficult to keep track of pricing and often one has to use a best guess solution. The whole issue of different covenants on loans, deals and bond issues is an equally obscure sector. These all represent market inefficiencies that could be done away with using the blockchain. 



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August 26 2015

Commentary by Eoin Treacy

Email of the day on technological innovation:

This addresses concerns you have voiced about technological change (our ongoing Third Industrial Revolution) leading to the potential disappearance of jobs. The same concern was voiced during previous periods of rapid change in Technology. A quote from the article :

"Technological change increased the demand for other types of labour that were complementary to the new technologies. So, for example, large numbers of supervisors and managers were needed for the vast new factories and companies. Product innovation created completely new markets which demanded completely new types of job."
 
The article goes on to say that economists at the time could not conceive of the jobs that would appear and my sense is the same is true today. 

The real issue for us all is adaptability. Didn't Darwin say something about this? 

Eoin Treacy's view -

Thank you for this email and the associated article. The question is not whether some people will lose their jobs due to their skills becoming obsolete because that is already happening. Rather we need to monitor how many new jobs are being created in new sectors as they emerge. Generalisation, adaptability, non-linear thinking, problem solving and creativity represent the buzzwords for the labour force of the next decades because relatively unskilled jobs, heavily regulated by unions are going to less common. People have always followed a “needs must” approach to work and the pace of automation is unlikely to change that. 



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August 21 2015

Commentary by Eoin Treacy

What the China bears are missing

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

First, let's address the issue of overstating the GDP. Critics point to the country's weak industrial production, export and investment figures as proof that the country is fudging its number. Lardy, a senior fellow at the Peterson Institute of International Economics, points to a salient fact that many people choose to ignore: the biggest contributor to the country's GDP is now the services industry.

"the skeptics have taken insufficient notice of China's progress in transitioning to its new model of economic growth, one less dependent on expanding industrial output, investment, and exports and more dependent on expanding private consumption expenditure¡±, he says.

Between 2011 and 2014, the size of the service sector as a share of GDP rose by about 4 percentage points to 48 per cent and, at the same time, the share of the industrial sector dropped to 43 per cent of GDP. This is a marked change from a decade ago, when the industrial sector accounted for 47 per cent of the GDP while the service sector only accounted for 41 per cent of the economy.

Considering the size of China's economy -- it's a $US10 trillion behemoth -- the transition is even more impressive. Many services are booming in China, the e-commerce sector grew by 31.4 per cent in 2014. The entertainment sector has been growing at an average of 17 per cent a year between 2010 and 2015. In health care, McKinsey predicts the growth in spending will grow from $US357 billion in 2011 to about $US1 trillion in 2020.

 

Eoin Treacy's view -

Unfortunately the services sector now accounts for more than 50% of GDP because the industrial and construction sectors have declined so much. The services, consumer discretionary, information Technology and healthcare sectors are most likely to lead the Chinese economy in a recovery not least because they are receiving a great deal of government support. However this was priced in by the impressive outperformance of the Chinext Index and Shenzhen B shares earlier this year. 



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