Investment Themes - Japan

Search all article by their themes/tags in the search area
below for example “Energy” or “Technology”.

Search Results

Found 1000 results in Energy
May 19 2015

Commentary by David Fuller

How Is India Doing?

My thanks to a subscriber for these bullet points from Goldman Sachs.  Here is the opening:

The long-term positive macro story is still largely intact

● We met with a number of technocrats in place in key ministries who seem

well in command of their brief. We heard no complacency as yet on the need

for reforms.

● Quiet progress on longer-term structural reforms in some areas (National

Infra Fund, reducing Energy subsidies, direct transfer of subsidies).

● Significant progress on increasing coal production and dealing with

transport/environment clearance bottlenecks.

● Recognition that the MAT was an 'own goal' and committed to defusing the

problem.

● Feeling that corruption levels are diminishing and ease of doing business is

improving.

● Strong conviction that some big-ticket reforms will in fact occur, especially

GST, where we heard widespread agreement that if passed, this would have

significant positive impact.

Near-term progress has been slower than expected

● Passing reform legislation through Parliament is proving an obstacle (the

opposition is focusing on polarizing issues like land reform, and retain control

of the Upper House)

● Lack of progress in addressing balance sheet problems for PSU banks and

corporates, limiting appetite for private investments

● General sense that onshore monetary conditions are tight and, in our view,

over-optimism about near term RBI easing

● Rural incomes/spending under stress due to weak commodity prices and

lower government spending, with no obvious near term relief

David Fuller's view -

These and the other points mentioned sound reasonable to me.  India (weekly & daily) from the time Narendra Modi threw his hat into the electoral ring in September 2013, before peaking at 30000 in early March of this year.  I have maintained that it would experience a well deserved consolidation before eventually moving higher. 

This item continues in the Subscribers’ Area, where the list of bullet points is also posted..



This section continues in the Subscriber's Area. Back to top
May 19 2015

Commentary by Eoin Treacy

Musings From the Oil Patch May 19th 2015

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

It is possible that what is happening in China with respect to EVs and hybrid vehicles is a precursor of how America’s vehicle sales and distribution models will work. In response to air pollution and vehicle congestion in major cities, China has begun a strategic initiative to build EVs and is encouraging foreign manufacturers and their partners to join the effort. China expects as many as 40 new EV models go on sale in the country this year, triple the number of new EV models available two years ago. As described in an article in Business Week, Toyota Motors (TM-NYSE) will only market an EV in China as it is committed to hydrogen-powered vehicles as a better alternative to EVs elsewhere. In fact, its dedication to hydrogen-powered vehicles is why Toyota ended its all-electric Rav4 EV crossover partnership with Tesla Motors, Inc. (TSLA-Nasdaq).

China has new emission guidelines that call for a 28% improvement in average per vehicle fuel consumption by 2020, something that likely requires manufacturers to embrace plug-in EVs. Since China controls the permitting of new manufacturing facilities, automakers are almost forced to embrace EVs if they want to have plants capable of manufacturing new vehicles. According to an analyst with A.T. Kearney in Shanghai, China, all the new EV models coming to market may enable the industry to get 1-2 million EVs and other new Energy vehicles on the country’s roads by 2020. That achievement, however, will still fall well short of the government’s target of five million EVs being on the road.

While China may be the model, the technology still is short of delivering a reasonably-priced EV with a traveling range similar to that of an ICE vehicle, or roughly 200 miles on a single charge. There is also the issue with fast charging of EVs, as drivers will measure charging times against the length of time they must spend at the gas pump filling up their ICE vehicle. Environmental concerns are an important consideration for EVs, but they were largely bought by people more interested in impressing their neighbors with their statement about environmental concern than their economics. The fact these clean-fuel vehicles are now being traded in for conventionally-fueled vehicles at an accelerating rate suggests that economics are clearly trumping environmental considerations. Whether this is a good thing or not remains to be seen, but the fact it is happening tells us how powerful the pocketbook is for consumer purchasing decisions. It also tells us that auto manufacturers need to address the shortcomings of EVs and hybrids if they want them to become a competitive auto market segment. Then again, those manufacturers may just elect to let the draconian U.S. fuel-efficiency standards force consumers to buy these less desirable vehicles.

 

Eoin Treacy's view -

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

As the world’s largest car market, China’s regulatory structure will make waves around the world. If China is insisting on electric vehicles in order to contain pollution then car manufacturers will have little choice but to build them. 

An additional thought with regard to range anxiety: A large number of people, at least in Southern California lease they vehicles. In order to get the best price for the vehicle at the end of the lease, mileage has to be kept low. This means that many people rent a car for long trips and use their own car for commuting. I wonder if it is conceivable that the same model will expand beyond SoCal with the advent of electric vehicles which may or may not have overcome their range issues within the next decade. 

 



This section continues in the Subscriber's Area. Back to top
May 13 2015

Commentary by Eoin Treacy

Pareto Securities on Pretium Resources

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

We expect Brucejack to have sizeable production and free cash flow
Based on Pretium Resources' June 2014 feasibility study and starting from 2018, we believe the Brucejack deposit has the ability to produce average annual life-of-mine (LOM) gold production of 404.1koz at an all-in sustaining cost (AISC) of CAD 500/oz for 18 years, post an initial capital cost of CAD 811.9m.

We initiate with a BUY rating and a target price of CAD 10.88/share.
Our target price is based on a sum-of-the-parts valuation composed of the following: 1.0x NPV9% of our LOM assumptions for the Brucejack project, balance sheet items, the after-tax PV9% of general and administration and exploration costs, PV7% of the after-tax interest costs, financing assumptions and in-the-money (ITM) instruments.

Eoin Treacy's view -

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

The post credit crisis environment has been difficult for explorers as Energy prices surged, access to credit was restricted and gold prices fell from their 2011 peak. More recently the outlook has improved not least because Energy prices no longer represent so much of a headwind and gold prices have stabilised. The rationalisation that has purged the sector of wildcat investors has resulted in leaner, more disciplined and cheaper operations. This is reflected in the valuation of the Gold BUGS Index relative to the bullion price. 



This section continues in the Subscriber's Area. Back to top
May 12 2015

Commentary by Eoin Treacy

Continuous Commodity Index and related shares

Eoin Treacy's view -

The CCI which is the unweighted Old CRB, fell from 700 in 2011 to a recent low above 400. It has at least steadied, not least because Energy markets have stabilised and industrial metals have been exhibiting relative strength. The consistency of the fall from above 550 has now been broken, but a sustained move above the 200-day MA will be required to confirm more than temporary steadying. 



This section continues in the Subscriber's Area. Back to top
May 12 2015

Commentary by Eoin Treacy

Email of the day on a name change:

New Energy Technologies Inc (WNDW US Equity) 2.0240  has recently changed their name  to SOLAR WINDOW TECHNOLOGIES.(WNDW US Equity) 2.0240   They are closer to production than  Ubiquitous Energy

Eoin Treacy's view -

Thank you for pointing out this name change which has a more marketable ring to it than New Energy Technologies. I've been watching the company for a number of years. If I recall correctly T.Boone Pickens was an early investor and I learned of the company following an interview he gave on CNBC 

I've been watching the share since in the hope they would come through with a marketable product. 



This section continues in the Subscriber's Area. Back to top
May 11 2015

Commentary by David Fuller

Silver No Longer Poor Man Gold as Solar Demand Surges

Silver has been mined for thousands of years. But for most of the 20th century it was the poor man’s precious metal, its value eclipsed by the enduring lure of gold.

The first big revolution in silver came in 1492 with the discovery of the New World, which opened up mining of the metal on a scale not previously seen. In the centuries that followed Hernán Cortés and the conquistadors’ destruction of the Aztecs, Peru, Bolivia and Mexico accounted for three-quarters of all world production and trade in the metal.

Today, more than 877m ounces of silver are mined annually and the metal is increasingly being employed in new industrial processes. A major catalyst for demand over the next decade will be in the production of solar Energy.

Silver is a key component in crystalline silicon photovoltaic (PV) cells. According to IHS, demand for solar power is set to increase by 30pc to 57 gigawatts of electricity in 2015. China alone is expected to install something in the region of 17 gigawatts of solar capacity by the end of the year, creating huge potential demand for silver.

David Fuller's view -

This is the first bullish news that I have heard about silver since it peaked near $50 just over four years ago.

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
May 11 2015

Commentary by Eoin Treacy

The rise of electricity storage Something for everybody

This article by John P. Banks for the Brookings Institute may be of interest to subscribers. Here is a section: 

In sum, there is great potential for storage both in front of the meter and on the customer side of the meter. Costs need to come down, but the longer-term trajectory indicates that this will happen, and policies and regulations to incentivize storage need to continue to be implemented to spur the creation of markets. The DOE's QER is a step in the right direction, calling for the establishment of a framework and strategy for storage and flexibility. 

In the near-term, it is likely that most of the market development and storage capacity deployed will be at the grid-scale in competitive markets such as PJM, but the SCE procurement certainly highlights the impact of supporting policy and regulation in spurring competitively procured PPA-type arrangements. In addition, California's investor owned utilities have initiated the first round of storage auctions in response to the state's mandate, with final project selection and submission to the California Public Utilities Commission for approval this coming fall.  

In the longer-term, solar-plus-storage could become increasingly economic on the customer side. Indeed, as Hamilton of the Electricity Storage Association described, the three biggest storage markets in the residential sector are California, Arizona, and Hawaii and what they all have in common is lots of solar. But beyond selected markets, residential-scale storage systems such as Tesla's PowerPack won't likely lead to mass defection from the grid in the next five to 10 years. The important point, however, is that Tesla's announcements and all the other recent news is exciting because it shows the progress and potential of a technology with multiple applications and benefits across the grid, providing something for everybody.

 

Eoin Treacy's view -

In my review of utility grade Energy storage companies last week, I highlighted that the sector has been in existence for a number of years but it is Tesla's high profile into the sector that has ignited media interest. We are still in the very early stages of this evolution and it is likely to persist into the lengthy medium term. 



This section continues in the Subscriber's Area. Back to top
May 08 2015

Commentary by Eoin Treacy

Musings from the Oil Patch May 8th 2015

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report. Here are two sections on Saudi Arabia and oil market dynamics respectively:

Besides Prince Mohammad bin Salman’s role as minister of defense, which to date has not been a monumental success as the battle with the Iranian-backed Houthi rebels in Yemen has produced little other than destruction of that country and a humanitarian disaster, he also has been handed responsibility for the council dealing with economic reform. King Salman appointed Labor Minister Adel Fakeih, a former chairman of Savola Group, a food company, as minister of economy and planning. In January, King Salman appointed Azzam bin Mohammed Al-Dakhil, a board member on several private companies, as minister of education. He also named Mohammed Al Jadaan, an advisor to Morgan Stanley and Clifford Chase in Saudi Arabia, to head the capital markets authority. This is quite important as on June 15th the country’s stock exchange will open to direct foreign investment. Saudi Arabia will become one of the largest emerging market indexes available to investors.

And

Two trends in the crude oil trading market will help shape the future of oil prices. One is the action of commodity traders who seem to have thrown in the towel in late March on their bets that oil prices would continue to fall. (See Exhibit 17 above.) The traders have since added to their long trades, meaning they expect prices to continue rising. But the ETFs for oil have suddenly witnessed huge outflows of money that will put downward pressure on crude oil prices as futures contracts, which the funds hold, are sold to meet the redemptions. The Wall Street Journal reported that one ETF, the United States Oil Fund LP, experienced a $2.7 billion cash outflow in April. That fund was holding about 11% of the June crude oil futures contracts’ total open interest. Will the commodity traders tossing in their towels be the buyers of the contracts the ETFs are selling? If yes, then oil prices will not retreat. If the answer is no, then look for near-term downward pressure on oil futures prices.

 

Eoin Treacy's view -

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

Saudi Arabia remains in a state of transformation both politically and economically as it responds to the elevation of a new generation to power, continued strife along just about all of its borders, Energy price volatility and a massive young population. Opening up the country to direct foreign investment raises the question of what foreigners might be allowed to buy? The stock market is a natural destination for investment flows. 



This section continues in the Subscriber's Area. Back to top
May 06 2015

Commentary by David Fuller

Cameron Might Just Win After All, Bookmakers Say on Eve of Vote

Here is the opening of this topical report by Bloomberg:

Ed Miliband might want to hold off measuring for curtains in No. 10 Downing Street just yet as Conservative incumbent David Cameron stages a comeback in the betting market on the eve of the election.

William Hill Plc, the biggest U.K. bookmaker, gives Labour leader Miliband and Cameron the same chance to be prime minister, with the odds on both at 10-11, meaning a successful 11 pound ($16.70) bet wins 10 pounds. Last month, William Hill had Miliband as favorite, as did Betfair, which now gives both an even shot.

Opinion polls indicate neither Cameron nor Miliband will win enough seats tomorrow to govern the U.K. without the support of smaller parties. Odds show the most likely next government is a Labour minority, given the Scottish National Party has offered to support Miliband. Yet the Conservatives will win the most seats and votes, odds show.

David Fuller's view -

I think Cameron needs at least 15 more seats than Miliband, taking him over 300, to be sure of forming the next government.  Polls are not reflecting this but they can be inaccurate.  Betting shops are a fraction closer, as are the UK’s financial markets which have remained stable.

Conservatives underestimated Miliband’s Energy for the campaign and this could be costly.  Also, Conservatives lost the word game.  All leftwing types now describe the most socialist policies as ‘progressive’.   Conservatives were branded as the ‘austerity’ party and until the last few days only George Osborne seemed to talk about responsible governance. 

I found it a depressing campaign, woefully short of leadership, not to mention humour with the exception of Boris Johnson who will surely be the next leader of the Conservative Party.      



This section continues in the Subscriber's Area. Back to top
May 01 2015

Commentary by Eoin Treacy

Elon Musk Challengers Jostle to Solve Riddle of Energy Storage

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

If the storage breakthrough is coming, it seems obvious it would happen in California, which has long led the U.S. in supporting alternative Energy. The state has the most demanding fuel-efficiency standards for cars, as well as incentives that have made it the biggest market for solar power in the U.S.

California “is often a lab” for the rest of the country, said Brian Warshay, an analyst at Bloomberg New Energy Finance. It will “continue to be so on the storage front.”

Older methods of trying to store power have existed for decades, including pumped hydropower facilities in which water is sent to higher elevation reservoirs and released through lower turbines to produce electricity when demand is high.

 

Eoin Treacy's view -

Here is a link to Tesla’s website where they highlight some of the key features of the Powerwall battery. Perhaps the most important consideration today is that almost no one has a battery in their home and that in a decade it could be commonplace. I reviewed the residential battery sector on April 23rd

As much as smoothing out supply and demand curves for electricity use in the home are interesting, the industrial and utility sectors are just as exciting. 

 



This section continues in the Subscriber's Area. Back to top
April 29 2015

Commentary by Eoin Treacy

Email of the day on solar cell manufacturers

This was a useful update on the solar industry and Canadian Solar in particular. CSIQ's chart pattern seems to show 1 year range between $20 and $40. Maybe time for a breakout?

Eoin Treacy's view -

Thank you for this topical article. . Here is a section: 

Along with government incentives to combat global warming, a more natural economic process in the marketplace is driving quick growth in demand for solar power. Cheaper panels and cheaper batteries mean that not too long from now consumers will simply put solar panels on their roofs because that is cheaper than buying electricity off the grid.

The U.S.-based Rocky Mountain Institute warned earlier this month that utilities in the U.S. Northeast stand to lose as much as half of residential sales by 2030 as customers install solar and battery-storage systems and generate their own power.

To keep up with this increase in demand, Canadian Solar plans to almost double its own panel capacity from 2013 levels, Qu said. Along with supply from original equipment manufacturing, total capacity will reach more than 4 gigawatts, he said.

 



This section continues in the Subscriber's Area. Back to top
April 28 2015

Commentary by Eoin Treacy

Tensions building

Thanks to a subscriber for this report from Deutsche Bank focusing on the European region. Here is a section: 

Resolution of the Greek crisis did not take a definitive step forward with the finance ministers meeting in Riga. The controversial move to secure cash reserves from local governments buys Greece several weeks, but the ECB appears increasingly uncomfortable with its rising ELA exposure to Greece. At the same time, Alexis Tsipras’ popularity is starting to wane. The clock is ticking. Our baseline remains unchanged but the risks are high and rising. 

Keep an eye on Italy over the next two weeks – the country faces a relatively low risk of a high impact event. The final vote on the new electoral law in the Lower House is a key fork in the road for PM Renzi’s institutional reform process and probably for the future of his government. We think that the balance of probability is largely in favour of PM Renzi and that the electoral law should pass. The risks are not negligible, however.

Finland’s Centre Party will lead the formation of the new government. A coalition of three parties is probably required to facilitate a coherent reform agenda, which could include the EU-skeptical Finns party. We would downplay the risks to Greece as the Finns party has toned down its rhetoric and is keen to join the government. At worst, Finland could be a source of delay.

The April Flash PMIs disappointed with the euro area composite falling 0.5 points to 53.5 (market expectation: 54.4). Both France and Germany missed expectations by a non-negligible margin. However, the euro composite remained above Q1 levels and is consistent with GDP growth slowing only marginally from 0.5% qoq in Q1 to 0.4% in Q2, in line with our expectations. Other euro area data surprised to the downside too and SIREN-Surprise fell into negative territory for the first time in four months. Nevertheless, SIRENMomentum appears to confirm upside risk relative to our (1.4% yoy) and Bloomberg consensus projections (1.4% yoy) for 2015.

Next week sees the first April CPI prints in the euro area. The risks are to the downside of consensus. We see scope for inflation to rise in H2. There is evidence of the weaker currency in imported inflation, but we don’t expect the impact on producer and consumer prices to be evident until H2.

 

Eoin Treacy's view -

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

The ECB has taken on a great deal of additional responsibility in the last decade but its one core mandate is to target an inflation rate of close to but below 2%. Inflation figures can’t but surprise to the downside considering the decline in Energy prices and the knock-on effects this has for prices of other goods. However we also know that these factors will wash out of the statistics within six months. At that point the likelihood of deflationary pressures easing, not least because the ECB has reversed monetary policy, will improve. 

There is not a great deal of evidence to suggest QE supports economic growth. On the other hand we have ample evidence to support the view that it inflates asset prices and puts downward pressure on the respective currency. 

 



This section continues in the Subscriber's Area. Back to top
April 28 2015

Commentary by Eoin Treacy

African revival shifts east

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

Among the oil producers, support for reforms that proved elusive when revenues were booming may now be forthcoming. Last month’s election of Muhammadu Buhari in Nigeria on a strong anti-corruption platform could prove to be an opportunity in this regard. Lower oil revenues are intensifying the momentum to diversify the oil economies, particularly in Angola and Nigeria.

Most countries in Africa are Energy importers and will benefit from lower oil prices. Many are also largely producers of soft commodities, which should be less sensitive to the slowdown in capital spending in China.

On balance, we think that the region’s centre of economic gravity will shift towards the less resource-intensive countries of east Africa, including Ethiopia, Kenya, Mozambique, Tanzania, and Uganda. They are economically more diverse and beginning to form a relatively large and well-integrated regional market. Investment flows, including from China, have already begun to shift in this direction.

These countries likely stand a better chance of delivering the structural transformation that will be needed to create jobs. This will be critical as half of the one billion new workers set to join the global labour force over the next twenty-five years will do so in frontier Africa.

Eoin Treacy's view -

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

There is no doubt that the run up in commodity prices has been of benefit to African countries not least farmers since agriculture continues to account for the majority of employment. As the above report highlights falling oil prices represent an opportunity for Energy importers particularly in East Africa. In many respects, this is a story from the last decade. Africa’s demographics are what is likely to animate investor interest over the next few decades. 



This section continues in the Subscriber's Area. Back to top
April 27 2015

Commentary by Eoin Treacy

Audi just created diesel fuel from air and water

This article by Eric Mack for Gizmag highlights the benefits improving solar cell efficiency could potentially have for the wider economy. Here is a section: 

Sunfire claims that analysis shows the properties of the synthetic diesel are superior to fossil fuel, and that its lack of sulphur and fossil-based oil makes it more environmentally friendly. The overall Energy efficiency of the fuel creation process using renewable power is around 70 percent, according to Audi.

"The engine runs quieter and fewer pollutants are being created," says Sunfire CTO Christian von Olshausen.

The fuel can be combined with conventional diesel fuel, as is often done with biodiesel fuels already.

The Dresden pilot plant is set to produce about 42 gallons (160 l) of synthetic diesel per day in the coming months, and the two companies say the next step is to build a bigger plant.

"If we get the first sales order, we will be ready to commercialize our technology," von Olshausen says.

Sunfire anticipates that the market price for the synthetic diesel could be between 1 and 1.5 Euros per liter, which would be nearly competitive or a little more expensive than current diesel prices in Europe, but the actual figure will be largely dependent on the price of electricity.

 

Eoin Treacy's view -

One of the issues hydrogen fuel cell and similar technologies face is that they are dependent on the availability of cheap electricity to drive the process of separation or combination. The commercial utility of a water-to-diesel project as outlined above will be contingent on the cost of electricity coming down. As such the improving efficiency of solar cells and improvements in battery technology represent a major step forward for such technologies as the cost of electricity would be free from volatility and could conceivably trend lower in real terms over time. 



This section continues in the Subscriber's Area. Back to top
April 24 2015

Commentary by David Fuller

Oil at $65 Could Free 500,000 Barrels From Shale Fracking

Oil needs to recover to $65 a barrel for U.S. drillers to tap a pent-up supply locked in shale wells and unleash more crude on markets than is produced by Libya.

Dipping into this “fracklog” would add an extra 500,000 barrels a day of oil into the market by the end of next year, Bloomberg Intelligence said in an analysis on Thursday. Producers in oil and gas fields from Texas to Pennsylvania have 4,731 idled wells at their disposal.

Prices are rebounding from a six-year low after drillers idled half the nation’s oil rigs, slowing the shale boom that boosted production to the highest in four decades. The number of wells waiting to be hydraulically fractured, known as the fracklog, has ballooned as companies wait for costs to drop. That could slow the recovery as firms quickly finish wells at the first sign of higher prices.

“Once service costs come down and drillers begin to work through their higher-than-normal backlog, the market should start to price in that supply coming online,” Andrew Cosgrove, an Energy analyst for Bloomberg Intelligence in Princeton, New Jersey, said by phone. “It may act as a cap on prices.”

