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June 11 2013

Commentary by Eoin Treacy

Big bang measures to fight air pollution

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

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

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

And

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

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

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

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

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June 11 2013

Commentary by David Fuller

Email of the day

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

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

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

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

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

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

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

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

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June 10 2013

Commentary by David Fuller

Email of the day (2)

On a Robotics Fund
"Bonjour, First of all many thanks for your daily work with which I start every week day. Following your Comments and Audios I am quite interested by the theme of robotics and industrial automation and looking for a mutual fund with a global approach to cover it and play the US industrial recovery, the Japanese and German problem of young workforces, the Chinese increasing labor costs...

"Do you, or the Collective, know such a fund if it already exists?"
David Fuller's view - Thanks for your interesting question. Someone within the Collective of Subscribers would know if a fund similar to your specifications exists. However, the fund industry has gone through a tough period and will be wary of

There are Technology funds, of course, which can certainly perform when in fashion. Nevertheless, I think the more industrialised Autonomies will be among the major benefactors of technological innovation. Eoin's reviews include them and the best time to pick them up, I suggest, is when they are coming into form and the overall chart pattern indicates plenty of unfulfilled upside potential. At least half a dozen of these from different industries would give you fund-type exposure, without the costs.

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June 10 2013

Commentary by David Fuller

American Expansion Lasting Longer Than Most as Muted Growth Deters Excess

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

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

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

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

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

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

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

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

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

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

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June 07 2013

Commentary by Eoin Treacy

Is the Information Technology Revolution Over?

Thanks to a subscriber for this interesting report by David M. Byrne, Stephen D. Oliner, and Daniel E. Sichel for the Federal Reserve. Here is the abstract
Given the slowdown in labor productivity growth in the mid-2000s, some have argued that the boost to labor productivity from IT may have run its course. This paper contributes three types of evidence to this debate. First, we show that since 2004, IT has continued to make a significant contribution to labor productivity growth in the United States, though it is no longer providing the boost it did during the productivity resurgence from 1995 to 2004. Second, we present evidence that semiconductor Technology, a key ingredient of the IT revolution, has continued to advance at a rapid pace and that the BLS price index for microprocesssors may have substantially understated the rate of decline in prices in recent years. Finally, we develop projections of growth in trend labor productivity in the nonfarm business sector. The baseline projection of about 1¾ percent a year is better than recent history but is still below the long-run average of 2¼ percent. However, we see a reasonable prospect — particularly given the ongoing advance in semiconductors — that the pace of labor productivity growth could rise back up to or exceed the long-run average. While the evidence is far from conclusive, we judge that "No, the IT revolution is not over."
Eoin Treacy's view - Veteran subscribers will be familiar with our view that technological innovation is very much on track and is likely to lead to outsized productivity gains in future. This report from the Fed echoes Mr. Bernanke's tone at a graduation ceremony he spoke at last month. (Also see Comment of the Day on May 21st). They are both notable for narrow focus on the benefit of technological development for the domestic US economy, By setting such limits they fail to address the major productivity gains that can be made from simply making current Technology available to more of the world's population.

Even as the USA is likely to maintain its technological edge, the modernisation of productive capacity globally is creating wealthier trading partners and larger markets for US goods and services. Therefore a holistic approach to assessing potential is likely to prove invaluable as the pace of technological development and access accelerate.

The Nasdaq