U.S. oil futures tumbled by more than $50 a barrel in the second half of last year amid a worldwide glut of crude. West Texas Intermediate for June delivery fell $1.16 to $56.58 a barrel at 11 a.m. on the New York Mercantile Exchange.

Oil production in the lower 48 states would rise to 7.67 million barrels a day in the fourth quarter of 2016 if drillers start shrinking their fracklogs by 125 wells a month in October and put some rigs back to work, Bloomberg Intelligence models show. The U.S. fracklog has more than tripled in the past year, with oil wells making up more than 80 percent of the total.

David Fuller's view -

‘Service costs’ are at least partially a euphemism for oil workers, who were very highly paid at the height of the fracking boom in early 2014, and have subsequently been laid off by the industry since the price for crude oil plunged.  Oil sector employment will pick up, albeit at lower salaries, when WTI crude is in the high $60s.  Above that region employment and fracking production will accelerate until it caps prices once again. 

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
April 23 2015

Commentary by David Fuller

Oil Slump May Deepen as US Shale Fights OPEC to a Standstill

The US shale industry has failed to crack as expected. North Sea oil drillers and high-cost producers off the coast of Africa are in dire straits, but America's "flexi-frackers" remain largely unruffled.

One starts to glimpse the extraordinary possibility that the US oil industry could be the last one standing in a long and bitter price war for global market share, or may at least emerge as an Energy superpower with greater political staying-power than Opec.

It is 10 months since the global crude market buckled, turning into a full-blown rout in November when Saudi Arabia abandoned its role as the oil world's "Federal Reserve" and opted instead to drive out competitors.

If the purpose was to choke the US "tight oil" industry before it becomes an existential threat - and to choke solar power in the process - it risks going badly awry, though perhaps they had no choice. "There was a strong expectation that the US system would crash. It hasn't," said Atul Arya, from IHS.

"The freight train of North American tight oil has just kept on coming. This is a classic price discovery exercise," said Rex Tillerson, head of Exxon Mobil, the big brother of the Western oil industry.

Mr Tillerson said shale producers are more agile than critics expected, which means that the price war will go on. "This is going to last for a while," he said, warning that any rallies are likely to prove false dawns.

The US "rig count" - suddenly the most-watched indicator in global Energy - has fallen from 1,608 in October to 747 last week. Yet output has to continued to rise, stabilizing only over the past five weeks.

David Fuller's view -

There is no doubt that US fracking is a very adaptable business and the combination of technology and experience is making the industry much more efficient.  Nevertheless, today’s higher production will wane at current prices, as the yield from shale formations inevitably declines rapidly, necessitating additional drilling slightly further along the shale formation.  Companies will be less willing to continue drilling with WTI crude in the $50s region, especially as their hedged prices at higher levels begin to expire in 2016.  Additionally, plenty of oil industry workers have been laid off this year and it will take a little longer to get them back if the price of oil does rise.

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
April 23 2015

Commentary by Eoin Treacy

Tesla Wants to Power Wal-Mart

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

Jackson Family Wines, based in Santa Rosa, has a new partnership with Tesla involving battery storage and several vehicle charging stations, according to the February issue of Wine Business Monthly. The winery declined to comment.

Mack Wycoff, Wal-Mart’s senior manager for renewable Energy and emissions, said the company is intrigued by Energy storage. “Instead of pulling electricity from the grid, you discharge it from the battery,” he said. “Ideally you know when your period of peak demand is, and you discharge it then.”

Mike Martin, Cargill’s director of communications, declined to provide details about how the company plans to use Tesla batteries at the Fresno plant. The 200,000-square-foot facility, one of the largest of its type in California, produces nearly 400 million pounds of beef each year.

Janet Dixon is director of facilities at the Temecula Valley Unified School District in southern California, which plans to install solar panels at 20 of its 28 schools this summer. Dixon said that SolarCity is the solar provider, and five of the facilities will have Tesla batteries.

“We spend roughly $3 million a year on electricity, and most of that is lighting and air conditioning,” said Dixon. “We are going solar to reduce our overall costs and the battery storage should help us manage our peak demand.”

Eoin Treacy's view -

Tesla trades on aggressive multiples. Since its car sales are a fraction of even the smallest auto manufacturer, it will be quite some time before the company will compete on that front even if one assumes that large numbers of people will be driving electric vehicles 10 years from now. Batteries are a much bigger story for Tesla which is why they are investing so much capital in building a “gigafactory” which they anticipate will deliver the economies of scale necessary to drive down the cost of their products.

At the present moment almost no one has a battery in their home. As solar technology improves and the prospect of containing volatility on Energy spending becomes a realistic possibility demand is likely to increase. At the present moment the solar cells companies like SolarCity are installing in homes are not particularly efficient. However, as the efficiency rates of laboratory tested products reach commercialisation the Energy generation capacity of one’s home will rapidly improve. Therefore the efficiency of solar and the potential demand landscape for home batteries are linked. 



This section continues in the Subscriber's Area. Back to top
April 22 2015

Commentary by David Fuller

Energy-Hog China Seen Sitting Out Big Global Oil & Gas Deals

Here is the opening of this informative article from Bloomberg:

There are many reasons why China’s biggest oil companies should be dusting off their files on acquisition targets: cheap oil, the beginnings of global consolidation, and the nation’s rising crude consumption among them.

If it's not at the top of the priority list, it’s because state-owned giants such as PetroChina Co. and Sinopec have their hands full. Weathering government corruption probes and its plans to remake the public sector are bigger considerations for the year ahead.

Amid speculation that Royal Dutch Shell Plc’s purchase of BG Group Plc will spur a round of mega deals, China could find itself on the margins, swapping assets or buying smaller companies rather than bidding for the majors. That could prove a lost opportunity for the world’s most Energy-hungry nation, as its reserves decline and import needs are forecast to rise to two-thirds of consumption by the end of the decade.

PetroChina’s president, Wang Dongjin, said in March that the company is looking at many businesses overseas, although its ambition could be limited to asset swaps to reduce transaction costs.

That thinking hasn’t changed after the Shell-BG announcement earlier this month. Buying large global rivals would be politically difficult and suck up too many resources, according to a company official who asked not to be named as the information isn’t public. Instead, China’s biggest oil and gas producer is seeking individual assets that can give immediate returns, the person said.

David Fuller's view -

In addition to the corruption probes mentioned above, I think China’s big, state-owned oil companies are wary because with Brent Crude at $62 today, we now know that they paid over the odds for oil resources during the three previous years. 

This item continues in the Subscribers’ Area.  



This section continues in the Subscriber's Area. Back to top
April 21 2015

Commentary by Eoin Treacy

Musings From the Oil Patch April 20th 2015

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. This edition has more of interest than usual and I commend it to subscribers. Here is a section on the surge in private equity interest in the oil sector:  

We came away with several impressions from the two presentations and our discussions with fellow attendees. First, as we mentioned earlier, the vultures who circle over every disastrous industry are circling over Energy with high expectations that road-kill victims will soon be available. Second, there are a lot of smart investors looking for the right opportunity to “buy into the Energy industry at the bottom.” To us, that means there is too much money chasing a limited number of quality investments. That also likely means pricing on deals initially will be too high. The private equity investors believe these early investors may have to wait longer for the returns they are traditionally expecting. Fortunately, or unfortunately, the availability of public money is delaying the typical industry cycle pattern for private equity returns.

The uniformity of thinking among private equity players is a bit scary. Group-thought is usually not a successful strategy. The volume of public capital is not only surprising, but discouraging if one believes the industry needs to experience pain before a true recovery can begin. Lastly, in looking at the presenters and the audience, there were very few present that experienced the 1980’s forced re-structuring of the Energy business following the bullish experience of the 1970’s. In our discussions that day, we encountered another old-timer who referenced the 1980’s downturn starting in 1982, three years before when most who look at the industry’s history think it began. We were there then, and this guy had it exactly right. This industry is headed for significant change.

 

Eoin Treacy's view -

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

One of the problems faced by fundamental or value investors at a time when interest rates are low, liquidity abundant and valuations elevated is that there is a dearth of opportunities. When a decline such as we have seen in the Energy sector occurs, they have little choice but to deploy capital because there are so few other low prices opportunities. This at least partially explains the ease with which private equity firms have been able to raise capital. The problem is that with so much money chasing opportunities prices will rise for troubled assets and the eventual rationalisation of the sector will be delayed. 



This section continues in the Subscriber's Area. Back to top
April 15 2015

Commentary by David Fuller

The Major Paradox at the Heart of the Chinese Economy

Here is a brief section from this interesting article from Bloomberg Business.

Xi and Premier Li Keqiang are trying to defuse that debt bomb, rein in banks and local governments and promote the nation’s stock markets as a primary way for innovative and smaller companies to raise capital.

Both leaders say they’ve mapped out more than 300 reforms that over time will reduce state intervention in the economy. Among the initiatives is scaling back Energy-price controls that favor manufacturers. The changes are also designed to improve the social safety net and encourage market-driven deposit rates to get Chinese families saving less and spending more.

Few countries with the scale of China’s credit boom have escaped unscathed without experiencing some sort of banking crisis. Research by Michael Pettis, a finance professor at the Guanghua School of Management at Peking University, shows that “every investment-led growth miracle in the last 100 years has broken down.”

Avoiding that fate requires a high-wire balancing act for the government. It needs to wind down the torrent of investment -- 49 percent of China’s GDP from 2010 to 2014 -- without cratering the economy and worsening the situation for indebted local governments or the bad-debt burden of Chinese banks.

“Our goal is to keep China’s economic operation within the proper range,” Premier Li said in a March 31 interview with the Financial Times that was published Wednesday. Achieving the 7 percent target this year “won’t be easy” and requires “vision, perseverance and courage,” Li said, as cited by the newspaper.

Selling slower growth now for greater prosperity later isn’t an easy political sell, even in a one-party state. Xi faces entrenched interests that favor the status quo, such as state-owned nonfinancial enterprises that have $16 trillion in assets and local governments that have benefited from big public works projects and thriving real-estate markets.

There’s also the risk of a disorderly de-leveraging in the banking sector and the jobs-intensive property market. Any crisis there could take growth rates well below the government’s target of about 7 percent. China is already home to income-inequality levels on par with Nigeria and Mexico.

Throw higher unemployment into the mix and the risk of social unrest rises.

David Fuller's view -

I have sometimes described China’s economy and stock market as interesting enigmas.  For this reason I have also learned to be wary of highly opinionated forecasts for China from Western commentators. 

However, I have developed some helpful guidelines for monitoring and China’s stock markets.

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
April 15 2015

Commentary by David Fuller

Modi Hails Indian Uranium-Supply Accord With Cameco

Here is the opening of this informative article from Bloomberg:

India agreed to buy C$350 million ($285 million) of uranium through 2020 from Canadian producer Cameco Corp. to fuel its expanding fleet of nuclear reactors.

The accord was announced Wednesday as Indian Prime Minister Narendra Modi visited Ottawa, the first such trip by a PM from that nation in a generation. Cameco stock rose the most in five months in Toronto.

India is the fastest growing market for nuclear power after China. The nation is extending electricity supplies to serve more of its 1.24 billion population. It operates 21 reactors; another six are being built and due to come online by 2017.

While nuclear power isn’t the cheapest option, it’s preferable from an environmental perspective, Modi said. “This is an effort to save the world from global warming and climate change,” Modi told reporters.

India’s Department of Atomic Energy will acquire 7.1 million pounds of uranium concentrate, Saskatoon, Saskatchewan-based Cameco said in a statement.

“This is a new port of entry, if you will, for Cameco’s uranium and we’re glad to have it open,” Chief Executive Officer Tim Gitzel said in a phone interview.

Cameco rose 5.7 percent to C$20.07 in Toronto, the highest close since Dec. 3.

David Fuller's view -

Since India has a pollution problem to rival China’s, this is a sensible move and Modi has gained another Western ally.  I assume that nuclear is replacing more of India’s coal-powered utilities, which are certainly cheaper but also the biggest polluters.  



This section continues in the Subscriber's Area. Back to top
April 15 2015

Commentary by David Fuller

Cheap Oil Winners and Losers in One Giant Map

The world's most innovative regions just got a $900 billion-a-year stimulus package.

With oil prices still down about 50 percent since June, the global economy is benefitting. The IMF estimated in December that the price crash could boost GDP worldwide by 0.7 percent. But those benefits aren't shared equally.

Bloomberg New Energy Finance (BNEF) estimated some of the biggest winners and losers in the map above. Net oil importers like the U.S., Europe, and Asia are getting a nearly $900 billion economic stimulus from cheaper oil prices. The Middle East and Russia are getting stuck with the bill.

"I believe we are in an era of lower oil prices in the medium term and also in the longer term," Michael Liebreich, founder of BNEF, said in a presentation at the group's annual summit on Tuesday. "We have cheap oil, cheap gas, cheap renewables. We are definitely in an age where supply is not constrained."

Note: The calculations for the map are based on a $5 drop in natural gas price and $50 drop in oil price. The estimates use import/export volumes from 2011 to 2013, which would exclude the expansion in U.S. oil since then.  

David Fuller's view -

Developing Asia Pacific has the biggest winners, led by China and India.  Europe is next, Norway excepted.  The US does benefit but probably not by the $180bn shown, because America’s shale industry is now at least temporarily in retreat.   



This section continues in the Subscriber's Area. Back to top
April 14 2015

Commentary by David Fuller

The $5 Billion Race to Build a Better Battery

My thanks to a subscriber for this informative article from Bloomberg Business.  Here is the opening:

Professor Donald Sadoway remembers chuckling at an e-mail in August 2009 from a woman claiming to representBill Gates. The world’s richest man had taken Sadoway’s Introduction to Solid State Chemistry online, the message explained. Gates wondered if he could meet the guy teaching the popular MIT course the next time the billionaire was in the Boston area, Bloomberg Markets magazine will report in its May issue.  “I thought it was a student prank,” says Sadoway, who’s spent more than a decade melting metals in search of a cheap, long-life battery that might wean the world off dirty Energy. He’d almost forgotten the note when Gates’s assistant wrote again to plead for a response.

A month later, Gates and Sadoway were swapping ideas on curbing climate change in the chemist’s second-story office on the Massachusetts Institute of Technology campus. They discussed progress on batteries to help solar and wind compete with fossil fuels. Gates said to call when Sadoway was ready to start a company. “He agreed to be an angel investor,” Sadoway says. “It would have been tough without that support.”

Sadoway is ready. He and a handful of scientists with young companies and big backers say they have a shot at solving a vexing problem: how to store and deliver power around the clock so sustainable energies can become viable alternatives to fossil fuels.  How these storage projects are allowing utility power customers to defect from the grid is one of the topics for debate this week at the Bloomberg New Energy Finance conference in New York. Today’s nickel-cadmium and lithium-ion offerings aren’t up to the task. They can’t run a home for more than a few hours or most cars for more than 100 miles (160 kilometers). At about $400 per kilowatt-hour, they’re double the price analysts say will unleash widespread green power. “Developing a storage system beyond lithium-ion is critical to unlocking the value of electric vehicles and renewable Energy,” says Andrew Chung, a partner at Menlo Park, California–based venture capital firm Khosla Ventures.

The timing for inventors—and investors—may finally be right. Wind turbines accounted for 45 percent of new U.S. power production last year, while solar made up 34 percent of fresh capacity worldwide. Storing this Energy when the sun isn’t shining or a breeze isn’t blowing has remained an expensive hurdle. Battery believers say that’s changing. They’ve invested more than $5 billion in the past decade, racing to get technologies to market. They’re betting new batteries can hold enough clean Energy to run a car, home, or campus; store power from wind or solar farms; and make dirty electricity grids greener by replacing generators and reducing the need for more fossil fuel plants. This market for storage capacity will increase almost 10-fold in three years to 2,400 megawatts, equal to six natural gas turbines, Navigant Consulting says.

David Fuller's view -

Energy storage is the missing link for renewables such as solar, so these developments are encouraging and will be a welcome boost for the sector.

Just think – up until about a decade ago numerous gloomy forecasters told us that we faced a frightening, dark and interminable period of economic decline because of Energy shortages.  Today, Energy prices are lower due to an abundance of supply from not only fossil fuels but more importantly, increasingly viable renewables led by solar.  We can thank technology for this favourable situation.  



This section continues in the Subscriber's Area. Back to top
April 13 2015

Commentary by David Fuller

Iran Deal Can Open the Way to Trade and Peace

The notion of a Western rapprochement with Tehran has been in play since mid-2013, when Hassan Rouhani replaced Mahmoud Ahmedinejad as president. At a stroke, instead of a firebrand religious hardliner, Iran was represented by a seemingly moderate cleric, English-speaking and with a doctorate in law from a British university.

Within months of taking office, Rouhani was at Davos, Alpine hob-nobbing with the best of them, doing his bit to charm the Western and West-leaning global elite.

“Our country has never sought, nor seeks, anything other than peaceful technology,” he opined in early 2014, securing not only the start of this latest thaw in Iranian-US relations, but also an interim agreement to access much-needed foreign exchange reserves. “Iran is open for business,” Rouhani has said, at a string of international summits since, using a near identical text each time.

“Come and visit us and see the investment opportunities for yourselves.” Over the last 18 months, the Iranian president has consistently argued that his country, “within the next three decades, could become a top-10 global economy”. Funnily enough, he is right.

In 2012, the year before Rouhani took office, Iranian GDP shrank by over 5pc, the economy gripped by sanctions and enduring its worst financial crisis for at least two decades. Since then, growth has returned, in part because sanctions have slightly eased. Independent Western analysts now estimate 2014 GDP at around $450bn (£304bn), placing Iran comfortably among the world’s 30 largest economies – ahead of both Austria and Taiwan.

But this country is still massively under-achieving. Along with its natural commodities, Iran also boasts a highly-skilled, near-universally literate population, with a vigorous median age of just 28. Its numerous universities, while far from gender-friendly, have long-produced a steady stream of well-qualified scientists and engineers.

In the mid-1950s, real per capita GDP was just four-fifths that of Turkey, Iran’s ancient rival. Over the 20 years that followed, free trade and economic dynamism meant growth was strong, with GDP per head soaring to more than two-and-a-half times that of Turkey.

Then came Ayatollah Khomeini’s 1979 revolution, with its theocratic clampdown on enterprise, which sent the economy spiralling downward.

As such, Iran missed the emerging markets revolution that, from the 1980s onwards, ignited the rapid expansion of economies like China, India and Turkey.

Iranians are now, once again, much poorer than their Turkish neighbours. Rouhani has pledged to reverse that, stating repeatedly that he wants to “join the rest of the global economy”, positioning Iran as, potentially “the most exciting emerging market on earth”.

David Fuller's view -

Using history as our guide, we know that it can take just one key leader to either make or break a country’s fortunes for many years.  This is especially true in non-democratic societies where there is no orderly mechanism for removing the unreliable.

President Hassan Rouhani of Iran is an interesting case in point, who replaced the deeply unpopular and aggressively hostile Mahmoud Ahmedinejad in mid-2013.  A smiling, English speaking and apparently mild mannered cleric with a law degree from a British University, he has been a likely candidate for negotiations, although he is not the Supreme Leader.  That is 75 year old Ali Khamenei, who succeeded Ruhollah Khomeini in 1989. 

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
April 13 2015

Commentary by David Fuller

Saudi Arabia Plan to Extend the Age of Oil

David Fuller's view -

It is reasonable to assume that the world will still be consuming plenty of crude oil in 20 to 30 years’ time, despite renewables and climate change concerns.  However, the Saudi gamble is that low prices can curb both global oil and renewables production sufficiently to keep prices reasonably high. 

It may work for a few years but cannot reverse technological progress which ensures cheaper production costs for all forms of Energy, whether fossil fuels or renewables over the longer term. 

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
April 09 2015

Commentary by David Fuller

Full Text of PM Narendra Modis: Hindustan Times Interview.

Here is the opening of this fascinating and very revealing interview, Modi’s first with the Indian media since he became Prime Minister ten months ago, reported by Hindustan Times Editor-in-Chief Sanjoy Narayan and Executive Editor Shishir Gupta:

Q. Ten months after coming to power, what would you consider your major achievements?

A. Achievements have to be seen with reference to the past. In what situation did the people bring us to power? And what is the situation now? Is there a policy paralysis anymore? No. Is there a transparency issue? No. Is there stagnancy in governance? No. Instead, there is dynamism.

Our vision and commitment is towards the country's progress, its place in the world and the happiness of its people. We have taken a series of measures which has restored faith in our capacity to deliver with transparency, efficiency and speed. We are looking at the interests of the poor of the country and their empowerment. Initiatives like the Jan Dhan Yojana, Swachh Bharat Abhiyaan and Soil Health cards are aimed at giving more income and a better quality of life to the common man and also transform perceptions about our country. Our focus on Beti Bachao and on generation of renewable Energy is a demonstration of the fact that we not only care for the present but also for the future generations. The direction of our government is reflected in the recent enabling Union Budget, a futuristic railway budget, the pooling of gas for stranded power plants and for fertiliser plants. These show our firm commitment towards a prosperous and powerful India.

Good governance with good intentions is the hallmark of our government. Implementation with integrity is our core passion. We have converted certain adversities born of legacies into opportunities. The recent conclusion of the auctions in coal and spectrum establishes that the curse of scam and corruption is avoidable and transparency possible if there is political will.  Former prime ministers have been talking about leakage in subsidies. Our initiative of distribution of LPG subsidy through direct bank transfer is a shining example of our concrete strategy for helping the poor and the marginalised. For the first time, we have come out with a sound social security umbrella for the weaker sections. The Make in India campaign has taken off and is backed with skill development. It is going to open new vistas for employment for the youth.

We have restored the global credibility of India in terms of its politics, governance and economy. This is because the growth of the economy has been restored.  We have left behind countries like China in terms of our GDP growth. We have left behind the US in terms of steel production. The current account deficit has come down. Global institutions like the IMF, OECD and others are predicting even better growth potential in the coming months and years. India is, thus, back on the global radar.

David Fuller's view -

If you have any interest in India, and most subscribers do because I have talked about it more than any other country and market since Narendra Modi, threw his hat into the electoral ring over a year ago, you are likely to find this candid interview fascinating.   

I have previously described Narendra Modi’s challenge as Prime Minister, in successfully managing India’s huge and unwieldy democracy, as the modern day equivalent of the Labours of Hercules.  What you will see in this interview is the powerful intellect, eye for detail and extraordinary drive of this Prime Minister.  He has enormous Energy and a formidable business brain as we saw when he previously led the State of Gujarat.  Fortunately, he has no rajah background or pretensions, recognising that India will not fulfil its potential without educating and creating opportunities for its poorest people, in addition to its huge middleclass.  India is the ultimate challenge for democratic governance, but with enormous potential, which Narendra Modi aims to develop.    

(See also: India Outlook Raised by Moody’s While Fitch Sees Faster Growth)



This section continues in the Subscriber's Area. Back to top
April 08 2015

Commentary by David Fuller

Shell Will Buy BG Group for $70 Billion in Cash, Shares

Here is the opening of this topical article from Bloomberg:

Shell, which helped pioneer the process of liquefying gas for shipment aboard tankers decades ago, and rivals such as Chevron are betting LNG will play an increasing role in emerging economies seeking alternatives to dirtier Energy sources such as coal.

The fundamental logic of a merger “always existed, what has happened in the last month is that it has become very compelling from a value perspective,” Van Beurden said on a conference call on Wednesday.

The new company will be the largest producer of LNG among international oil companies and gas is a “very important” component of the deal, he said.

Buying BG also brings Shell a share in Brazil’s largest deepwater fields, consolidates its position in Australia’s gas industry and allow more participation in the U.S.’s emergence as a LNG exporter.

Shell will pay 383 pence in cash and 0.4454 of its B shares for each BG share, the companies said on Wednesday. That’s equal to about 1,367 pence a share, valuing BG at about 47 billion pounds, a premium of about 50 percent on BG’s closing share price yesterday.

To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant share buyback of $25 billion from 2017 to 2020.

David Fuller's view -

This is a bold and also controversial move by Shell.  Bold because Shell is betting its future on natural gas and wants to be the biggest player in this sector.  Controversial because Shell is paying a hefty price for BG, presumably because it has confidence in the takeover candidate’s portfolio and is also hoping to deter rival bids from American companies, which have the benefit of a stronger currency. 

This item continues in the Subscribers’ Area where three other articles are also posted.  



This section continues in the Subscriber's Area. Back to top
April 07 2015

Commentary by David Fuller

China Stocks Resume Rally to Seven-Year High on Stimulus Bets

Here is the opening from this interesting article from Bloomberg:

The Shanghai Composite Index rallied to the highest level since March 2008, as large-company shares jumped on speculation the government will take more measures to boost the world’s second-biggest economy.

Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., the nation’s biggest lenders, advanced at least 2.6 percent. PetroChina Co., the No.1 Energy company, increased 3.6 percent. China CNR Corp. and CSR Corp. both surged 10 percent after the trainmakers said their merger got regulatory approvals.

The Shanghai Composite rose 2.5 percent to 3,961.38 at the close. The benchmark gauge extended gains over the past year to 92 percent, the best performing major global index among 93 measures tracked by Bloomberg, amid speculation the central bank will extend cuts in borrowing costs and on increased use of leverage to buy stocks.

“It’s a bull market and funds keep flowing into the market,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “The market will continue to rise unless we see signals of a crackdown from regulators.”

The CSI 300 Index rose 2.2 percent. The Bloomberg China-US Equity Index added 1 percent in New York Monday. Mainland and Hong Kong markets were closed on Monday, with the latter set to resume trading on Wednesday.

David Fuller's view -

The penultimate paragraph above may be the most helpful for actively managed funds.  

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
April 01 2015

Commentary by David Fuller

Saudi Oil Infrastructure at Risk as Mid-East Conflagration Spreads

Saudi Arabia’s escalating intervention in Yemen is a high-stakes gamble that risks back-firing in a series of complex ways, ultimately endangering Saudi oil infrastructure and the security of global Energy supply.

Military analysts say there is little chance that air strikes by a Saudi-led coalition of Sunni countries will subjugate the Iranian-backed Houthi forces in Yemen. It may require a full-blown invasion by land forces to secure control. Large concentrations of Saudi armour and artillery are already massing near the border, though this may simply be a negotiating ploy.

The longer the conflict goes on, the greater the risks that it will stir up internal hatred in a country that has traditionally been relatively free of sectarian violence. Adam Baron, from the European Council on Foreign Relations, said the inflammatory comments about the Sunni-Shia struggle by politicians across the region are becoming “self-fulfilling prophecies”.

Al-Qaeda in the Arabian Peninsular (AQAP) – thought to be the most lethal of the jihadi franchises, and a redoubt for Saudi jihadis – already controls a swathe of central Yemen and is the chief beneficiary of the power vacuum.

AQAP can plan terrorist strikes against Saudi targets from a deepening strategic hinterland with increasing impunity. All US military advisers have been withdrawn from Yemen, and much of the country’s counter-terror apparatus is disintegrating. It is becoming harder to harry al-Qaeda cells or carry out drone strikes with precision.

The great unknown is whether a protracted Saudi war against Shia forces in Yemen – and possibly a “Vietnam-style” quagmire – might tug at the delicate political fabric within Saudi Arabia itself. The kingdom’s giant Ghawar oil field lies in the Eastern Province, home to an aggrieved Shia minority.

“If the Saudis continue this war – and if they keep killing civilians – this is going to create internal instability in Saudi Arabia itself,” said Ali al-Ahmed, from the Institute for Gulf Affairs in Washington.

Large numbers of Saudi youth are disaffected. An estimated 6,000 have been recruited by al-Qaeda and a further 3,000 have fought for ISIS in Syria and Iraq. While the Saudis have a formidable security apparatus, with a 30,000-strong force guarding the oil infrastructure, the risk of infiltration is high even among clans linked to the royal family.

Two al-Qaeda suicide bombers in a pipeline attack in 2006 were scions of the ruling elite, one a close relation of a leading Wahhabi cleric and the chief of the religious police.

David Fuller's view -

The perpetually troubled Middle East is rapidly sliding into the world’s most dangerous power struggle, with potentially international implications.  For once the epicentre of tensions in the region is not Israel’s perennial struggle with the Palestinians.  Moreover, this crisis cannot logically be blamed on American intervention in the region, although a few commentators will inevitably persist with this theme for political reasons.

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
April 01 2015

Commentary by David Fuller

Light bulb set to be first commercial consumer application for graphene

Here is the opening of this interesting article from Gizmag:

In two claimed firsts, researchers at the University of Manchester have produced both the first commercial application of graphene and the world's first graphene light-bulb. It is expected that this new device will have lower Energy emissions, cheaper manufacturing costs, and a longer running life than even LED lights. And this isn't just a pie-in-the-sky prototype, either. The team who developed it believes that the graphene light-bulb will be available for retail sale within months.

To that end, the University of Manchester has partnered with the UK company Graphene Lighting PLC to produce the new bulb and share in the profits of its sales. This will also make certain that the University is directly advantaged by commercial products being developed out of their National Graphene Institute (NGI).

"This lightbulb shows that graphene products are becoming a reality, just a little more than a decade after it was first isolated – a very short time in scientific terms," said Professor Colin Bailey, Deputy President and Deputy Vice-Chancellor of The University of Manchester. "This is just the start. Our partners are looking at a range of exciting applications, all of which started right here in Manchester. It is very exciting that the NGI has launched its first product despite barely opening its doors yet."

The University of Manchester told us that the light bulb comprises a traditional LED coated in graphene which transfers heat away from the LED, prolonging life and minimizing Energy usage.

David Fuller's view -

My guess is that graphene will prove to be indispensible in the widest range of products over the next decade.  Practically everyone will benefit from this but the question remains: what is the best investment opportunity in grapheme?



This section continues in the Subscriber's Area. Back to top
March 31 2015

Commentary by Eoin Treacy

Carlyle Dives Into Energy Industry LBOs as Apollo Lies in Wait

This article by Kiel Porter and Devin Banerjee for Bloomberg may be of interest to subscribers. Here is a section: 

The four biggest private-equity firms have raised about $30 billion to invest in Energy deals. They don’t all agree on how to spend that money.

Carlyle Group LP is prepared to bet that oil prices have bottomed out and sees now as the best time to deploy its money, co-founder David Rubenstein said last week. Apollo Global Management LLC says the sell-off in oil isn’t over yet and the highest-returning deals are still on the horizon.

“There will be attractive opportunities to buy now,” Rubenstein said March 23 at the SelectUSA Investment Summit in Washington. Greg Beard, who leads Energy investing at Apollo, sees a different timeline: “The worst, the problems, are yet to come,” he said in an interview last month.

Private-equity firms are trying to take advantage of crude’s 54 percent plunge since June, which has made targets cheaper. Carlyle, Apollo, Blackstone Group LP and KKR & Co. raised about $30 billion in the past 18 months for Energy- related deals.

How and when they spend that money depends on their view on the future direction of oil. Apollo, led by Leon Black, has recently bought debt of companies struggling to meet their repayments because the firm expects oil will remain at multiyear lows, potentially allowing it to take control later. Carlyle has raised billions to acquire companies in leveraged buyouts because it expects oil to start rising, allowing it to sell its holdings at a profit later.

“Oil prices will come back a bit,” Rubenstein said. “If you can buy now at relatively low prices and hold on for a few years, you’re going to do quite well.”

 

Eoin Treacy's view -

The speed with which the major private equity firms have been able to raise large pools of capital to invest in the Energy sector is a testament to just how much liquidity is still sloshing around the system. There are plenty of opportunities to acquire attractive assets as overleveraged players are squeezed by lower than expected prices for both oil and gas. The fact that private equity has already become so active suggests they will aid in base formation development. However base formation development and recovery are not the same thing. 



This section continues in the Subscriber's Area. Back to top
March 30 2015

Commentary by Eoin Treacy

MTA Symposium 2015 Bet on Quality and Monitor Consistency Presentation

Eoin Treacy's view -

The MTA Symposium drew a record number of attendees this year, from all over the world, which is a further testament that we remain in a persistent bull market. This year’s theme was on beating the benchmark which set me to ruminate on the role of career risk and fees in sustaining an environment where the majority of mutual funds underperform. I concentrated the first part of my presentation on highlighting how equal weighting, dividends and currencies contribute to total return, The second part of my presentation talked about international exposure and how the Autonomies benefit from major themes such as the rise of the global middle class, the accelerating pace of technological innovation and the lower price of Energy in real terms. Here is a link to the pdf

Congratulations to Walter Deemer, a long-time friend of FullerTreacyMoney, for whom this year’s conference was a lap of honour in thanks for his decades of service to the field of technical analysis. 

One of the more interesting presentations I attended was from a company creating market timing tools from Twitter feeds. iSentium takes in posts from approximately 300,000 active twitter users, employs a keyword search and plots the trend of mentions of the company. While they claim to cover 7000 instruments it appears that the most liquid universe in terms of social media is approximately 100 instruments, primarily liquid ETFs. They have plans to expand their coverage and what they can do with their data but I suspect growth will be dependent on the number of Twitter feeds increasing substantially. There is definitely something of interest in the garnering of trading ideas from social media for short-term traders, not least during market events such as earnings announcements, but it still appears to be an immature sector. 



This section continues in the Subscriber's Area. Back to top
March 25 2015

Commentary by David Fuller

The Weekly View: As the Cycle Turns: Buying Mid-Stage Cyclicals and Neutralizing Defensives

I am not sure what happened to the usual contributors to this timely Letter but this edition is led by Doug Sandler, Chief Equity Officer.  Here is the opening:

We continue to believe that we are in the middle innings (5th or 6th inning) of an equity bull market in the US, and we do not currently see the next bear market on the horizon.  Equity valuations remain “fair” according to our Price Matters discipline, and global accommodation has raised the likelihood that the current bull market could go into extended innings.  We are also encouraged by the fact that earnings expectations for US companies have been significantly reduced recently as analysts have quickly incorporated worst-case scenarios for crude oil and currencies into their financial models.  We expect that these rushed estimate reductions will prove overly pessimistic and too one-sided in nature, failing to consider the many positive economic implications of cheap gasoline and a strong dollar.

Wit that macro outlook in mind, we wanted to highlight some of the changes we have been making recently in the domestic equity portion of the RiverFront portfolios.

David Fuller's view -

If the Fed intervened, commencing on March 13th, as I have been saying, then the US Dollar Index headwind has certainly been checked.  Moreover, it could easily range sideways to somewhat lower for a considerable time.  If so, that will help the price of WTI crude oil move a little higher, as it is priced in US Dollars.  These two factors would lend support to the optimistic view from RiverFront.

Over the longer term, I maintain that the US Dollar will move higher in a likely secular uptrend led by the USA’s technology lead and near Energy independence.  

The Weekly View is posted in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
March 24 2015

Commentary by Eoin Treacy

Musings From the Oil Patch March 24th 2015

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

As small U.S. oil producers struggle to remake their business models, the bankruptcies are already beginning to be announced with Quicksilver (KWKA-OTC), a Barnett gas shale producer being the most recent company to file for court protection. Continued low natural gas prices and now low oil and natural gas liquids prices are straining the finances of E&P companies, and in some cases oilfield service firms. We are seeing frequent announcements of E&P company asset sales, capital spending cuts and employee layoffs. We also see numerous announcements of companies hiring advisors signaling that more restructuring activity is on the horizon.

Indicative of the challenges facing Energy companies with substantial debt loads is shown in Exhibit 14, which plots the rates for the high-yield (HY) debt market overall and for the Energy sector within that market. As shown, immediately before global oil prices began to slide last year, the spread between Energy HY and overall HY yields was almost non-existent. As oil prices fell at the end of 2014, the Energy HY rate soared as the financial weakness of highly leveraged Energy companies was highlighted.

The most surprising phenomenon (for us) this year has been the receptivity of public equity and debt markets to offerings from Energy companies. As Dealogic has reported, so far this year, Energy equity offerings have accounted for 12% of total U.S. equity issuances, or roughly $8 billion. The firm also reports that the pace of Energy debt issuance has remained consistent with the pace the sector experienced over the past five years, as companies have sold $5.6 billion in new bonds. It appears investors are happy to back Energy companies with the expectation crude oil and natural gas prices will rise from current levels in response to global Energy demand growth and prospects that supply additions will be limited or even decline, as producers cut back their drilling. How much this view is shaped by a hoped-for-cut in output this spring by OPEC, Russia and Mexico that would shoot oil prices sharply higher is unknown, but we suspect that possible scenario does play a role.

 

Eoin Treacy's view -

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

WTI crude oil prices have at least stabilised in the region of $40. However, a meaningful catalyst in the form of sharply lower output or significantly above target demand will likely be required to spur a return to demand dominance beyond the short term. The wide divergence between current pricing and where oil was expected to trade when so much money was invested in additional supply from expensive and technically difficult regions is undoubtedly causing problems for less well-capitalised companies. 

There will be additional bankruptcies and private equity firms are eager to make acquisitions at distressed valuations. However an additional perspective is to conclude the only way companies have a chance of meeting their debt obligations is to increase output and that supply has to get to market. 

 



This section continues in the Subscriber's Area. Back to top
March 23 2015

Commentary by David Fuller

March 20 2015

Commentary by David Fuller

Shale Producers Have Found Another Lifeline: Shareholders

Here is the opening of this interesting report from Bloomberg:

(Bloomberg) -- U.S. oil producers are issuing new shares of stock at the fastest pace in more than a decade, looking to investors for a cash lifeline to pay down debt and keep drilling as crude prices continue to sink.

Tapping equity markets has become the best option for companies such as Dallas-based RSP Permian Inc., which announced March 17 it’s seeking to raise as much as $232 million by selling additional shares. Calgary-based Encana Corp. and Noble Energy Inc. of Houston also have issued shares in the past two months to reduce debt.

That brings funds raised in the first three months of the year to about $8 billion, more than 10 times the total in the same period last year. As the continued slide in oil prices further crimps cash flows, banks are pressuring these companies to shore up their capital and reduce debt to lower servicing costs and provide wiggle room.

“There aren’t really any better alternatives right now,” Chad Mabry, an analyst at MLV & Co. LLC in Houston, said in a telephone interview.

A growing acceptance that low prices will persist has convinced producers to turn to equity markets while they still can, he said. “They’re preparing for the worst.”

Few saw issuing new stock as an attractive option when the oil market first started crashing late last year because it would dilute the value of stock held by existing shareholders at a time when their holdings already were hurt by falling prices.

As recently as December and January, many producers assumed there would be little interest in pouring more money into the sector, and that funding from debt or equity wouldn’t materialize, said Rob Santangelo, co-head of equity capital markets Americas for Credit Suisse Group AG.

That began to change in February when prices seemed to stabilize and frozen credit and equity markets opened up. The $8 billion in stock issued in the first three months of 2015 is the highest of any quarter in more than a decade. If the pace continues, sales of new equity would surpass the total of 2008 and 2009 combined, the last time oil prices crashed, according to data compiled by Bloomberg.

The surge in equity offerings, even with the dilution of existing shareholders, now is widely considered the lesser of evils versus expensive borrowing or asset sales at reduced prices, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells.

David Fuller's view -

This is the flexibility of the capitalist system.  For relatively new oil companies formed as the shale boom took off a few years ago, the ability to issue shares today provides a considerable lifeline now that they need it.  This will disappoint countries which are primarily oil producers because the majority of private sector shale oil firms are not about to disappear as quickly as many sprang to life. Some will merge and all will rely on technology to increase their efficiency.  Shale drillers are here to stay, for so long as we need crude oil.  



This section continues in the Subscriber's Area. Back to top
March 20 2015

Commentary by Eoin Treacy

U.Ks FTSE 100 Rides Past Record, Reaching 7,000 for First Time

This article by Inyoung Hwang and Roxana Zega for Bloomberg may be of interest to subscribers. Here is a section: 

“U.K. stocks have had a strong rise given the headwinds,” Richard Hunter, head of equities at Hargreaves Lansdown Plc in London, said by phone. “Mining, oil and bank stocks make up a big part of the index, and we all know the difficult time these three sectors have had. Despite that, the FTSE 100 has managed to make progress.”

It’s been a good week for the benchmark: Chancellor of the Exchequer George Osborne on Wednesday unveiled higher economic growth and lower deficit and unemployment forecasts along with help for the North Sea oil industry. The latter has helped Energy stocks trim declines spurred by a rout in oil and metals prices. Banking shares have been hurt by a series of scandals ranging from manipulation of interest-rate benchmarks to tax- evasion schemes.

Even with the FTSE 100 at a record, the advance in British equities this year is about a third that of gains in European peers, which was boosted by additional stimulus from the region’s central bank.

Eoin Treacy's view -

Clicking through the constituents of the FTSE-350 sector Indices section of the Chart Library, we can see that the UK stock market’s rally is well supported, It is also worth noting that the banking, resources and oil & gas sectors are no longer acting as headwinds, have all found at least near-term support this week. 

We are in the final stages of testing for the new filter system and hope to re-launch it soon. Perusing the results of this high/low filter for the FTSE-350 we can see that the majority have been trending for some time which highlights just how much of a brake the above sectors have represented for the UK stock market. 

In the table, the columns represent performance over 1 month, 3 months, 6 months, 12 months, 3-years and 5-years. It will only show data for when the respective share has hit a new high. Therefore at the top of the table you will see all the columns are filled because prices have hit new five-year highs while further down the list a share may only have hit a new 3-month high. 

 



This section continues in the Subscriber's Area. Back to top
March 19 2015

Commentary by Eoin Treacy

Yuan Surges Most in a Year as Fed Eases Capital Outflows Concern

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

China’s capital outflows concern may be tempered after the Fed’s comments, and the PBOC will likely become more flexible as worries about a weaker yuan ease, Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp., said in an interview.

China is in talks with the International Monetary Fund to include the yuan in the institution’s basket of reserve currencies, PBOC Deputy Governor Yi Gang said in Beijing on March 12. The currency will decline 0.22 percent the rest of this year to 6.21 a dollar at the end of 2015, according to the median estimate in a Bloomberg survey.

“The fundamentals are still bullish for the yuan with the government’s plan to make it a reserve currency,” said Scotiabank’s Tihanyi. The PBOC fixings also send a “strong signal” that the authorities favor a stable currency, he said.

 

Eoin Treacy's view -

The Renminbi can be viewed from a number of different perspectives. For some it represents how much of an advantage China has gained from devaluing its currency more than twenty years ago. For others it represents the challenges experienced by manufacturers as its value has increased over the last decade. For still others its stability is a totem for the increasingly vital role China plays in the global economy. 

The Chinese authorities have made clear they want to make the Renminbi as international as possible. Opening up the financial markets, encouraging competition, insisting on the currency being used as a medium of international trade and other measures are all designed to achieve this goal. As the largest Energy importer, the benefit of sourcing supply denominated in one’s domestic currency is obvious but for that goal to be reached the currency will have to be globally fungible which is not the case just yet. 

 



This section continues in the Subscriber's Area. Back to top
March 18 2015

Commentary by David Fuller

The Weekly View: Submerging Markets

My thanks to Rod Smith, Bill Ryder and Ken Liu of RiverFront for their ever-interesting investment letter.  Here is a brief sample:

Asia (China, South Korea, Taiwan and India), in contrast, are net oil importers and benefit from falling Energy prices.  Furthermore, many of their largest companies export to the US and are thus helped by a strong dollar, which effectively makes their products cheaper for American buyers.  Thus, Asia ex-Japan is the only EM region with earnings and stocks near record highs, whereas Latin America and Eastern Europe remain well below peak levels.  Valuations in Asia ex-Japan remain near average levels, while we do not expect major currency depreciation among Asian nations, we think they are feeling pressure to weaken their exchange rates.  Therefore, while Asia ex-Japan is our favourite among EM, e prefer DM overall (especially on a currency-hedged basis).  

David Fuller's view -

Well, there is a lot of concern about currencies but is it justified?  People like the US market, backed by the strong USD, but the S&P 500 is only up +1.97% so far this year.  In contrast, the Euro has been the weakest currency but the Euro Stoxx 50 is up +4.55% in USD since QE was announced by the ECB.  It is by no means an exception because the French CAC is +5.64%, German DAX +9.03%, Italian MIB +6.43%, Holland’s AEX +4.92% and Sweden’s OMX +5.53%, all in USD terms so far this year.  In the Asia-Pacific region, Japan’s Nikkei 225 is +11.63%, Australia’s ASX 200 + 4.14%, China’s Shanghai Comp +10.16%, Taiwan’s TAIEX +4.83%, South Korea’s KOSPI +4.94% and India’s SENSEX +5.65%, again all in USD this year.

This item continues in the Subscribers’ Area where The Weekly View is also posted.



This section continues in the Subscriber's Area. Back to top
March 17 2015

Commentary by David Fuller

Email of the day

On supply restrictions despite a superior product at a cheaper price:

“David, what if a country produces more of a high quality product as a result of their own technological innovations and they can hardly store it anymore and you are not allowed to sell it on the international markets and your product has a superior quality and is sold at a considerable lower price than the lower quality product produce abroad what would you do? What if companies like GE, Pentair, Caterpillar etc suffer due to decreasing sales because of this and if US banks are occurring losses due to this law; what would you do? What if a lot of jobs are at stake? Apparently there was a meeting last Friday with the White House. Isn't this a great opportunity for President Obama to lift the export ban on WTI?  These are as you said before very interesting times. Maybe BP an RD wouldn't like it but the European autonomies and consumers would like it for sure. Maybe a nice trade, going long WTI and short Brent.”

David Fuller's view -

Many thanks for a very interesting and topical email from The Netherlands, beautifully introduced to show the insanity of the policy to which you are referring.  My guess is that President Obama is not very interested in economic matters.  Moreover, he favours green Energy policies and mistrusts the oil industry, which is unlikely to have voted for him.  He certainly did not encourage fracking, which has been a godsend for the US economy.  More importantly, it is now the single most important factor in today’s much cheaper oil prices, which will help the global economy to recover over the next few years.

This item continues in the Subscriber’s Area.



This section continues in the Subscriber's Area. Back to top
March 17 2015

Commentary by David Fuller

Beyond China: The Future of the Global Natural Resources Economy

My thanks to a subscriber for this blockbuster report from Citi. Here is part of the introductory summary:

The structure of global economic growth is once again undergoing a fundamental transition, shifting away from the prevailing model of China as the world’s factory and advanced economies as the drivers of consumer demand. In its place, a more heterogeneous, multipolar framework is emerging with both manufacturing and final consumption more broadly spread across the globe.

Whereas the Commodities Supercycle was characterized by rapid, synchronized global demand growth centered on the rise of China, we expect the coming decade to feature slower, more geographically diverse, less synchronized demand growth. The drivers of natural resources demand are spreading across the globe in new ways. For oil, demand growth should increasingly come from the Middle East. For coal, the same is true of India. Only in base metals does China’s predominance look to remain unchallenged. As a result, the traditional practice of analyzing commodities demand based on the US, China and Europe will become less relevant as the drivers of incremental demand come increasingly from the “Emerging 5”: India, ASEAN, the Middle East, Latin America and Africa.

However, no large emerging market is likely to rise up to the point where China has now come to a landing. The most cited potential successors, India and Brazil, are based on democratic institutions unlikely to provide the consensus required to sustain high fixed asset investment levels. Japan and Europe could do this from the 1950s through the 1970s due to the imperative of post-WWII reconstruction. The “Asian tigers” also succeeded, but under what were initially authoritarian systems.

David Fuller's view -

I particularly agree with the first and last paragraph of this opening summary by Citi’s distinguished team of commodity analysts. 

I discussed part of this subject on 9th March, in response to my opening article by Andrew Critchlow of The Telegraph: Miners Pray the Commodities Collapse Has Hit Rock-Bottom.  

Taking a somewhat longer-term view than Citi above, here is my initial reply from the 9th:

Mining has always been the most cyclical of industries.  Nevertheless, this cycle has been longer for two main reasons: 1) The 2008 credit crisis has lengthened the global economic slowdown; 2) Accelerating technological innovation has made mining much more efficient. 

Consequently, the closest parallel for mining is with the oil and natural gas extraction industries.  However, they will learn more from mining because its bear market started earlier.  Fifteen to twenty years ago, and earlier still, the main fear was that the world was running out of these resources.  What we have learned is that technology can locate additional resources much more easily and enable us to extract them far more efficiently.  There is also a third factor in addition to the two mentioned in the paragraph above: 3) Technology has created new materials which will reduce demand for industrial resources.

Demand for crude oil and eventually natural gas will decline in decades ahead, as the efficiency with which solar Energy is produced continues to increase.  Similarly, demand for industrial metals will decline as they are replaced by graphene, ceramics and plastics. 

This item continues in the Subscribers’ Area, where the Citi report is also posted.



This section continues in the Subscriber's Area. Back to top
March 13 2015

Commentary by Eoin Treacy

Material Question

This article by John Colapinto for the New Yorker offers an interesting history of the potential and challenges represented by graphene. Here is a section: 

Friedel offered a broad axiom: “The more innovative—the more breaking-the-mold—the innovation is, the less likely we are to figure out what it is really going to be used for.” Thus far, the only consumer products that incorporate graphene are tennis racquets and ink. But many scientists insist that its unusual properties will eventually lead to a breakthrough. According to Geim, the influx of money and researchers has speeded up the usual time line to practical usage. “We started with submicron flakes, barely seen even in an optical microscope,” he says. “I never imagined that by 2009, 2010, people would already be making square metres of this material. It’s extremely rapid progress.” He adds, “Once someone sees that there is a gold mine, then very heavy equipment starts to be applied from many different research areas. When people are thinking, we are quite inventive

Samsung, the Korea-based electronics giant, holds the greatest number of patents in graphene, but in recent years research institutions, not corporations, have been most active. A Korean university, which works with Samsung, is in first place among academic institutions. Two Chinese universities hold the second and third slots. In fourth place is Rice University, which has filed thirty-three patents in the past two years, almost all from a laboratory run by a professor named James Tour.

 

Eoin Treacy's view -

The intersection of graphene, solar innovation and concern for the environment suggest that the greatest application of the material will be in the Energy sector. The issue is that a number of issues with mass production and just getting graphene to perform as hoped remain to be solved. There is no reason to believe they will not be solved but the lead time to getting marketable products and earnings is an unknowable. 



This section continues in the Subscriber's Area. Back to top
March 12 2015

Commentary by Eoin Treacy

Tesla Hackers Show an Energy Revolution Closer Than Once Thought

This article by Matthew Campbell, Tim Loh and Mark Chediak for Bloomberg may be of interest to subscribers. Here is a section:  

Consider the crash effort at the Joint Center for Energy Storage Research in suburban Chicago. Within five years, researchers want to create one or more battery types that can “store at least five times more Energy than today’s batteries at one-fifth the cost,” according to George Crabtree, an agreeable silver-haired scientist who runs the U.S. Energy Department-backed battery-research skunk works.

Harvard University, the Massachusetts Institute of Technology, leading-edge technology companies like Elon Musk’s Tesla Motors Inc. and scads of startups are getting into the act. Some are seeking to double the capacity and dramatically cut the costs of the lithium-ion battery, the standard in iPhones and electric vehicles. Others are working on mega-scale battery systems using novel chemistries that could cheaply store enough Energy to help power entire cities.

Battery entrepreneurs have begun to even talk like revolutionaries. “The ability for a battery company to change the dynamics of the world is what has got us excited,” says Bill Watkins, chief executive officer of Imergy Power Systems Inc., a Fremont, California, startup working on utility-scale batteries. “We can actually make a big difference here. I call it democratizing Energy.”

As the former CEO of Seagate Technology Plc, the Silicon Valley digital storage maker, Watkins can speak from experience about tectonic technology shifts. In 1980, a Seagate five- megabyte hard drive that rendered floppy disks obsolete was a $1,500 PC add on. These days, drives holding two terabytes of data -- equivalent to two million megabytes --  can be had for a retail price of under $200.

What’s primarily driving the battery revolution is the phenomenal growth of rooftop and other forms of solar Energy and an awakening by renewable Energy advocates that storage is the lagging piece of the transformative puzzle. Solar now powers the equivalent of 3.5 million American homes and accounted for 34 percent of all newly installed electricity capacity last year.

Wind supplies enough electricity for the equivalent of about 14.7 million U.S. homes, about the same as 52 coal-powered generating plants, according to the Wind Energy Foundation.
An exponential breakthrough in battery capacity and cost would bulldoze the limitations to adopting renewable Energy on a massive scale, be a potent weapon to fight climate change by lowering carbon emissions and potentially bring billions of dollars in profits, never mind fame, to the winners. The knock on renewables is that while fossil fuels keep the power on all the time, solar fades when the sun doesn’t shine and wind power fizzles when the wind doesn’t blow – unless you have a way to store the excess for when you need it.

“What’s holding back solar and wind isn’t their availability but the fact that the technology to generate renewable Energy has lept far ahead of the capacity to store and deploy it round the clock as needed,” says Crabtree of the Joint Center project, which is run out of the federal Argonne National Laboratory.

Prophesies of Energy revolutions always come with caveats, of course, and some researchers note that an exponential breakthrough in battery storage and cost has been forecast for more than a decade and still hasn’t arrived. “Of all these other battery technologies people promote, how many of them are real?” says Jeff Dahn, a professor at Dalhousie University in Nova Scotia who continues to plug away at making stronger and cheaper lithium-ion batteries. “All that remains to be seen.”

 

Eoin Treacy's view -

When we first started writing about the massive investments in battery technology as early as 2010 there was a great deal of enthusiasm about how batteries were going to make the case for renewable Energy more compelling than ever. However, the difficulty of innovating in the chemical sector and the lead time in bringing new methodologies to market was underestimated. 



This section continues in the Subscriber's Area. Back to top
March 11 2015

Commentary by Eoin Treacy

Musings From the Oil Patch March 10th 2015

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

European natural gas prices have been falling during the past year, largely due to the drop in global oil prices. Most natural gas contracts in Europe have their delivered price tied to indices that reflect the level of and changes in crude oil prices. January’s delivered gas price has declined 5.9% from December’s $9.83 per million British thermal units (Btus). Versus a year ago, the delivered gas price has fallen by 20.2% to the January price of $9.25/mmBtus from $11.59/mmBtus. In response to the arrival of more LNG supplies into Europe, Gazprom has reduced its price demands slightly while also improving the financing and delivery terms.

The fact that Statoil and Lithuania have been negotiating the recently announced LNG contract for 4-6 months signifies that the huge competitive advantage U.S. LNG exporters anticipated when they started filing for permits to build the new export terminals has slowly dissipated. Lower crude oil prices have dragged down oil-linked LNG pricing terms in Asia and Europe, even as U.S. natural gas prices remain entrenched in a trading range below $3 per thousand cubic feet (Mcf). U.S. LNG exporters fully anticipate that domestic gas prices will remain below $4/Mcf giving them a significant cost advantage when delivering LNG into the Asian and European markets, but that was when Asian and European LNG prices were in the double digits, and in some cases the high double digits. Continued weak economic activity in these regions is further contributing to the narrowing of the gas price gap between delivered LNG prices in those markets and U.S. natural gas prices.

The arrival of additional supply, especially from the four new Australian export facilities just beginning to ship gas, is compounding the downward pressure on global LNG prices. As U.S. export terminals begin to near service, the pressure to secure markets for surplus U.S. natural gas will force shippers to seek the best deals available. As noted in the Statoil/Lithuania LNG deal, the contract terms are non-binding, suggesting that Lithuania will be looking for even better terms in future contracts. As reported, Lithuania has already signed an additional 16 non-binding agreements with companies that currently supply about half the world’s LNG. Does this suggest Europe will become a highly competitive LNG market with buyers playing one supplier against another? If so, it could mean the owners of the new North American LNG export terminals may regret their decisions to build them.

 

Eoin Treacy's view -

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

Europe has a laundry list of issues that have retarded growth not least public policy and labour inflexibility. The cost of Energy is another that has been a major headwind but the changing landscape of the market is removing that as an obstacle. Europe has a well- developed natural gas pipeline structure and has the capacity to receive shipments from just about anywhere. The changing Energy environment is not particularly good news for companies that have invested heavily in US export potential but the existence of this infrastructure represents a bonus for the global economy because supply will be plentiful. A great deal of LNG capacity will reach the global market in the next year or two. This couldn’t be better news for the global economy since it will reduce some of the demand for oil. 



This section continues in the Subscriber's Area. Back to top
March 10 2015

Commentary by Eoin Treacy

Short Term Oil Market Outlook DNB March 9th

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

Since it seems the longer end of the 12-month forward Brent curve is anchoring up at around 66-68 $/b and we see limited upside for that part of the Brent price curve in the coming couple of months, we believe it will have to be mainly the spot Brent price that will have to do the job of creating the expanding contango required to incentivize the traders to continue to buy crude oil. Since global demand for crude oil will probably continue to drop seasonally until May, we believe the turning point for crude buying for crude processing (and not for storage) will be late April or early May. From then on and into late summer we should see more demand for crude oil as global refineries are ramping up their runs.
 
This will remove the worry of continuous crude stock builds as the market turns to build products instead (where stock levels are much lower). The acid test for the global oil market will then be what happens to global refinery margins when throughput is ramping up after May. Will oil consumption then be strong enough to withstand all the extra supply of products? That question can however be put aside for later reports closer to the summer. Before that, we believe in a bearish couple of months for the Brent price.

We do not subscribe to the view that Brent will fall into the 30’s, which we have seen advocated by several other analysts the past month or so. If the one-year ahead Brent price has an anchor in the 66-68 $/b range is should not be possible for the front of the market to drop much lower than the low 50’s because then it will pay of to store crude on ships and traders will be willing to buy the crude.

 

Eoin Treacy's view -

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

The collapse in oil prices over the last year helps to hammer home the conclusion that the bull market in oil prices is over. It is open to question whether we have already seen the peak in oil demand but if not we are a lot closer to that event that we were a decade ago. The evolution of competing sources of Energy is occurring so rapidly that the risk of oil shares disappointing over the medium to long-term has increased fairly substantially. 



This section continues in the Subscriber's Area. Back to top
March 05 2015

Commentary by David Fuller

Email of the day

Dr David Brown interviewed by Forbes:

“Dear David, I was interviewed by Forbes Magazine following my presentation on the Third Industrial Revolution last week at the Markets Now evening. The interview was published yesterday and it is available at this link.

“It provides a summary of the main factors that drive industrial revolutions, which I covered in the first part of my talk. Subscribers who could not attend Markets Now last week may be interested in this summary - which is much shorter than my 2 hour presentation! However, the Forbes article does not cover the investment opportunities which were of course the most important part of the talk. Those are available to subscribers on the slides you posted.”

David Fuller's view -

Many thanks for this email and the link to your excellent interview with Forbes Magazine.  A small number of fortunate subscribers were mesmerised by your presentation and Q&A session at the last Markets Now, and many more saw your presentation, posted here last Wednesday.  The Forbes article, partially reproduced below, will generate considerable interest, as will your next presentation at Markets Now on an entirely different topic of considerable interest.  



This section continues in the Subscriber's Area. Back to top
March 05 2015

Commentary by David Fuller

The Third Industrial Revolution: Internet, Energy and a New Financial System

Here is the conclusion of this fascinating interview with Dr David Brown by Goncalo de Vasconcelos for Forbes:

de Vasconcelos: So what will the Third Industrial Revolution impact the most?

Brown: Eventually everything, but the early movers have been USA-led computing, IT, internet companies and social media sites, which have grown to global behemoths faster than ever in history. These in turn have driven biotechnology as the genome at last begins to impact. Both went through a hype phase in the 1990s, then a bust, then the real winners emerged. That is a typical pattern over the initial 15-20 years of a breakthrough technology. Solar power has been driven mainly by Germany and more recently China, though the USA is catching up fast. Current solar systems have only 10-20% efficiency in sunlight capture but new materials will take this into the 50-100% range very soon now. And battery storage technology is advancing rapidly.  Additive manufacturing (aka 3D printing) will replace our old material and Energy-wasteful methods. Robotics is beginning to spread out of factories with Japan, Germany and China leading the charge, though expect the USA to catch up and contribute to innovation. Nanotechnology will mature in the 2020s. The Internet-of-Things is a few years away, and it will probably drive the next phase of healthcare advances, but needs more stable internet, better security and cheaper components before it can take off. And machine learning /AI will be a game-changer for humanity, beginning to impact within the next decade. The new finance is now appearing through Africa-led mPesa, followed by Google GOOGL +0.55%-wallet and Apple-pay etc. The US internet giants are registering as banks, they have very cheap infrastructure and billion-size customer bases and are likely to challenge patriarchs of the current financial system. There is much innovation in finance in the UK too. We see positive deflation all over the world as a result of these lower-cost and more-efficient solutions to human needs.

de Vasconcelos: So where are we in the Third Industrial Revolution?

Brown: Industrial revolutions take decades to play out. We have barely started in this one. Remember that the first and second Industrial Revolutions involved only Western Europe and its off-shoots, whereas this one is truly global. And online education is available to everyone for the first time ever. OECD projections indicate the world will become about 10 times wealthier during this century, and these advances certainly support their case. Exciting times!

David Fuller's view -

David Brown is assessing the current economic outlook in the context of two previous industrial revolutions.  Moreover, the panoply above is certainly no less exciting or revolutionary than anything else that has occurred throughout human history, and it is occurring at a much more rapid pace.  

This item continues in the Subscribers’ Area. 



This section continues in the Subscriber's Area. Back to top
March 05 2015

Commentary by Eoin Treacy

Top 10 Emerging Technologies of 2015

This article from the Scientific American may be of interest to subscribers. Here is a section:

Neuromorphic technology
Computer chips that mimic the human brain

Even today's best supercomputers cannot rival the sophistication of the human brain. Computers are linear, moving data back and forth between memory chips and a central processor over a high-speed backbone. The brain, on the other hand, is fully interconnected, with logic and memory intimately cross-linked at billions of times the density and diversity of that found in a modern computer. Neuromorphic chips aim to process information in a fundamentally different way from traditional hardware, mimicking the brain's architecture to deliver a huge increase in a computer's thinking and responding power.

Miniaturization has delivered massive increases in conventional computing power over the years, but the bottleneck of shifting data continuously between stored memory and central processors uses large amounts of Energy and creates unwanted heat, limiting further improvements. In contrast, neuromorphic chips can be more Energy efficient and powerful, combining data-storage and data-processing components into the same interconnected modules. In this sense, the system copies the networked neurons that, in their billions, make up the human brain.

Neuromorphic technology will be the next stage in powerful computing, enabling vastly more rapid processing of data and a better capacity for machine learning. IBM's million-neuron TrueNorth chip, revealed in prototype in August 2014, has a power efficiency for certain tasks that is hundreds of times superior to a conventional CPU (central processing unit), and more comparable for the first time to the human cortex. With vastly more computing power available for far less Energy and volume, neuromorphic chips should allow more intelligent small-scale machines to drive the next stage in miniaturization and artificial intelligence.

Potential applications include: drones better able to process and respond to visual cues, much more powerful and intelligent cameras and smartphones, and data-crunching on a scale that may help unlock the secrets of financial markets or climate forecasting. Computers will be able to anticipate and learn, rather than merely respond in preprogrammed ways.

Eoin Treacy's view -

IBM was a major contributor to the above article and as a result it mentions a number of areas where the company has a competitive advantage. We have all marvelled at the ability of its Watson program to compete against humans in real life tests of mental agility and at the company’s continued ability to develop cutting edge technology. However there has been a gap between development and delivery that has resulted in a lacklustre performance.



This section continues in the Subscriber's Area. Back to top
March 04 2015

Commentary by Eoin Treacy

The Price of Oil Is About to Blow a Hole in Corporate Accounting

This article by Asjylyn Loder may be of interest to subscribers. Here is a section: 

The U.S. Securities and Exchange Commission requires drillers to calculate the value of their oil reserves every year using average prices from the first trading days in each of the previous 12 months. Because oil didn’t start its freefall to about $45 till after the OPEC meeting in late November, companies in their latest regulatory filings used $95 a barrel to figure out how much oil they could profitably produce and what it’s worth. Of the 12 days that went into the fourth-quarter average, crude was above $90 a barrel on 10 of them.

So Continental Resources Inc., led by billionaire Harold Hamm, reported last month that the present value of its oil and gas operations increased 13 percent last year to $22.8 billion. For Devon Energy Corp., a pioneer of hydraulic fracturing, it jumped 31 percent to $27.9 billion.

This year tells a different story. The average price on the first trading days of January, February and March was $51.28 a barrel. That means a lot of pain -- and writedowns -- are in store when drillers’ first-quarter numbers are announced in April and May.

“It has postponed the reckoning,” said Julie Hilt Hannink, head of Energy research at New York-based CFRA, an accounting adviser.

Eoin Treacy's view -

Oil prices have bounced from their January lows but nowhere near enough to alter the average pricing for the year to date.  In fact since the pace of the short-term advance has moderated there is an increasing possibility that the short covering rally is over. This opens up potential for a retest of the low. If oil follows anything like the path natural gas took following its 2008 crash, prices could range for a prolonged period. Such an environment would require some major adjustments by the drilling sector.
 



This section continues in the Subscriber's Area. Back to top
February 26 2015

Commentary by Eoin Treacy

Tesla gearing up for release of batteries for the home

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

As the company’s first foray into selling directly to the home Energy storage market, the batteries are expected to get plenty of attention just by virtue of the attached Tesla label. And it should be an improvement from the home batteries Tesla has been quietly supplying to its sister company, the solar panel maker SolarCity, located up the road from Tesla in San Mateo, California. Those batteries are currently available in select markets within California, and only through SolarCity. The new batteries would be more widely available.

Tesla would face plenty of competition for their batteries, with names like Bosch, GE and Samsung involved. Honda has unveiled a demonstration smart home that features a rechargeable home battery, along with an electric vehicle, solar panels and geothermal heat pump, and is driven by an Energy management system.

Researchers from both Harvard and MIT have developed flow batteries for renewable Energy storage, while Bloom Energy’s fuel cell boxes act as a power source as well as an Energy storage device.

One area where Tesla might stand out is in cost. Tesla assembles its battery packs from battery cells provided by Panasonic, and is about to do it on a massive scale as soon as 2016 at its gigafactory currently under construction in Nevada. Such an economy of scale – producing 50 gigawatt-hours of battery capacity each year – is expected to push the company’s car battery costs down by 30 percent. Based on the same technology, Tesla's home battery costs should come down as well.

 

Eoin Treacy's view -

The same efficiency gains observed in how Moore’s Law is applied to semiconductors can also be seen in solar technology. This has changed how companies perceive the growth of the domestic Energy production sector. This requires a much more flexible electric grid and a utility sector that will have to evolve if it is to avoid obsolescence. As the potential to cut one’s personal expenses through the application of technology develop, homebuilders will be happy to see that the benefits of owning a new home equipped with the wide range of modern gadgetry is becoming increasingly convincing. 



This section continues in the Subscriber's Area. Back to top
February 25 2015

Commentary by Eoin Treacy

Musings from the Oil Patch February 24th 2015

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

A contributing factor for the weak economic activity in recent years has been countries holding the line on their currencies. That attitude may be changing, which could be good news for Energy demand as currency devaluations are designed to pump up economies. According to a study written by economic historian Barry Eichengreen of the University of California, Berkeley, the countries that were the first to engage in monetary easing, in this case the break with the gold standard, recovered the fastest. In 1931, it was Britain that broke from the gold standard first and the first nation to recover. Today, we are relearning this history.

Since the U.S. was the first country to engage in massive monetary easing in 2008, our economy was the first to recover. As counted by investment bank Evercore ISI, there have been some 514 monetary easing moves by central banks over the past three years. According to Morgan Stanley’s (MS-NYSE) global strategists, there are now 12 central banks around the globe that have recently moved to ease their monetary policies. As this was happening, U.S. monetary authorities are discussing increasing interest rates and in effect becoming the recipient of deflationary pressures driven out by those countries easing their monetary policies. Because China has tied its currency to that of the United States, it will also receive deflation.

The prospect of raising interest rates in the U.S. has led to a strengthening of the dollar, which has been a contributing factor to the fall in oil prices and other commodity prices. As pointed out by the Morgan Stanley analysts, not everyone can be a winner in the currency wars. Therefore, there will be one or more losers, with the U.S. and China on the short end of the stick right now. Given the recent weakening statistics in retail sales, home building and now certain regional manufacturing data in the U.S., one wonders whether the Federal Reserve will not hike interest rates this year as broadly expected. We are also seeing moves by the Chinese government to ease its monetary policy to help bolster its local and regional governments and their banks to offset the flow of currency out of the country. Being tied to the U.S. dollar, the renmimbi has had an upward bias as the dollar has strengthened. That trend induced Chinese companies to borrow outside of the country expecting to be able to pay off the loans with cheaper local currency. Now, the renmimbi continues to weaken within a very tight band in response to the currency outflows. China monetary authorities struggle with whether to weaken its currency and stimulate economic growth, but that move runs the risk of leading to an increase in corporate bankruptcies. Is it possible that we could soon see every country engaged in monetary easing trying to promote its own economic self-interest? What would that mean for future Energy demand and oil prices?

 

Eoin Treacy's view -

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

Japan’s decision to embark on broad based monetary easing in order to kick start inflation in its economy was the catalyst for the competitive devaluation we now see just about everywhere. Various international currency agreements such as Bretton Woods I and II or the Plaza Accord eventually run their course and a rebalancing occurs as one country or another seeks an advantage. Eventually the process is taken to extremes, which creates the conditions necessary to encourage governments to agree to support multilateral intervention. We are still a long way from such a move. 



This section continues in the Subscriber's Area. Back to top
February 19 2015

Commentary by Eoin Treacy

Leslie and Mark's Old/New Idea

This article by Josh Freed for the Brookings Institute is a balanced exposition of the state of the global nuclear sector and may be of interest to subscribers:

There are American political leaders in both parties who talk about having an “all of the above” Energy policy, implying that they want to build everything, all at once. But they don’t mean it, at least not really. In this country, we don’t need all of the above—virtually every American has access to electric power. We don’t want it—we have largely stopped building coal as well as nuclear plants, even though we could. And we don’t underwrite it—the public is generally opposed to the government being in the business of Energy research, development, and demonstration (aka, RD&D).

In China, when they talk of “all of the above,” they do mean it. With hundreds of millions of Chinese living without electricity and a billion more demanding ever-increasing amounts of power, China is funding, building, and running every power project that they possibly can. This includes the nuclear sector, where they have about 29 big new light water reactors under construction. China is particularly keen on finding non-emitting forms of electricity, both to address climate change and, more urgently for them, to help slow the emissions of the conventional pollutants that are choking their cities in smog and literally killing their citizens.

Since (for better or for worse) China isn’t hung up on safety regulation, and there is zero threat of legal challenge to nuclear projects, plans can be realized much more quickly than in the West. That means that there are not only dozens of light water reactor plants going up in China, but also a lot of work on experimental reactors with advanced nuclear designs—like those being developed by General Atomic and TerraPower.

Eoin Treacy's view -

There are exciting things happening in the nuclear sector at present as technology catches up with the early aspirations of the industry in the decade following World War II. However, while computer modelling and mathematical work is relatively cheap, building test reactors and overcoming the necessary regulatory hurdles is expensive and beyond the scope of the even the best funded start up. 

The reality is that with cheap oil and gas the USA just does not have the incentive to drive the next stage of nuclear research. China and India need the technology. The pace with which they are polluting their cities is unsustainable and represents a growing headwind to the development of the services and knowledge based economies that will further their development goals. As a result they have a great incentive to explore any technology that can deliver a semblance of Energy independence. 

 



This section continues in the Subscriber's Area. Back to top
February 19 2015

Commentary by Eoin Treacy

Shale Giant Says U.S. Output Will Fall This Year on Big Cuts

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

U.S. oil production is set to fall this year as drastic drilling cutbacks take hold faster than world governments expected, according to the biggest, fastest-growing shale company.
EOG Resources Inc.’s forecast contradicts most estimates that see U.S. production rising, including those by the U.S. Energy Information Administration and the International Energy Agency. The company said the crude market would rebound quickly and labeled the current downturn a “short cycle.”

The Texas producer said its own production would bottom in the second and third quarter, resulting in output remaining unchanged for the year compared to last year’s breakneck pace of growth. The deciding factor in what has been viewed as a price war with Saudi Arabia and its OPEC allies is how many of the thousands of U.S. producers will follow suit.
“EOG is viewed as the premier company in shale development, and if they’re not going to grow, it is a very important signal to the market,” said Michael Scialla, a Denver-based analyst at Stifel Nicolaus & Co. “The argument that this slowdown is going to take a while to have an impact on supply is completely wrong.”

And 

Noble Energy Inc., Devon Energy Corp. and Marathon Oil Corp., three other companies with significant shale operations, said they will boost output this year. More than half of Devon’s 2015 oil production is hedged at a price of $90.75 a barrel. Apache Corp. plans to pump about the same volume of oil as last year.

 

Eoin Treacy's view -

The mechanics of unconventional oil and gas wells means that supply growth is not possible without constant drilling of new wells to make up for the early peak in production from older ones. It is for this reason that the Baker Hughes Rig Count has become such a focus of attention as prices fell. In a low oil price environment, at least relative to that seen early last year, unhedged producers have little choice but to cut back on expansion plans. Those that have hedged have secure cash flow, provided their counterparties are solvent, so they will be under less pressure to cut.



This section continues in the Subscriber's Area. Back to top
February 18 2015

Commentary by David Fuller

Many fed Officials Were Inclined to Keep Zero Rates Longer

Here is the opening of this topical and important subject, reported by Bloomberg:

(Bloomberg) -- Federal Reserve policy makers judged that risks facing the U.S. economy argued for keeping interest rates near record lows for longer, minutes of their most recent policy meeting showed.

“Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time,” according to a record of the Jan. 27-28 Federal Open Market Committee meeting released on Wednesday in Washington.

The committee, while considering risks to be “nearly balanced,” pointed to a strengthening dollar, international flash points from Greece to Ukraine, and slow wage growth as weakening the case for the first rate rise since 2006.

The FOMC said after its last meeting it “can be patient” as it considers when to raise the benchmark interest rate, even as it described the labor market as “strong.” A report the following week showed payrolls rose more than forecast in January to cap the strongest three-month gain in 17 years.

Stocks pared losses and Treasuries rose after the report. The Standard & Poor’s 500 Index was down less than 0.1 percent to 2,098.96 at 2:03 p.m. in New York. The yield on the 10-year Treasury note fell five basis points, or 0.05 percentage point, to 2.09 percent.

Members of the committee discussed their communication strategy at length.

“Many participants regarded dropping the ‘patient’ language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates,” the minutes said. “Some expressed the concern that financial markets might overreact.”

David Fuller's view -

I think they are right to delay a rate hike.  The Dollar’s strong rise since last July is already a headwind for US exporters, at a time when the previously robust Energy sector is weakening due to the slump in oil prices.  Moreover, the global economy is still soft.  There will be plenty of time to lift rates closer to yearend or in 1Q 2016, assuming the economy remains steady, before the next US presidential election campaign is fully underway.  



This section continues in the Subscriber's Area. Back to top
February 18 2015

Commentary by David Fuller

Disruptive Technologies: Advances That Will Transform Life, Business, and the Global Economy

My thanks to a subscriber for this terrific report from McKinsey Global Institute.  Here is a brief portion of the Executive summary:

Today, we see many rapidly evolving, potentially transformative technologies on the horizon—spanning information technologies, biological sciences, material science, Energy, and other fields. The McKinsey Global Institute set out to identify which of these technologies could have massive, economically disruptive impact between now and 2025. We also sought to understand how these technologies could change our world and how leaders of businesses and other institutions should respond. Our goal is not to predict the future, but rather to use a structured analysis to sort through the technologies with the potential to transform and disrupt in the next decade or two, and to assess potential impact based on what we can know today, and put these promising technologies in a useful perspective. We offer this work as a guide for leaders to anticipate the coming opportunities and changes.

IDENTIFYING THE TECHNOLOGIES THAT MATTER

The noise about the next big thing can make it difficult to identify which technologies truly matter. Here we attempt to sort through the many claims to identify the technologies that have the greatest potential to drive substantial economic impact and disruption by 2025 and to identify which potential impacts leaders should know about. Important technologies can come in any field or emerge from any scientific discipline, but they share four characteristics: high rate of technology change, broad potential scope of impact, large economic value that could be affected, and substantial potential for disruptive economic impact. Many technologies have the potential to meet these criteria eventually, but leaders need to focus on technologies with potential impact that is near enough at hand to be meaningfully anticipated and prepared for. Therefore, we focused on technologies that we believe have significant potential to drive economic impact and disruption by 2025.

David Fuller's view -

This report is posted in the Subscribers' Area.

McKinsey’s Report is an excellent primer for anyone interested in knowing more about technology. It is also a good introduction to David Brown’s presentation: The Third Industrial Revolution.  I have seen it and cannot wait to hear the discussion next Monday.   



This section continues in the Subscriber's Area. Back to top
February 18 2015

Commentary by Eoin Treacy

Portland to generate electricity within its own water pipes

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

LucidPipe simply replaces a stretch of existing gravity-fed conventional pipeline, that's used for transporting potable water. As the water flows through, it spins four 42-inch (107-cm) turbines, each one of which is hooked up to a generator on the outside of the pipe. The presence of the turbines reportedly doesn't slow the water's flow rate significantly, so there's virtually no impact on pipeline efficiency.

The 200-kW Portland system was privately financed by Harbourton Alternative Energy, and its installation was completed late last December. It's now undergoing reliability and efficiency testing, which includes checking that its sensors and smart control system are working properly. It's scheduled to begin full capacity power generation by March.

Eoin Treacy's view -

This represents an innovative idea but is just one example of how technological innovation is enhancing productivity. LucidPipe is privately held but the video on their homepage is worth watching just for the sheer simplicity of the concept and the benefit that accretes to the user of the technology. 



This section continues in the Subscriber's Area. Back to top
February 17 2015

Commentary by Eoin Treacy

Fiery Oil-Train Crash Probed by U.S. Rail, Pipeline Regulators

This article by Nancy Moran and Edward Dufner for Bloomberg may be of interest to subscribers. Here is a section: 

The draft rule also would require that new cars be built with steel shells that are 9/16th of an inch thick, people familiar with the plan said. The walls of the current cars, both DOT-111s and the newer CPC-1232 models, are 7/16th of an inch thick.

Monday’s derailment was the second in three days in North America. Canadian National Railway Co. shut its main line linking western and eastern Canada after an eastbound train carrying crude oil came off the tracks in Ontario.

The train of 100 cars, all carrying crude from Canada’s oil-producing region of Alberta to eastern Canada, derailed just before midnight Saturday in a remote and wooded area about 30 miles (48 kilometers) north of Gogama, Ontario, spokesman Patrick Waldron said in an e-mail.

 

Eoin Treacy's view -

There is still a great deal of opposition to building additional pipeline infrastructure in the USA, not least the Keystone project. However, considering the economic benefits of increasing domestic supply the product will find its way to market one way or another. The growth of shale-by-rail has been the primary response to the lack on Energy infrastructure serving North Dakota in particular.  This is regardless of the fact that trains carrying such large heavy cargoes run a higher risk of derailing. It is only a matter of time before the sector is more heavily regulated suggesting demand for new upgraded railcars is likely to increase. 



This section continues in the Subscriber's Area. Back to top
February 16 2015

Commentary by Eoin Treacy

Is That All There Is? A Fresh Look At U.S. Gas/LNG Export Potential

Thanks to a subscriber for this article by Housley Carr for RBN Energy. Here is a section:  

Exports of U.S.-sourced natural gas as liquefied natural gas (LNG) will likely begin within a year’s time, and will ramp up through the 2016-19 period. That much seems certain. What’s less clear is whether the capacity of U.S. liquefaction/export projects will plateau at the roughly 6 Bcf/d in the “First Four” projects now under construction or continue rising higher. Yesterday’s decision by the BG Group to delay its commitment to the 2 Bcf/d capacity of the Lake Charles LNG terminal until 2016 certainly casts doubts on those further expansions. Prospects for additional export projects hinge on a few interrelated factors, including the higher capital costs associated with some next-round projects; the costs and challenges of shipping LNG through the expanded Panama Canal; and the possibility of competing LNG export projects being developed elsewhere, including western Canada. Today we consider these factors and handicap the handful of export projects on the cusp of advancing.

Making a final investment decision (FID) on multibillion-dollar liquefaction and export projects is not for the faint of heart. Once that FID trigger is pulled, there’s really no turning back. But the decision to build a project is in many ways easier than the decision by a Japanese utility or global LNG trader to commit to 15 or 20 years of LNG purchases. After all, if (as has been the case with all U.S. liquefaction/export projects so far) the project’s economics are based largely on long-term take-or-pay liquefaction commitments, the developer is basically assured of recovering the costs of its investment (and making at least some profit) once it has the necessary Sales and Purchase Agreements (SPAs), even if the LNG buyer elects not to use all the liquefaction capacity it has lined up.

An LNG buyer, on the other hand, is committing to pay up to $3.50/MMBTU for liquefaction capacity and—if, as is likely, it uses that capacity--115% of the Henry Hub price of natural gas for the gas that is liquefied. As a result, prospective LNG buyers need to be very sure that any SPA they enter into will work to their benefit over a wide range of possible scenarios, including the possibility (and current reality) of low oil prices that make once-onerous oil-indexed LNG contracts look not so bad anymore.  As we said in Episode 1, the first liquefaction “train” at Cheniere Energy’s Sabine Pass facility in southwestern Louisiana by early 2016 will be supercooling natural gas and loading LNG onto ships for export to Asia and other markets. Three more trains at Sabine Pass will start operating later in 2016 and in 2017, and soon thereafter the Cameron LNG, Freeport LNG and Cove Point LNG liquefaction/export facilities (a total of six more trains) will be up and running too. The LNG production capacity of what we call the First Four (four trains at Sabine Pass, three at Cameron, two at Freeport and one at Cove Point) totals 45 million tons per annum (MTPA)—enough to consume just over 6 Bcf/d of U.S.-sourced natural gas, or about one-twelfth of current U.S. gas production.

 

Eoin Treacy's view -

As a result of the fall in oil prices investment in Energy infrastructure is on hold at best. The decline has upended the growth assumptions of major oil and gas companies with the result they will likely need to see evidence of bottoming before they commit to major expenditure once more.  For Asia the fall in Energy prices is good news for some of the world’s largest importers i.e. China, Japan and India while it is a mixed blessing for countries such as Indonesia and Thailand. 
 

 



This section continues in the Subscriber's Area. Back to top
February 13 2015

Commentary by Eoin Treacy

The Big Picture and the Autonomies

Eoin Treacy's view -

It was a great pleasure to meet so many subscribers in London earlier this week while speaking with potential investors in the FP WM Global Corporate Autonomies Fund. I thought subscribers might be interested in the presentation I prepared for the talk at the East India Club on Tuesday which includes some slides I had not used previously such as how population decreases as incomes increase. 

The base case for the Autonomies is that there are three main themes evolving that have exciting potential to drive a secular bull market in equities. These are the rise of the global middle class, where improving standards of governance is acting as an enabler. The exponential pace of technological development and the potential for collaboration to increase innovation is another. Meanwhile the revolution in Energy not least unconventional oil and gas as well as solar is the third. As truly global companies that dominate their respective niches, the Autonomies remain well placed to benefit from these themes.

If you have any questions please contact Chris Moore at [email protected]

Here also is a link to a post on the Autonomies and here is a link to the fund brochure

It was also a pleasure to meet with a number of journalists. I took the opportunity to ask the inestimable Merryn Somerset Web at Moneyweek, a Japan veteran, what her interpretation of its QE program is? 
 

 



This section continues in the Subscriber's Area. Back to top
February 13 2015

Commentary by Eoin Treacy

Musings From the Oil Patch February 10th 2015

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report. Here is a section on the Baker Hughes rig count:

Another week and another huge drop in the Baker Hughes oil-directed drilling rig count. The speed with which the rig count is dropping has encouraged forecasters to translate the decline into an immediate fall in oil output. The focus of analysts has been on the oil rig decline since the world is absorbed with determining when either Saudi Arabia cuts its production to boost global oil prices from current levels or the American shale industry cuts back drilling sufficiently that the natural decline rate of shale wells eliminates the existing oil surplus.

The chart of the count of active oil drilling rigs since the turn of the century shows an almost vertical decline in recent weeks. The angle of this oil rig decline is sharper than occurred in the 2008-2009. On the surface, this picture would support the view of a rapid decline in new oil production. Below the surface there may be some variances in the pace of decline of the various drilling rig types that could moderate the optimism of a quick production reaction.

In Exhibit 21 we plotted the change in the weekly rig count since Thanksgiving by whether the rigs were drilling directional, horizontal or vertical wells. In the first couple of weeks, there seemed to be little or no reaction to the start of the collapse of oil prices following the Thanksgiving Day meeting of the Organization of Petroleum Exporting Countries (OPEC) at which the members agreed to sustain the organization’s 30-million-barrel a day production level. The announcement of that decision caused one of the largest one-day drops in global oil prices and started the industry on the slide into its current recession.

 

Eoin Treacy's view -

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

The Energy sector has experienced a sharp decline as oil prices fell and as expansion plans were cancelled or at least re-evaluated. The Baker Hughes rig count offers a representation of just how quick the response to falling oil prices has been. Having cut back on expansion, drillers will now be watching for signs of oil prices stabilising before committing to additional expenditure. 



This section continues in the Subscriber's Area. Back to top
February 12 2015

Commentary by David Fuller

Want Conservatives to Save Energy? Stop the Environmentalist Preaching

Indeed, one company in the behavioral space, Simple Energy in Boulder, Colo. – an Opower rival – is examining political beliefs as just one factor out of many that may shape how people perceive Energy messages. CEO and founder Yoav Lurie says his company has found, for instance, that terminology matters. “Liberal respondents tended to resonate well with the term ‘save Energy,’ where conservative households resonated better with the term ‘waste less Energy,’” he notes.

“It turns out that ‘waste less’ works in liberal households as well,” Lurie adds, “so you might just change that message to ‘waste less.’”

He emphasizes that his company is not selectively messaging to different consumers based on ideology, but it could be a potential way to reach people. When it comes to the message, Lurie says, “the thing we care about most is how it’s received.”

In the end, then, perhaps the best way to think about ideology and Energy use is this: Nobody is against efficiency or lower bills. Nobody is for waste. Nobody hates the environment.

But environmental and Energy issues are nevertheless wrapped up in politics, which makes conservation, overall, less of a “safe” space for conservatives, according to Renee Lertzman, who works with Brand Cool as Director of Insight and is a consultant on climate change communications. Conservatives often feel “ambivalent” about the topic, she says, pulled in different directions — and liberal assumptions don’t help.

“A lot of people I interviewed felt very offended that they were often assumed to be not caring, they felt very insulted and patronized, because of their choices, and I really felt for that,” Lertzman says. “I felt, it would be so important to convey to people, we know you really do care. And that itself, as a starting off point, would be very powerful.”

David Fuller's view -

For me, this is all about emotional intelligence, which is incredibly important in so many aspects of life, although it is too often misunderstood and therefore seldom taught.  



This section continues in the Subscriber's Area. Back to top
February 11 2015

Commentary by David Fuller

What Apple Just Did in Solar Is a Really Big Deal

Here is the opening of this topical article from Bloomberg:

It was a year ago this week that Apple Chief Executive Officer Tim Cook responded to a climate-change heckler at the company's annual shareholder meeting with an impassioned rebuttal in which he famously told investors who care only about profits to "get out of the stock."

Now Cook is putting his prodigious sums of money where his mouth is, proclaiming the “biggest, boldest and most ambitious project ever,” an $850 million agreement to buy solar power from First Solar, the biggest U.S. developer of solar farms. The deal will supply enough electricity to power all of Apple’s California stores, offices, headquarters and a data center, Cook said Tuesday at the Goldman Sachs technology conference in San Francisco.

It’s the biggest-ever solar procurement deal for a company that isn't a utility, and it nearly triples Apple’s stake in solar, according to an analysis by Bloomberg New Energy Finance (BNEF). “The investment amount is enormous,” said Michel Di Capua, head of North American research at BNEF. “This is a really big deal.”

David Fuller's view -

Iconic Apple can only increase US and also global interest in solar power.  It remains far more flexible and adaptable in terms of instillations than any other source of electricity.  It also has more scope for lower costs because solar benefits more from technological progress than any other source of power.



This section continues in the Subscriber's Area. Back to top
February 04 2015

Commentary by David Fuller

Iain Little: Oh Dear, An Odey Idea

My thanks to the author for his ever-interesting Fund Manager’s Diary.  Here is the opening:

I first met Crispin Odey in 1980. We were poorly paid, poorly fed company analysts in the City and in those floppy-haired, blue-sky days, Crispin and I followed the fortunes of the UK’s electronics companies, Crispin for Framlington, I for Kleinwort Benson. Crispin delivered questions to management with a courtly elegance that belied a passion for getting to the bottom of things, particularly if he suspected chicanery. I remember a precocious understanding of how companies really worked: top line, bottom line, margins, moats, management. Despite media puff, analysts who think with true originality about what makes companies tick are rare in the City (Terry Smith of Fundsmith is one).

The art of knowing a good fund is the art of knowing a good man.  So in the early ‘90s I backed Crispin with client money when he went independent with his European hedge fund.  My clients and I remember a volatile ride with some picturesque detours.  One year, Crispin assumed that knowledge of European equity markets perfectly equipped him to judge the West African cocoa market.  My clients were treated to a Six Flags roller-coaster, hefty drawdowns and the nearest thing to an apology I’ve read in 35 years in the industry.  Crispin began his client confessional with some TS Eliot poetry: “I should have been a pair of ragged claws / Scuttling across the floors of silent seas”.  It didn’t bring the money back, at least not that year, but it made Crispin a lot of friends.

In an industry filled with helmet-wearing piste-huggers, Crispin has skied off-piste like few others.  He has gone on to manage USD 12bn of other peoples’ money, and has made a considerable fortune.  I went on to graze in the quieter pastures of the private client world and immerse myself in the fascinating challenge of explaining a sometimes impenetrable and always mischievous world to families, clients and friends, a quest that continues to this day.

So when I read this week that Crispin has written that "Equities Will Be Devastated", I sat up.  It is so far from what we believe most likely (a humdrum and extended global recovery supported by technological breakthroughs, cheaper Energy and negligible interest rates).  Most chillingly, we are part of the very consensus that Crispin decries.  Crispin’s warnings could script a Hollywood disaster movie.  Here are clips.

David Fuller's view -

No forecast from a highly experienced fund manager should be dismissed lightly.  Nevertheless, when I read the clips from Crispin Odey’s Letter that Iain Little reproduced, I was far from convinced.  I also recalled remarks from other commentators who have said: “This is the most unloved bull market in history.” 

This item continues in the Subscribers’ Area, where Iain Little’s Letter is also posted.

 



This section continues in the Subscriber's Area. Back to top
February 04 2015

Commentary by Eoin Treacy

Petrobras Top Management Resigns in Brazil Corruption Case

This article by Sabrina Valle, Denyse Godoy and Paula Sambo for Bloomberg may be of interest to subscribers. Here is a section: 

“With low oil prices and Petrobras’s financial difficulties, the incentives to lean more on international oil companies to help develop the pre-salt have grown substantially,” the Eurasia analysts wrote about the company’s offshore discoveries. “It is clear that any substitute to Graca is likely to be someone with industry credentials and capable of conducting a ‘house cleaning’ of the firm.”

The scandal has also engulfed Brazil’s largest construction companies, which may bring public works projects to a halt, and threatens the presidency of Dilma Rousseff, who served as Petrobras chairman during some of the time when the alleged graft was occurring.

Foster, a frequent guest at the presidential palace in Brasilia, had offered to resign “one, two, three times” after the company was forced to delay quarterly results because of the scandal, she told reporters on Dec. 17. Foster said then that she would stay in the job as long as the president trusted her.

Rousseff has been a personal friend since the two worked together at the Ministry of Mines and Energy in 2003.

Eoin Treacy's view -

An issue faced by many nationalised industries is that they become subject to the avarice of their politically appointed boards as well as rent seeking public officials. For Petrobras this was particularly poignant since the President of Brazil is a former executive. In the run up to the October election Petrobras rallied in anticipation of Dilma Rousseff losing. Unfortunately for shareholders she won and the additional decline in oil prices contributed to the share more than halving from what was already a depressed level. 



This section continues in the Subscriber's Area. Back to top
February 03 2015

Commentary by David Fuller

U.S. Stocks Advance as Energy Rally Extends to Broader Market

Here is the opening of this report from Bloomberg:

(Bloomberg) -- U.S. stocks rallied for a second day, rebounding from the biggest monthly drop in a year for the Standard & Poor’s 500 Index, as a four-day rally in Energy stocks spread to the broader market.

Exxon Mobil Corp. and Chevron Corp. climbed more than 2.6 percent as Brent crude entered a bull market. Freeport-McMoRan Inc. rose 9.1 percent as commodities had the biggest three-day advance since 2012. Office Depot Inc. jumped 22 percent after the Wall Street Journal reported the company is in advanced merger talks with Staples Inc.

The S&P 500 added 1.2 percent to 2,045.13 at 3:23 p.m. in New York, climbing above its average level for the past 50 days. The Dow Jones Industrial Average rose 277.24 points, or 1.6 percent, to 17,638.28. That gauge is up 2.8 percent over two days. Trading in S&P 500 companies was 32 percent above the 30-day average.

“The fact that oil is stabilizing takes some edge off the argument that the global economy is really in trouble,” Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion, said in a phone interview. “The markets are a little oversold after being down in January, which is also part of the strength today.”

David Fuller's view -

Given the US stock market’s size it remains a big influence on equity trends in other parts of the world.  Consequently, few investors can afford to overlook market developments on Wall Street, where the technical action has been nervous since October 2014.  It has also been ranging in a volatile fashion so the next sustained breakout is likely to be important – up or down.   

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
February 02 2015

Commentary by Eoin Treacy

Oil Bears Miss Biggest Rally Since 2012 as Rigs Withdraw

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

The United Steelworkers union, which represents employees at more than 200 U.S. oil refineries, terminals, pipelines and chemical plants, began a strike at nine sites on Sunday, the biggest walkout called since 1980. A full walkout of USW workers would threaten to disrupt as much as 64 percent of U.S. fuel production.

The U.S. oil rig count dropped to a three-year low of 1,223, Baker Hughes said Jan. 30. Drillers idled 352 oil rigs in eight weeks.

Royal Dutch Shell Plc, Occidental Petroleum Corp. and ConocoPhillips alone said they would reduce spending by almost $10 billion this year.

Chevron Corp. cut its drilling budget by the most in 12 years and said it may delay some shale projects. The company is targeting $35 billion in capital projects this year, from $40.3 billion in 2014.

“Oil production growth should be flat or declining by May or June unless there’s some substantial recovery in oil prices,” James Williams, an economist at WTRG Economics, an Energy-research firm in London, Arkansas, said by phone Jan. 30.

 

Eoin Treacy's view -

Falling prices necessitate that those heavily impacted by the decline act. Oil companies cutting investment is an expected response and they will be slow to ramp back up now that they have relearned how swiftly prices can fall when supply exceeds demand. Striking union workers introduces a fresh dynamic and could act as a bullish catalyst if they succeed in withholding supply from the market. 

Brent Crude rallied by an additional $1.80 today to take the bounce to almost $10 from the mid- January low. This is the largest rally since the onset of the decline in June and suggests short covering is underway. Considering the speed and depth of the decline there is ample room for mean reversion and an unwind of the short-term oversold condition. However once this rally has run its course a potentially lengthy period of support building will probably be required before a return to medium-term demand dominance will be in evidence.  

 



This section continues in the Subscriber's Area. Back to top
January 30 2015

Commentary by David Fuller

U.S. Economy Expanded Less Than Forecast in Fourth Quarter

(Bloomberg) -- The economy in the U.S. expanded at a slower pace than forecast in the fourth quarter as cooling business investment, a slump in government outlays and a widening trade gap took some of the luster off the biggest gain in consumer spending in almost nine years.

Gross domestic product grew at a 2.6 percent annualized rate after a 5 percent gain in the third quarter that was the fastest since 2003, Commerce Department figures showed Friday in Washington. The median forecast of 85 economists surveyed by Bloomberg called for a 3 percent advance. Consumer spending, which accounts for almost 70 percent of the economy, climbed 4.3 percent, more than projected.

Swept up by the cheapest gasoline in years and the biggest employment increase since 1999, households are gaining the confidence to spend more freely, which will bolster the odds the world’s biggest economy can escape a global slowdown unscathed. Engaged consumers will help ensure that most American employers will look to expand, even as the decline in oil hurts companies such as Caterpillar Inc.

The expansion last quarter was “all about a solid consumer performance,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who correctly forecast the fourth-quarter growth rate. “Overall, the number has returned to trend growth after a couple of really hot quarters.”

David Fuller's view -

The US consumer is in better shape with the help of higher employment, some wage increases and cheaper gasoline.  However, the US Dollar Index’s sharp rise remains a headwind for the profits of US multinational companies.  More seriously, a sharp slowdown in the domestic Energy sector, particularly regarding fracking, will weigh on 1Q GDP growth, and probably beyond. 

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
January 30 2015

Commentary by David Fuller

Cheap Oil Burns $390 Billion Hole in Pockets of Investors

Here is the opening of this topical article from Bloomberg:

(Bloomberg) -- Investors have a message for suffering U.S. oil drillers: We feel your pain.

They’ve pumped more than $1.4 trillion into the oil and gas industry the past five years as oil prices averaged more than $91 a barrel. The cash infusion helped push U.S. crude production to the highest in more than 30 years, according to data compiled by Bloomberg.

Now that oil prices have fallen below $46, any euphoria over cheaper Energy will be tempered by losses that are starting to show up in investment funds, retirement accounts and bank balance sheets. The bear market has wiped out a total of $393 billion since June -- $353 billion from the shares of 76 companies in the Bloomberg Intelligence North America Exploration & Production index, and almost $40 billion from high-yield Energy bonds, issued by many shale drillers, according to a Bloomberg index.

“The only thing people are noticing now is that gas prices are dropping,” said Sean Wheeler, the Houston-based co-chairman of the oil and gas industry team for law firm Latham & Watkins LLP. “People haven’t noticed yet that it’s also hitting their portfolios.”

The money flowing into oil and gas companies around the world in the last five years came from a variety of sources. The industry completed $286 billion in joint ventures, investments and spinoffs, raised $353 billion in initial public offerings and follow-on share sales, and borrowed $786 billion in bonds and loans.

David Fuller's view -

This has been weighing on Wall Street’s performance recently.  However, a further technical rally in oil prices, of which we saw the first evidence today (see charts above) would reduce concerns.   



This section continues in the Subscriber's Area. Back to top
January 30 2015

Commentary by David Fuller

Seven Reasons Cheap Oil Cannot Stop Renewables Now

Here is the opening of this interesting, somewhat controversial article from Bloomberg:

Oil prices have fallen by more than half since July. Just five years ago, such a plunge in fossil fuels would have put the renewable-Energy industry on bankruptcy watch. Today: Meh.

Here are seven reasons why humanity’s transition to cleaner Energy won’t be sidetracked by cheap oil.

1. The Sun Doesn't Compete With Oil

Oil is for cars; renewables are for electricity. The two don’t really compete. Oil is just too expensive to power the grid, even with prices well below $50 a barrel.

Instead, solar competes with coal, natural gas, hydro, and nuclear power. Solar, the newest to the mix, makes up less than 1 percent of the electricity market today but will be the world’s biggest single source by 2050, according to the International Energy Agency. Demand is so strong that the biggest limit to installations this year may be the availability of panels

“You couldn’t kill solar now if you wanted to,” says Jenny Chase, the lead solar analyst with Bloomberg New Energy Finance in London.

David Fuller's view -

This is a good article, even if it does lose its focus, in my opinion, in the last two paragraphs.  It also contains some helpful graphics.

In particular, look at the third point.  Here is a key sentence on solar: “It’s a technology, not a fuel.”  This is certainly true and solar is fast on its way to becoming the dominant technology in the Energy field.  



This section continues in the Subscriber's Area. Back to top
January 30 2015

Commentary by Eoin Treacy

Musings From the Oil Patch January 30th 2015

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

What is most interesting is the consistency in long-term demand growth since 1989. As shown on the chart, for the decade 1989-1999, demand grew on average by 900,000 barrels a day. For the overlapping decade of 1994-2004, average demand grew 50% faster, or an average rate of increase of 1.45 million barrels a day. That period was marked by 2004’s dramatic increase along with healthy growth during the last half of the 1990’s. When we calculated the average demand growth for 2000-2014, it was at an annual average rate of 950,000 barrels a day. This means that last year’s demand grew by only two-thirds of the historical growth rate. This year’s growth will come close to matching the long-term average, however, that forecast was made before the International Monetary Fund (IMF) cut its global economic growth estimates for 2015 and 2016 by 0.3 percentage points, respectively. The problem is that if industry planners were anticipating growth more like that experienced over the 1994-2004 decade, then demand is falling well short of expectations. What we know about this year’s Energy demand forecast is that it will continue to be buffeted by the cross-currents from the demand stimulus as a result of lower oil prices and reduced economically-driven demand from around the world.

In our view, much of the world’s Energy business for the past decade has been driven by an extrapolation of the demand trends established in 1994-2004. The financial crisis and recessionary period presented a brief interruption in that healthy growth trend. Population growth, rising living standards and cheap capital, curtesy of easy monetary policies around the world, stimulated significant growth in oil drilling and production that contributed to the current supply growth. Lack of demand continues to play a greater role in the weak oil prices of today than many are willing to acknowledge. That imbalance between demand and supply is not particularly large – maybe 1.5 million barrels a day, although supply is growing while demand is lagging. Saudi Arabia knows it needs a healthy global economy to spur long-term oil demand growth and thus lift global oil prices. How long will it take to re-establish this growth? Saudi Arabia said it was prepared to live with low oil price for up to two years. Fundamentals, however, should shorten that time frame.

Eoin Treacy's view -

A link to the full report is posted in the subscriber's Area,

A 60% cut in the price of oil will reignite demand growth. However prices will not rebound in any meaningful way until demand has recovered sufficiently and supply has been pared back so that the market returns to relative equilibrium before reversing. The motives of the Saudi Arabians in holding production steady in a supply dominated environment will be cause of continued debate but until they decide to alter their strategy the market will be susceptible to weakness.  

As with any major decline analysts tend to extrapolate the trend and become progressively more bearish as prices fall.  However where oil finds support will be heavily influenced by the ability of shale oil producers to sustain production at lower prices.



This section continues in the Subscriber's Area. Back to top
January 29 2015

Commentary by David Fuller

Five Hours and $20 Billion in Cuts: Big Oil Goes Long

The first major oil companies to report earnings amid the worst oil crash since 2009 all pledged to protect shareholder payouts even as they announced more than $20 billion in spending cuts in a span of five hours.

By preserving and even increasing dividends, Energy companies are attempting to keep investors on board while they wait for oil and natural gas prices to rebound to more profitable levels. Producers, meanwhile, are choosing to cut drilling programs and workforces to weather a downturn that could extend for years.

Royal Dutch Shell Plc, Occidental Petroleum Corp. and ConocoPhillips pledged to slash spending by almost $10 billion this year alone -- enough to drill more than 1,400 shale wells. The risk: cannibalizing budgets to feed cash to shareholders may leave companies with reserves too anemic to fuel future output, said Timothy Doubek, who helps manage $26 billion in corporate debt at Columbia Management Advisors.

“It’s a pretty impressive ax they’re taking to their drilling budgets, but when the stock is down 30 or 50 percent, what are they trying to protect by preserving dividends?” Doubek said in a telephone interview from Minneapolis. “You’re protecting a stock price that can’t be protected. Why don’t you keep as much cash as possible so you can be the first one to take advantage when assets go up for sale?”

Shell, Occidental and ConocoPhillips handed over more than $17 billion in dividends to shareholders last year, according to data compiled by Bloomberg. For the full year, Shell and ConocoPhillips paid out $11.8 billion and $3.5 billion, respectively. Occidental’s dividend bill for the first nine months of 2014 was $1.69 billion; the company hasn’t yet disclosed its fourth-quarter payout.

David Fuller's view -

The big international oil companies have long-term institutional investors who prize the shares mainly for their attractive dividends.  For that reason alone, the decision to hold payouts while slashing some now marginal projects makes sense to me.  It will be a different story if Brent crude oil is still trading below $50 a barrel a year from now.  Note: a slight loss of downside momentum is evident but there have been no upward dynamics to date.

This item continues in the Subscribers’ Area. 



This section continues in the Subscriber's Area. Back to top
January 29 2015

Commentary by David Fuller

Deepak Lalwani: India Report

My thanks to the author for his informative letter, and here is a section:

What do India and the US bring to the table and why do they both wish to form a strategic partnership? For the US, India's size, location, fast growing economy and being the world's largest democracy offers much potential. Especially when Europe is facing economic, political and monetary problems, the Middle East faces continual challenges of embracing democracy and a rising China's military and territorial claims are causing concern. The US views India as a huge market and a potential counterweight in Asia to an increasingly more assertive China. But the US has been frustrated with the slow pace of New Delhi's economic reforms, inability to slash bureaucracy and make doing business in India much easier and a reluctance to support Washington in international affairs. The US is keen to expand ties in business, defence, civil nuclear contracts and counter-terrorism. For India, as it moves away from Soviet legacy institutions under Modi, the US represents a huge business market, a major source of badly needed investments into India to lift economic growth and a global superpower that could help with a permanent seat on the UN Security Council.

Obama's visit ended on a very upbeat note for both countries. The markets should view the trip as being very fruitful. The two leaders announced plans to unlock billions of dollars in nuclear trade and to deepen defence and counter-terrorism ties and knowledge. Of particular importance was an agreement on two issues that has stopped US companies from setting up nuclear reactors in India and had become a major irritant in bilateral relations. A 10-year framework for defence ties and deals on co-operation for the production of drone aircraft and equipment for C-130 transport planes was agreed. A $4bn US investment to expand trade and business with India was announced. Other deals ranged from financing initiatives to help India use renewable Energy to lower carbon intensity. An Obama-Modi hotline - India's first at leadership level- was agreed. Overall, a very positive path. The crucial part will be if the untapped potential of a US-India strategic partnership can be unlocked. If so, it will be a huge win-win for both countries.

David Fuller's view -

These are important points, with which I strongly agree.  No other country has the potential to contribute more to India’s future GDP growth than the USA.  America has a strong ally in Japan but another one would be very useful.  Technology projects between the US and India would be fruitful for both countries.  Additionally, if the US can hasten India’s economic development, it could be an increasingly powerful ally, with an unlimited and increasingly skilled labour force. 

Now if only the US played cricket…

The India Report is posted in the Subscribers' Area, with an additional comment.



This section continues in the Subscriber's Area. Back to top
January 29 2015

Commentary by Eoin Treacy

RBA Rate-Cut Pressure Builds as Global Easing Wave Sweeps Closer

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

“The key driver for these central banks is increasing downside risks to global inflation and growth,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “Canada talked about an insurance cut and pointed at Energy, you substitute that in Australia for iron ore and dairy in New Zealand. It’s no coincidence that the commodity nations’ central banks are shifting rapidly in policy assessments.”

Traders are pricing in a 53 percent chance the RBA board will ease by a quarter percentage point at its first meeting of the year Feb. 3, according to swaps data compiled by Bloomberg.

The chance fell to 15 percent Jan. 28 after a report showed faster-than-forecast core inflation in the fourth quarter. The RBA has stood pat at a record-low 2.5 percent since August 2013.

A columnist in Australia’s biggest selling daily newspaper wrote overnight that the Reserve Bank of Australia will cut both its growth and inflation forecasts in its Statement on Monetary Policy to be released Feb. 6, without citing anyone. Terry McCrann predicted that Governor Glenn Stevens will lower rates by a percentage point this year to 1.5 percent.

Eoin Treacy's view -

When central banks worry about how to stock of outstanding debt in their respective countries, the last thing they want is for deflationary or disinflationary forces to take hold. They often view inflation as an aid in reducing the quantity of debt outstanding so we can anticipate that the RBA and RBNZ will cut Interest rates in the not too distant future not least because so many of their trading partners are doing so. The collapse of iron-ore prices and the fact that much of Australia’s natural gas exports are tied to oil represent additional reasons to weaken the currency in order to support prices in local currency terms.

The Australian Dollar completed a Type-3 top against the US Dollar in 2013, completed a first step below it in October and continues to extend its decline. While it is becoming increasingly oversold, a major change of trend would be required to question what could be a secular decline. 



This section continues in the Subscriber's Area. Back to top
January 28 2015

Commentary by David Fuller

Three Charts Showing Why the Fed Shrugged at Low Inflation

Here is the opening of Bloomberg’s summary following the Wednesday’s Fed meeting, written by Craig Torres and Aki Ito:

Here's the biggest news out of the Federal Reserve today: Janet Yellen and her colleagues acknowledged some measures of slowing inflation but didn't panic. An epic collapse in oil prices has dragged down what were already too-low readings on consumer prices, relative to the Fed's target of 2 percent inflation. Those developments didn't convince the Fed to change its tune.

The Fed statement did have some notable additions on inflation. First, Fed officials told us that lower oil prices will support growth because they have "boosted household purchasing power." Second, they blamed the low readings on inflation "largely" on Energy prices, instead of "partly," the word they used in December.  The Fed policy committee nodded toward the bond market's perception that inflation risk is very low and said "market-based measures of inflation compensation have declined substantially in recent months." They also said they expect inflation to rise "gradually toward 2 percent over the medium term." The time horizon in that phrase is new, and underscores that officials still see low inflation as a temporary issue.

David Fuller's view -

This is a good article.  I think the Fed will also assume that low oil prices are good for the global economy, although they will surely be factoring in a sharp slowdown in the USA’s fracking sectors.

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
January 28 2015

Commentary by Eoin Treacy

Sliding Oil Triggers LNG Drop as Indian Demand Seen Rising

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

LNG prices in Japan, the world’s biggest buyer of the fuel, will probably plunge 35 percent in 2015 and Indian costs will decline 33 percent, according to Energy Aspects Ltd., a London- based consultant. Costs in Asia will this year average below $10 per million British thermal units for the first time in four years as new projects in Australia and the U.S. boost supply through 2016, Bloomberg New Energy Finance said.

Most LNG in Asia is linked to crude costs with a time lag of several months, so Brent’s 49 percent drop in the second half of 2014 hasn’t fully filtered into prices. Global demand for the gas chilled to minus 170 degrees Celsius (minus 274 Fahrenheit) will rise 9.8 percent this year amid increased imports by India and southeast Asia, after climbing 0.5 percent in the first nine months of 2014, according to Sanford C. Bernstein.

“We are already seeing, at current prices, renewed interest from Indian buyers,” Laurent Vivier, vice president for strategy and market analysis at Total Gas & Power, said Monday by e-mail. “There is some flexibility in the demand as well. When prices fall to current levels, it creates additional demand.”

 

Eoin Treacy's view -

Consumers have bemoaned the link between natural gas pricing and crude oil over the last decade but the pendulum has swung back in their favour over the last six months. As major Energy importers without significant domestic supply Japan and India are major beneficiaries of the decline in oil prices. 

For Japan, the fall in oil prices gives the BoJ additional room to stimulate the economy while consumers will see they have additional cash. The Nikkei-225 continues to firm within its three-month range and a sustained move below 16,500 would be required to question medium-term potential for a successful reassertion of the medium-term uptrend. 

 



This section continues in the Subscriber's Area. Back to top
January 28 2015

Commentary by Eoin Treacy

Email of the day on Caterpillar earnings

I've attached below the transcript of CAT's conference call following its latest earnings report-I believe the company is a good bellwether for the global economy. A bit depressing, but does give you a good picture of slow growth worldwide.  Note how Chairman expects stronger dollar & how that will hurt US manufacturing.  Also note how CAT expects that there might be a quarter or 2 delay in a slowdown of their sales (they'll work off their inventory first which will hit profits right away).  Company has cautious view on mining and expects flat oil & gas prices for 2015.

Eoin Treacy's view -

As a globally diversified company with operations in power systems, construction and resources Caterpillar is heavily influenced by both the extraction and construction sectors. The sharp declines in oil, iron-ore and copper represent significant headwinds for the company’s customers who have been cutting back on spending plans. Since investment in Energy projects in particular represents a significant source of income for the company the outlook is likely to remain uncertain for the foreseeable future as spending on new projects is cancelled. 



This section continues in the Subscriber's Area. Back to top
January 28 2015

Commentary by Eoin Treacy

Pizza Boxes in Play as Rock-Tenn Heralds More Mergers

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

There are other forces driving consolidation. An improving job market and the drop in oil prices are helping to stoke demand for consumer-related packaged products, said Panjabi of Baird. International Paper Wednesday reported fourth quarter sales that beat analysts’ estimates.
At the same time, materials costs are coming down, Panjabi said.

“The idea of increasing your exposure to that paradigm makes more sense,” he said. Companies are going to want to “capitalize on that dynamic” and merging with a peer will help reduce costs even further.

Packaging Corp. could be a potential takeover target or a merger partner, Anthony Pettinari, a New York-based analyst at Citigroup, wrote in a report on Tuesday. The company could also be an acquirer, according to Mark Wilde, a New York-based analyst at BMO. After buying Boise Inc. in 2013, it has the balance sheet flexibility to start looking at deals, he said.

 

Eoin Treacy's view -

As Energy costs fall and consumers have more cash, the demand for and cost of manufacturing packaging should improve. The sector has been a solid outperformer over the last few years as consumer demand globally improved in line with the growth of the middle class but the fall in oil prices is an additional bullish catalyst. 



This section continues in the Subscriber's Area. Back to top
January 23 2015

Commentary by David Fuller

Prince Alwaleed: We Will Never See Oil at $100-Plus Again

January 23 2015

Commentary by Eoin Treacy

New Saudi King to Keep Al-Naimi as Oil Policy Seen Unchanged

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

King Salman, Saudi Arabia’s new ruler, will keep Oil Minister Ali Al-Naimi in his post, bolstering expectations that he will continue the policy of maintaining crude output to preserve market share even as prices have plunged.

Salman, 79, issued a royal decree to retain current ministers, according to the official Saudi Press Agency. Al- Naimi led OPEC’s Nov. 27 decision to maintain its crude production even as shale supplies spurred U.S. output to the highest in three decades. Salman said on Saudi national television that he will maintain the policies of his predecessor.

With production of 9.5 million barrels a day and exports of 7 million, Saudi Arabia accounts for more than a 10th of global supply and a fifth of crude sold internationally. The country’s refusal to surrender market share to rising U.S. output has contributed to the worst slump in prices since the global credit crisis of 2008.

“The Saudi leadership has already taken the tough decision to live with lower oil prices,” Florence Eid-Oakden, chief economist at London-based consultants Arabia Monitor, said by phone. “Naimi is well established, he is respected and there shouldn’t be a change as long as the current cabinet is in place.”

 

Eoin Treacy's view -

I posted Allen Brooks’ prescient commentary on the likely path of accession to the Saudi throne on January 13th. I’ve reposted the report in the Subscriber’s Area which includes a particularly interesting family tree along with positions held. 

This additional article by Middle East veteran Robert Fisk for the Independent  highlights just how much of a challenge the Saudi administration faces with civil wars in a handful of neighbouring countries. The vast majority of people have difficulty with the Catholic/Protestant/Republican/Loyalist distinctions in Northern Ireland. The additional challenge of understanding the enmity between various Sunni and Shia sects, often but not exclusively influenced by historical rivalry and tribal priorities represents a daunting task. So far the Saudi administration has succeeded in ensuring fighting has occurred outside its borders. Viewed in this respect, the policy of maintaining crude oil output in order to maintain market share can also be seen as reducing a source of income for its enemies. 

 



This section continues in the Subscriber's Area. Back to top
January 22 2015

Commentary by Eoin Treacy

UBA Plans Angola, South Africa Moves as Nigeria Hit by Oil Price

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

Nigerian companies and the Lagos-based bank are “adequately protected” against a drop in the value of the naira and the price of oil, Oduoza said. The currency of Africa’s largest economy and crude producer probably won’t be devalued further and loan defaults are unlikely to increase, he said. Angola is the continent’s second-biggest oil producer.

Nigeria is struggling to cope with crude prices that plunged by more than half in the past six months. Policy makers responded by devaluing the currency in November, increasing interest rates to a record 13 percent and proposing spending cuts.

“We have done quite a lot of hedging and we have applied various financial products to make sure that the bank is adequately protected,” Oduoza said. “The naira is finding its realistic value,” he said. “I do not think you are going to see any major devaluation, if at all it is going to happen.”

 

Eoin Treacy's view -

In the aftermath of the 2008 crash the Naira traded in a relatively tight range, albeit with a mild weakening bias, until November when it broke downwards. Considering the extent to which the Nigerian economy is reliant on Energy exports (95% of the total), it is too early to conclude the devaluation process has ended. 



This section continues in the Subscriber's Area. Back to top
January 21 2015

Commentary by Eoin Treacy

2015 Asia Research Outlook Tread Carefully in the Year of the Ram

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

Cost savers: Mid-stream industrial sectors that could benefit from lower commodity prices and highly leveraged sectors that could benefit from lower financing costs.

Top-line growers: Increasing demand for better quality of life suggests a stronger appetite for healthcare, environmental protection, TMT, and child/senior-related consumption.

Reform beneficiaries: Look for potential beneficiaries from SOE reform, “Go Global”, financial reform and land/Hukou reform, but watch for potential losers from fiscal/tax reform.

MSCI inclusion: Select TMT and consumer discretionary names will benefit at the expense of the largest incumbents including financials, Energy and telecom.

 

Eoin Treacy's view -

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

In many respects the MSCI China Index is similar to the Hang Seng China Enterprises (H-Shares) Index. They certainly have a similar chart pattern and valuations. Mainland listed shares have so far been the primary beneficiaries of the opening up of the Hong Kong Shanghai Stock Connect with overseas investors dominating what has so far been one way traffic. 



This section continues in the Subscriber's Area. Back to top
January 21 2015

Commentary by Eoin Treacy

Canada Cuts Key Rate as Oil Shock Clobbers Inflation Outlook

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

Canada, the largest exporter of oil to the U.S., is loosening monetary policy as a plunge in oil prices raises the risk of deflation globally. The European Central Bank is expected to announce tomorrow it will buy government bonds for the first time. The Bank of Japan has already boosted its asset purchases and the Bank of England said two policy makers had dropped their call for rate increases.

“It’s a shocker,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said in a telephone interview. “It is an aggressive move. It speaks volumes about where the Bank of Canada sees the economy and inflation going.”

The nation’s currency depreciated more than 2 cents against its U.S. counterpart on the rate decision and was quoted at 1.2368 per U.S. dollar at 11:33 a.m. in New York Wednesday. Two- year bond yields plunged 29 basis points to as low as 0.55 percent. Stocks surged 1.9 percent in Toronto.

The price of North American crude oil, Canada’s top export, has plunged 55 percent to $47.36 a barrel since June.

 

Eoin Treacy's view -

As a major commodity exporter the impact of falling commodity prices represents a headwind for a significant portion of the Canadian economy, not least Western provinces. On the other hand lower Energy prices and a falling Loonie will be welcomed by the manufacturing sector which has faced stiff headwinds over the last decade. 

The pace of the US Dollar’s advance versus the Loonie has picked up as the oil price fell and has been accelerating for the last week. The rate is closing in on the 2008/09 peak and a clear downward dynamic would be required to question potential for additional upside. 

 



This section continues in the Subscriber's Area. Back to top
January 21 2015

Commentary by Eoin Treacy

BHP Billiton cuts US shale oil rigs by 40% amid sliding price

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

BHP said on Wednesday it would reduce the number of rigs from 26 to 16 by the end of the June in response to weaker oil prices. However, shale volumes were still forecast to grow by approximately 50 percent during the period.

“In petroleum, we have moved quickly in response to lower prices and will reduce the number of rigs we operate in our onshore US business by approximately 40% by the end of this financial year,” chief executive Andrew Mackenzie said.

“The revised drilling programme will benefit from significant improvements in drilling and completions efficiency.”

Mackenzie said while the firm’s drilling operations would focus on its Black Hawk field in Texas, “we will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production”.

 

Eoin Treacy's view -

Energy companies are aggressively cutting back on investments in additional supply as prices fall but production from existing wells continues to flow. The constant need for new drilling, associated with the swift peaking of unconventional wells, means that the supply response of related drillers is likely to be swifter than might have otherwise been the case. This may bring forward the point at which the market returns to balance but some evidence of short covering will be required before we can conclude that demand is returning to dominance. 



This section continues in the Subscriber's Area. Back to top
January 20 2015

Commentary by David Fuller

Tim Guinness: 2015 Outlook for Energy

My thanks to a subscriber for this comprehensive report, published by Guinness Asset Management Ltd.  Here are the first two bullet points for 2015:

We expect the oil price to remain volatile for a number of months, with a recovery to $75+/bbl likely over the next 12 months. A necessary part of this outcome is for US oil shale growth to fall back by the end of 2015. After 2015 the likelihood is that the price will fluctuate quite widely, but move on an upwards trajectory as accelerating emerging country demand growth and flattening US shale oil growth slowly tighten the global oil supply/demand balance.

The oil price at $50-60/bbl is not yet at an economic extreme, leaving a reasonable chance that it continues to decline while the market starts to rebalance. An oil price in the $50-60/bbl range is not high enough to justify new investment in higher cost and more marginal non-OPEC projects. However, it is not low enough to warrant existing high cost producers to shut in reasonable volumes of supply. We believe that oil prices would need to fall to around $35-40/bbl to warrant this.

Saudi and other OPEC members are acting rationally in their response to the falling oil price. OPEC’s decision not to cut production is borne out of a realisation that the falling price is principally a function of non-OPEC over-supply, making ‘emergency’ quota cuts a fools’ errand as they would simply encourage more non-OPEC growth. We sense that Saudi are eyeing US shale oil growth and would prefer a shallower oil price recovery for the time being (i.e. one that doesn’t allow US oil growth to accelerate unabated), rather than a ‘V’ shaped recovery that restores it to $100/bbl. If we are right, it is logical for Saudi & co to tolerate a lower oil price for as long as it takes to achieve this.

David Fuller's view -

I do not see this as an OPEC agreement.  It was a Saudi-led decision for the predominantly Sunni producers – Saudi Arabia, Qatar, Kuwait and the UAE - to keep pumping, weakening the growing and predominantly Shia Iran / Iraq alliance, while also curbing non-OPEC supplies from US shale oil to Russia’s production. 

This item continues in the Subscribers’ Area, where Tim Guinness’ Letter is also posted.   



This section continues in the Subscriber's Area. Back to top
January 20 2015

Commentary by Eoin Treacy

The Global Corporate Autonomies Fund

Eoin Treacy's view -

Veteran subscribers will be familiar with the focus we have put on the types of companies David first referred to as Autonomies over four years ago. We came up with the designation in order to reflect the potential of truly global companies as some powerfully bullish factors converge.

Perhaps the most important of these is that governance is generally improving on a global basis. Some would argue the opposite with Russia deteriorating, ISIS running rampant in Iraq, Ebola posing a threat in West Africa and Europe still struggling with deflation. However that would be to miss the point that capitalism has gone global which is allowing more people than ever before to lift themselves out of poverty and into the middle classes. The major population centres of the world primarily in Asia and increasingly in Africa have abandoned the ideology of communism and billions of people are being provided with the tools, knowhow and infrastructure to multiply their productive capacity. This is a secular theme and the demand cycle this is unleashing represents a powerfully bullish force for equity markets over the long term.

The Technology, Healthcare and Energy sectors have the capacity to change how we live our lives. Innovation in any one of these has the potential to fuel a major bull market but right now we are presented with accelerating innovation in all three. This is important for two reasons. The first is that the world’s most advanced economies have potential to enhance their productive capacity. The second is that because capital is now global, these products, services, methods and skills can be disseminated rapidly so that more people than ever before can benefit. For emerging economies this represents a shortcut to development since they can sidestep a number of developmental stages as innovative solutions are embraced.

Energy deserves special mention because it touches each of our lives in a very real way every day. Unconventional oil and gas represent game changers for the Energy sector and are already delivering on lower Energy prices in real terms. One of the oldest adages from the commodity markets is that “the cure of high prices is high prices”. The high oil price environment ignited interest in developing new more efficient Energy sources. The entry of shale oil and gas is a partial solution. The application of Moore’s law to solar cell development has even more potential to displace fossil fuels and maintain a low Energy price structure. The evolution of nuclear technology shows similar promise.

These represent major themes and consumers are likely to be among the greatest beneficiaries. The companies providing new products and services will benefit but their customers will be benefit even more. This is one of the primary reasons we started looking at big multinational companies. What really sharpened our focus was the fact so many were breaking out to new all-time highs when the wider market was still getting off its knees. Truly global companies that dominate their respective niche have proven track records of generating brand loyalty, opening up new markets and they have the scale to achieve success whether others might flounder. Many of the Autonomies have strong balance sheets and have been around long enough to have lengthy records of dividend increases. However we did not make dividends a defining characteristic because that would exclude a significant number of the companies delivering the innovation upon which productivity growth potential relies.

I used the Autonomies in the latter half of Crowd Money to show base formation completion and as a template for how a number of themes can coalesce to drive a major bull market. A subscriber, Chris Moore at WM Capital Management in the UK, approached me last year at The Chart Seminar asking if there was a fund that he might invest in for his clients that represented these themes. There were some global funds and some dividend funds but none that we could describe as representing the Autonomies. He asked if I would like to start one and I concluded that it would be better to be part of the fund than have someone else do it so I agreed.

The fund will be equally weighted, rebalanced quarterly and will hold the 100 Autonomies with the most attractive chart patterns. Veteran subscribers will be familiar with our frequent commentary on the high costs of fund management so I made competitive fees a condition of my participation. The fund will have a management fee of 0.55%.

It will launch in March and I will be giving a talk at the East India Club on February 10th to talk about The Big Picture and the Autonomies from 6:30pm. If you would like to attend or would like some additional information relating to the Global Corporate Autonomy Fund please contact Chris Moore at [email protected]   

Here is a link to the fund brochure: http://www.wmcapitalmanagement.com/images/The%20Global%20Autonomy%20Fund.pdf



This section continues in the Subscriber's Area. Back to top
January 20 2015

Commentary by Eoin Treacy

Email of the day on the impact of the Affordable Care Act on labour force participation:

I’ve been taking a tax class at UCLA Extension because I felt so at sea with how the system is structured since we moved to the USA and I wanted to get a better handle on what the best way to structure our finances is. I finished the open book exam over the weekend and commented to my instructor, in inestimable Linda Hewitt, that if I had ever wondered, now I know why I’m not an accountant. Here is her response: 

You have not lived here your entire life. But I can tell you, that our tax law continues to get crazier as we go along. 

We have regular income tax, AMT (Alternative Minimum Tax), FICA (Federal Insurance Contributions Act), and State Income Tax, & Medicare Surtax + all the other taxes (property, sales, etc.)

Then on the Wealth Transfer side of things you will learn in the Estate Class we have: Gift Tax, Generation Skipping Tax, Estate Tax, and IRD ('Income In Respect Of A Decedent)

OMG!

In CA. if you are in the Top Bracket between Fed./State/FICA/Medicare surtax you really are around 68% marginally. 

My husband and I used to be in AMT, until his company retired him out, with just my income we are no longer in AMT. 

I have clients where the wife has either quit work or reduced hours, and because of the tax savings are better off. 

You can get to the point where you punish a person for being productive!

Today with the medical subsidies many women work only part time or not at all to control their income to get the subsidy. These women were working full time prior. 

I go crazy. They advertise get a medical subsidy - 4 out of 5 people will get the subsidy in CA. under Cover CA. 

No one talks about the 5th person. Let's see that guy pay for his own health care + for 4 other people. 

I receive no help from anyone, I am almost 66 yr. old and work about 65 hours a week. What is fair about that? I work so someone else only has to work part time, and gets a big subsidy. My cost for Medical Premiums, out of pocket max and RX for my husband under Medicare runs me almost $20,000 a year for 2 people.  

If I had it to do over again, I would get a job in the public sector! 

Hope you don't mind me ranting away here! 

Eoin Treacy's view -

The USA has some of the most exciting advantages of any economy from the low cost of Energy, to its lead position in technological innovation, to the flexibility of its labor force and the proactivity of its central bank. However, the tax structure leaves a lot to be desired.

The breadth of the Affordable Care Act is incredible and perhaps more important, its full effects will not be in place for another year. The Fed has cited declining Labor Force Participation rates as a factor in why it has not raised interest rates so I thought it might instructive to view the chart. 



This section continues in the Subscriber's Area. Back to top
January 16 2015

Commentary by Eoin Treacy

Global growth: Can productivity save the day in an aging world?

Thanks to a subscriber for this heavyweight 148-page report which I consider indispensable reading over the weekend. Here is a section: 

Extrapolating from these case studies, we find sufficient potential to accelerate productivity growth to about 4 percent a year in the G19 and Nigeria. That would be more than enough to compensate for the waning of demographic tailwinds. The persistence of large gaps in the productivity performance of developed economies compared with emerging economies underlines the potential to retool the world’s productivity-growth engine.

We estimate that roughly three-quarters of the total global potential for productivity growth would come from the broader adoption of existing best practices—which we can characterize as “catch-up” productivity improvements. The positive message here is that these types of opportunity are all known to us and exist somewhere in the world. Eighty percent of the overall scope to boost productivity in emerging economies comes from catching up. The remaining one-quarter, or about one percentage point a year, could come from technological, operational, or business innovations that go beyond today’s best practices and that “push the frontier” of the world’s GDP potential. In contrast to some observers, we do not find that a drying up of technological or business innovations will act as a constraint to growth. On the contrary, we see a strong innovation pipeline in both developed and developing economies in the sectors we studied. Our estimate of the potential here is based only on the innovations that we can foresee. It is quite possible that waves of innovation may, in reality, push the frontier far further than we can ascertain based on the current evidence.

 

Eoin Treacy's view -

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

Major secular bull markets don’t just appear out of thin air. In Crowd Money I wrote about the four pillars of an investment theme that need to be in place for it to be sustained beyond the short term. These are the fundamental story, monetary policy/liquidity, governance and price action/crowd psychology. Veteran subscribers will be familiar with our view the necessary elements to support a major bull market are falling into place. Let’s take them in succession: 

The investment theme is pretty clear. We are living in the greatest age of humanity ever. There are more people alive today than have lived at any one time in history. This is driving demand for just about everything. Concurrently one of the greatest periods of technological innovation is unfolding. This has contributed to the lower cost of Energy we are currently experiencing. If you combine more people with better tools and lower Energy costs the result is productivity growth. In order for valuations to justify progressively higher prices, productivity growth is essential. 
 



This section continues in the Subscriber's Area. Back to top
January 15 2015

Commentary by David Fuller

Forget Emerging Markets. Hot Topic at Davos 2015 Is the U.S.

Here is the opening of this article from Bloomberg:

The World Economic Forum has long been something of a coming-out party for emerging economies, withdeveloping countries dispatching politicians and executives to the Swiss resort of Davos to drum up interest. This year, the big magnet for investment looks to be an older player on the global stage: the United States.

While Brazil stagnates, Russia enters a recession, and India struggles to implement economic reforms, the U.S. is booming as Energy prices plummet and Silicon Valley dominates global tech. Though yesterday’s retail sales report damped enthusiasm about the scale of the U.S. rebound, the American economy grew at its fastest pace in over a decade in the third quarter of 2014, reaching an annualized rate of 5 percent.

“The pendulum has shifted,” said Jacob Frenkel, chairman of JPMorgan Chase & Co. (JPM)’s international arm, who’s been attending Davos since the mid-1980s. “The U.S. is now regaining its position in the world economy. It is the place where the recovery took hold in the most robust way.”

David Fuller's view -

The US economy has done reasonably well on a relative basis and the US Dollar Index has staged a recovery after a lengthy period of underperformance, although this move has been flattered by the Euro’s weakness.

For investors, Wall Street’s performance has been OK, but the competition is picking up.  Last year, US stock market indices showed an average return of less than 10%.  In contrast, China’s Shanghai A-Share Index soared 40%, mostly in 4Q, India’s Sensex gained 25% and Indonesia was close behind.  These gains are quoted in US Dollar terms.  Less than two weeks into the New Year, the S&P 500 is down 3.2%, while the Hang Seng gained that amount, Shanghai A-Shares +3.4%, South Korea +1.7%, India +4.3%, Thailand +2.1% and New Zealand +1.5%, all in US Dollar terms as of today.  In Europe, following the uncoupling of the Swiss Franc from the Euro, Switzerland’s stock market fell sharply in CHF terms but is up +8.4% this year in US Dollars. 

This item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
January 15 2015

Commentary by David Fuller

Dubai Doubles Power-Plant Size to Make Cheapest Solar Energy

Here is the opening of this interesting report from Bloomberg:

Dubai’s government-owned utility plans to double the size of a solar power project that it expects will produce some of the world’s cheapest electricity.

Dubai Electricity & Water Authority awarded a contract to build the 200-megawatt plant to a group led by Saudi Arabia’s ACWA Power International. The 1.2 billion dirham ($330 million) generating station will be completed in April 2017, DEWA Chief Executive Officer Saeed Mohammed Al Tayer said yesterday at a news conference in the Persian Gulf emirate.

ACWA will sell electricity from the plant to DEWA at 5.85 cents per kilowatt-hour, a price that will be “the lowest by far” for solar power globally and among the cheapest from other sources, Paddy Padmanathan, the Riyadh-based company’s CEO, said in an interview.

Dubai plans to build 1,000 megawatts of solar capacity by 2030, enough to meet 5 percent of its forecast electricity needs that year, as it seeks to reduce reliance on natural gas as its main source of Energy for local use. Saudi Arabia and Abu Dhabi, the U.A.E.’s capital and largest emirate, are also developing renewable Energy as oil producers in the Gulf try to reduce the burning of costlier fossil fuels to produce power.

David Fuller's view -

There will be no stopping solar power, which is by far the most flexible Energy source, coming in units of variable sizes and shapes.  The efficiency of new solar panels improves every year, simultaneously lowering costs.



This section continues in the Subscriber's Area. Back to top
January 14 2015

Commentary by Eoin Treacy

US Preeminence

Thanks to a subscriber for this detailed report laying out the case for remaining fully invested in US equities. Here is a section: 

Overweight the Dollar: The divergence in growth rates between the United States and the Eurozone and Japan, the resulting divergence in monetary policy and renewed recognition of US pre-eminence are likely to lead to an increase in the value of the dollar relative to the euro and the yen. We believe that this cycle of dollar appreciation is more akin to the 1978–85 and 1995–2002 periods of dollar strength. As shown in Exhibit 30, during these two periods, spanning 6.3 years and 6.8 years, the dollar appreciated 93% and 46% on a trade-weighted basis, respectively. In these periods, the primary driver of the dollar’s strength was the divergence of monetary policy. We expect the dollar to appreciate an incremental 10% or so relative to the euro and the yen over the course of 2015.

We are not projecting a higher level of dollar appreciation because we are not expecting large interest-rate differentials between Treasury securities and German bunds and Japanese government bonds. Furthermore, the US dollar has already risen 24% from its trough in We expect the dollar to appreciate further relative to the euro and the Japanese yen in 2015. April 2011. The most recent appreciation followed statements by ECB President Mario Draghi in November 2014 suggesting more significant measures to prevent the Eurozone from sliding into deflation and by BOJ Governor Haruhiko Kuroda in late October 2014 to increase Japan’s pace of quantitative easing to fight deflation. This divergence of monetary policy can also be seen in the projected balance sheets of the three central banks over the next two years, as shown in Exhibit 31. 

The corollary to our view on US pre-eminence and a strong dollar is a negative view on gold.  The correlation between gold and the dollar has been -0.36 since 1974. Even though gold has already declined almost 40% from peak levels in September 2011, we believe that gold prices have further downside given declining physical demand, a stronger dollar and rising US interest rates. We recommend a tactical allocation that is designed to benefit from declining gold prices with some downside protection. 

 

Eoin Treacy's view -

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

The reasons for the economic outperformance of the US economy are well understood and include important considerations such as a widening technological lead, lower Energy costs and a proactive central bank. While it is correct to state that the Euro has fallen following the announcement of the ECB’s intention to adopt quantitative easing, the end of the Fed’s QE program in October is equally important. 



This section continues in the Subscriber's Area. Back to top
January 13 2015

Commentary by Eoin Treacy

Musings From the Oil Patch January 13th 2015

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report. It contains a number of titbits, not least on the outlook for the natural gas market and Energy stocks. Here is a section on the Saudi succession: 

Prince Muqrin is the third youngest son of King Abdulaziz. He is a pilot having been trained at a Royal Air Force college in Britain. He is a former chief of the General Intelligence Directorate and served as a governor of several provinces in the country including the one containing the holy city of Medina. While Prince Muqrin is thought to be a steady hand and close to the king, probably because he is strongly anti-Iranian, the fact that his mother was from Yemen and thought to have been a concubine, introduces a new dynamic into the succession thinking. At the current time, Islamist revolutionaries have seized control of Yemen and are actively fighting Saudi Arabia. We wrote about that development in the context of how Saudi Arabia is being surrounded by Islamist terrorists, which was manifest in the overthrow of the Kingdom’s political supporters in Yemen. The Saudi government admits it ignored Yemen in recent years, which contributed to the power shift and the loss of its allies there. 

At the time Prince Muqrin was elevated to his position as second in line to the throne in 2013, we and others commented that the choice indicated King Abdullah’s focus was on maintaining the historical consistency in the selection process rather than introducing politics into the selection. It also suggested that the King was entrusting Prince Muqrin with the future responsibility for selecting the first Saudi Arabian ruler from the family’s third generation, which will mark a significant event in the history of the country. 

The current fighting between Saudi Arabia and Yemen could present a succession issue within the Allegiance Council as family lines (loyalty) are considered very important in the Islamic world. Is it possible that Prince Mishal, as head of the Allegiance Council, might exercise power to alter the current royal succession line, and not just in dealing with the elevation of Prince Salman? Would he welcome his younger brother as King, or would he rather see the leader come from the next generation?

We have read that Prince Muqrin is not motivated by wealth and because of his strong anti-Iranian views may be more willing to use Saudi Arabia’s oil policy as a weapon against its neighbor. Does that mean he would be more willing to endure low oil prices for longer to ensure that the Kingdom’s Islamist enemies’ economies might be truly broken – possibly even leading to the overthrow of their governments? What about social unrest in Saudi in response to reduced government income? If low prices hurt Russia, would that be a problem? What would it mean for Saudi Arabia’s relations with the U.S.? We guess the Obama administration would be happy to have low oil prices for its remaining time in office as it should provide a powerful stimulus for economic growth. Low oil prices might also be welcomed by the presumed Democratic presidential nominee, Hillary Clinton. It would certainly set back the Energy self-sufficiency arguments made by the oil and gas industry and many Republican politicians, including some vying for their party’s presidential nomination, and it would hurt the economies of Texas, Oklahoma and North Dakota, among the handful of leading Energy state economies, all states dominated by Republican politicians. 

Eoin Treacy's view -

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

When the head of state is 90 one can’t but speculate about succession. When that state is Saudi Arabia, still the most influential oil producer, the stakes rise. As the custodians of Mecca and Medina, the Saudi royal family have a claim to leadership within the Muslin world that no other administration can touch. However it is worth considering that the deeply conservative elements of society that aided the creation of the state also represent a sympathetic ear for forces threatening the nation’s borders. Any new king will face a delicate task in managing the nation’s internal and external challenges. Oil will certainly continue to represent both a tool and weapon in achieving those goals. 



This section continues in the Subscriber's Area. Back to top
January 13 2015

Commentary by Eoin Treacy

Copper Falls for Fifth Day, Extending Drop to Lowest Since 2009

This article by Joe Deaux and Agnieszka de Sousa for Bloomberg may be of interest to subscribers. Here is a section: 

Copper fell to the lowest in more than five years on speculation that cheaper Energy costs will encourage mining companies to increase production.

Crude oil in New York traded below $45 a barrel today and has plunged about 50 percent in the past year as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. The decline will help cut costs to produce and transport metals, according to Natixis SA.

“OPEC is sticking to the plan of continued production, which is driving oil lower,” Mike Dragosits, a senior commodity strategist at TD Securities in Toronto, said in a telephone interview. “That’s seemingly driving the cost of production lower for copper, which was already seen as being in surplus.”

 

Eoin Treacy's view -

Energy represents a major factor in the cost of production for just about every commodity from grain to industrial metals. Falling oil and natural gas prices have contributed to lower costs for miners and allowed marginal production to survive at lower prices than many might once have expected. This reduced the price at which a tightening of supply due to lower prices might occur for at least some commodities. 



This section continues in the Subscriber's Area. Back to top
January 09 2015

Commentary by David Fuller

How OPEC Weaponized the Price of Oil Against U.S. Drillers

Here are several paragraphs from Bloomberg’s report:

If there ever was doubt about the strategy of the Organization of Petroleum Exporting Countries, its wealthiest members are putting that issue to rest.

Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008. Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want -- and are achieving -- further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.

U.S. crude production totaled 9.13 million barrels a day last week, up about 1 million barrels from a year ago and 49,000 from the OPEC meeting in November. Horizontal drilling and hydraulic fracturing in underground shale rock have boosted output by 66 percent over the past five years. Exports, still limited by law, reached a record 502,000 barrels a day in November, according to the Energy Information Administration.

The four Middle East OPEC members are counting on combined reserve assets estimated by the International Monetary Fund at $826.4 billion to withstand the plunge in prices. Petroleum represents 63 percent of their exports. At least 10 calls and several e-mails to the oil ministries of all four countries on Jan. 7 and yesterday weren’t answered.

OPEC won’t reverse course even if oil prices fall as low as $20 a barrel or non-OPEC countries offer to help with production cuts, Saudi Arabian Oil Minister Ali Al-Naimi said in an interview with the Middle East Economic Survey on Dec. 21. The kingdom may even bolster output if non-OPEC nations do so, he said. The global oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates.

It wouldn’t be the first time U.S. drillers are caught up in an OPEC battle for market share. In 1986, Saudi Arabia opened its taps and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

 

David Fuller's view -

OPEC’s four leading Sunni states of Saudi Arabia, the United Arab Emirates, Kuwait and Qatar are going for the jugular in this oil price war.  Their main target is the USA, not least as hydraulic fracturing (fracking) is one of the main factors undermining the Saudi-led OPEC control of oil prices, not least as many other countries could and probably will utilise fracking technology in future years.  Sunni countries are also hoping to weaken the growing potential alliance between Shia dominated Iran and Iraq.  Russia is another target, not least as it remains a very big oil producer and has previously used a navel base in Syria’s Mediterranean port of Tartus.  This has been significantly scaled back for security reasons during Syria’s bitter conflict but Putin is still a supporter of Bashar al-Assad.

This item continues in the Subscribers’ Area.

 



This section continues in the Subscriber's Area. Back to top
January 09 2015

Commentary by Eoin Treacy

Oil Market Report

Thanks to a subscriber for this edition of DNB’s topical report. Here is a section: 

We are directionally bullish to prices, but are revising down our average price forecast for

2015 due to a lower starting point than anticipated in early December
2015 revised down from 70 $/b to 65 $/b - could see prices even well into the 40¡¦s in 1H-2015 (not our base case however), but we expect a sharp price recovery
2020 revised down from 95 $/b to 90 $/b as we expect deflationary pressure in the oil market as global E&P CAPEX is cut drastically and hence create slack in the service industry

The market changed after the OPEC meeting
After the OPEC meeting in November the market will be left to itself until the next OPEC meeting scheduled for June
Prices will have to be low enough to achieve a new equilibrium between supply and demand but the price effect on fundamentals will be somewhat lagged
How far down prices need to decrease is impossible to calculate as the market could easily overshoot to the downside during the adjustment process, but we believe that current low prices are not sustainable for the global oil industry

1H-2015 looks over supplied even with higher demand and lower supply
The market looks to be over supplied in 1H-2015 even after assuming that global non-OPEC production will decrease sequentially through the year and at the same time assuming much stronger demand growth in 2015 than what we have seen in 2014
We expect that by 2H-2015 US shale production will start falling
Our base case is that by the second half of 2015 the worst part of the adjustment process is over and prices will improve

 

Eoin Treacy's view -

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

In common with this service, the DNB team have been some the most sceptical of the widely held opinion that oil prices would stay perennially high. Veteran subscribers will be familiar with our refrain that unconventional oil and gas represent game changers for the Energy sector but a secular bear market does not happen all at once. It is therefore interesting that the DNB team are now beginning to call time on what has been a spectacular decline since June. 



This section continues in the Subscriber's Area. Back to top
January 09 2015

Commentary by Eoin Treacy

China Nuclear

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

Compared with a 0-2GW p.a. capacity addition in 2007-13, we believe China’s nuclear installation is entering into a fast track. Based on the targeted 58GW of targeted nuclear installation set by the government for 2020E, China’s nuclear capacity will see a 20% capacity CAGR in 2014-20E, second only to the growth of solar (23%). While the 2019-20E actual capacity would be subject to the project approval in the next six to twelve months, the growth in 2015-17E is visible given the current construction schedule. We forecast a 9.5GW/10.9GW capacity addition in 2015/16, the highest in China’s history, and representing c.50% of the 2014E total capacity.  

Eoin Treacy's view -

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

The grey air that overhangs much of northern China in the winter months represents a drag for a country that has ambitions of creating a knowledge economy. If one is to depend on the productive capacity of an educated workforce then public health becomes an increasingly urgent priority. China’s nuclear capacity is growing impressively but from a low base. At only 2% of the Energy mix compared to somewhere in the teens for most developed economies, there is significant room for additional growth and it can’t come soon enough for those breathing the polluted air. 



This section continues in the Subscriber's Area. Back to top
January 09 2015

Commentary by Eoin Treacy

Email of the day on generation IV nuclear reactors

Here are some exciting news on collaboration between a US nuclear lab and privately held Terrestrial Energy, which seems to have the most advanced molten salt nuclear reactor concept available. This is encouraging news for those of us eagerly awaiting commercialization of new nuclear!

Fyi and disclosure I am invested in Terrestrial Energy.

 

Eoin Treacy's view -

Following on from the above piece, there is no denying that the molten salt reactors currently considered generation IV technology hold a great deal of promise as does the fusion solution touted as possible by Lockheed Martin and others. However, considering the lead time to commercialisation it will be the decade beyond 2020 where some of these promises are fulfilled. 

These advances help to enhance further the future of abundant Energy we envisage as the most probably result of a decade of high pricing. 

 



This section continues in the Subscriber's Area. Back to top
January 08 2015

Commentary by David Fuller

Market Tracing Familiar Pattern as S&P 500 Plunge Stops at 4%

Here is the opening, plus a concluding paragraph of this informative report from Bloomberg:

Traders whose bullishness on the Standard & Poor’s 500 Index (SPX) surged to the highest levels in 12 months last week finally got a break.

U.S. stocks rallied for the first time since the start of the year yesterday, rising 1.2 percent after suffering the fifth decline of 4 percent or more since last January. Relief that Federal Reserve minutes signaled no change in interest rate policy and optimism on employment growth helped break an 88-point slide in the benchmark gauge for American equity.

That was overdue news for speculators who had cut bearish bets on the SPDRS&P 500 exchange-traded fund to the lowest in a year and built long positions in futures to a 12-month high, data compiled by Bloomberg showed. The rebound came after trading in contracts tied to equity volatility flashed a signal on Jan. 6 that five days of selling had gone on too long.

“We’re trained like Pavlov’s dogs,” John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview. “It’s been a little bit of a rubber-band phenomenon for the past six months or so. The market was thirsty for news, and we got some today.”

The S&P 500 rallied the most in three weeks yesterday. It rose at the market’s open as data on the labor market and the U.S. trade deficit bolstered confidence in the strength of the economy. Gains extended at midday as lawmakers in Chancellor Angela Merkel’s coalition said Germany is leaving the door open to debt-relief talks with Greece’s next government.

And:

The five-day, 4.2 percent slump in the S&P 500 came just 13 days after the index dropped 5 percent between Dec. 5 and Dec. 16. The span between the two dips was the shortest since two retreats of more than 4 percent in late 2011, data compiled by Bloomberg show. Since 2009, retreats of this magnitude have happened every 51 days, on average.

David Fuller's view -

That last sentence above provides more than enough evidence for a ‘buy the dips’ conditioning process.  Moreover, throughout most of this nearly six year bull market to date, plenty of investors have either lost money by shorting too aggressively or missed out on big gains by taking profits too early. 

The speed of the recent rebounds indicates that there is still significant buying power underneath the market although this will not always be the case.  Danger signs will be a particularly strong rally which thins out demand, followed by an even sharper retreat.  Additionally or alternatively, we will see rallies weaken, causing lower highs and lower lows to occur on indices.  Those, of course, would provide evidence of medium-term downtrends. 

Meanwhile, more investors appear to have realised that low Energy prices due to oversupply are considerably more bullish than bearish for the global economy.  However, while the benefits are spread widely over time, disasters for the most vulnerable oil producers will occur more quickly, making them newsworthy.  Some will default.  Also, there is a risk that Putin does something really dangerous, possibly in an attempt to lift the oil price. 

Nevertheless, the key point for investors to keep in mind is that there is no such thing as a risk free environment, in investments or life in general.  So maintain a healthy lifestyle, aided by an equally healthy portfolio, consisting of sensible, proven funds or investment trusts, and Autonomy-type shares with reasonably good dividends.  Try not to chase uptrends in a six-year old bull market.  Reasonably active investors will generally do better by lightening on persistent strength, rather than selling following a shakeout.

This extensive item continues in the Subscribers’ Area.



This section continues in the Subscriber's Area. Back to top
January 08 2015

Commentary by Eoin Treacy

A year of public investment driven macro economic vigour

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on India. Here is a section: 

Improving economics and govt actions increase probability of ratings upgrade
We assign a high likelihood of a sovereign ratings upgrade for India as most macro indicators have exhibited improvements in past 2 years. A rating upgrade will likely entail multi-layered benefits for Indian economy and markets. Over the past decade we have witnessed 4 instances of rating upgrades by S&P and Moody’s and on an average Sensex has returned 9% in the following 6 months and 40% in the following 12 months of ratings upgrade. Boost to capital inflows and improved perception of India on the back of rating upgrade should help moderate volatility associated with US rate normalization and create some headroom for RBI to ease monetary stance.

India likely to remain one of the favored emerging markets
Expectations of normalization by the US Fed and a subdued commodity pricing environment will continue to drive multi-asset differentiation within Emerging markets. India's embrace of long pending, supply side reforms together with an investment driven macroeconomic stabilization will allow it to deepen its relative attractiveness in 2015. Among key EMs, India has demonstrated one of the best improvements on external front with CA deficit now in comfort zone at (2.1% in Sep’14 qtr. 4.7% in FY13), appreciable FX reserves accumulation and sharp uptick in capital inflows.

Government must ensure its economic agenda is not side tracked 
While the urgency in moving ahead on key ordinances is indicative of the commitment to reform, passing bills in parliament will be vital to ensure that reform is structural, enduring and getting institutionalized. Translation of many of the recent ordinances into law in the next session of parliament will be viewed as crucial determinants of the government’s execution prowess. Other risks: Faster- and steeper-than-anticipated Fed rate normalization and any systemic risk associated with steep decline in oil prices.

 

Eoin Treacy's view -

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

There are few countries that benefit more from weak oil prices than India so the recent Energy market moves represent something of a windfall for Narendra Modi’s government.  This might yet allow the RBI to cut interest rates but the broader question is over how bold the administration will be in its legislative agenda. A great deal of enthusiasm has already been priced into the market and it will be interesting to see how much is delivered upon this year. 

With a large young upwardly mobile population India represents a fertile market for global Autonomies, a number of which maintain listed subsidiaries on the Munbai exchange. Many of these trade on aggressive multiples not least because supply is reasonably thin. 

 



This section continues in the Subscriber's Area. Back to top
January 08 2015

Commentary by Eoin Treacy

Toyota opens fuel cell patents to drive "hydrogen society"

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

Toyota hopes to help jumpstart this future hydrogen society by sharing its intellectual property. This week's announcement represents the first time that it's sharing patents free of charge. The automaker helped to grow the gas-electric hybrid market in a similar manner, but those licensed technologies didn't come free.

"At Toyota, we believe that when good ideas are shared, great things can happen," said Bob Carter, senior VP of automotive operations at Toyota Motor Sales, USA Inc. "The first generation hydrogen fuel cell vehicles, launched between 2015 and 2020, will be critical, requiring a concerted effort and unconventional collaboration between automakers, government regulators, academia and Energy providers. By eliminating traditional corporate boundaries, we can speed the development of new technologies and move into the future of mobility more quickly, effectively and economically."

 

Eoin Treacy's view -

I wonder if falling oil prices had any impact on Toyota’s decision to open its patent portfolio for hydrogen-fuelled vehicles to the masses? After all one of the most compelling reasons for considering alternative fuel vehicles was the high cost of gasoline. The technology has come a long way in the last twenty years and governments are now more amenable to emission free technologies because of environmental concerns. However the total cost of ownership is likely to continue to be the primary arbiter for the majority of car buyers. 



This section continues in the Subscriber's Area. Back to top
January 07 2015

Commentary by Eoin Treacy

US Equity Strategy The 2015 Playbook

Thanks to a subscriber for this interesting report from Morgan Stanley. Here is a section: 

Healthcare and Technology – Contrarian to be market-weight? While we are currently market-weight both, a lot of investors we spoke with recently are overweight at least one (or both of these groups). For healthcare, our assessment is that our call there was probably our best sector-level call in the last four years. We were overweight 2011-through December 1st of 2014, nearly four years, on a thesis that there would be a R&D pipeline re-rating in biotechnology and pharmaceuticals and that the medical distribution businesses would benefit from volumes and were growth at a reasonable price. Both played out, and our view is reducing the overweight in now prudent. We still hold a 4% position in MCK, and a 2% one in CAH, and select pharma and biotech, and we don’t view healthcare as a short, but valuations are now at ten-year highs on price-to-forward earnings in absolute terms, even if they remain compelling against other defensives like consumer staples.

For technology, we struggle to implement a discipline where we want to own stocks that are recommended by our fundamental analysts and screen well in our disciplined strategies. Today, there is one technology stock, HPQ, that screens in the top quintile in both our 24-month model, BEST, and our 3-month alpha model, MOST, that is recommended by a fundamental analyst at Morgan Stanley. Hard to get 20% weight in technology!

Utilities: While we appreciate that this sector is very idiosyncratic, and we wouldn’t be surprised if the 10-year yield went lower in the next few months (we have not studied this like the US equity market multiple but wouldn’t be at all surprised if this was also un-forecastable in short horizons), we just can’t recommend a sector that is the most expensive vs. its own history it has ever been and trades at a premium to the overall market. Given the S&P500 benchmark weight is only 3%, we don’t think the bet is that significant either way, but midcap value investors have to make up their minds to avoid valuation if they want to own even the benchweight in this group.

 

Eoin Treacy's view -

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

All 9 of the major SPDR S&P sector indices can be found in the USA indices section of the Chart Library (at the bottom of the third column). It’s worth clicking through them because what quickly becomes apparent is that while Energy and materials have lost consistency the rest are still trending reasonably consistently. 

Healthcare, technology and utilities have been among the best performing stock market sectors over the last 12 months. They share a common characteristic of generally strong balance sheets and improving consumer finances. 

 



This section continues in the Subscriber's Area. Back to top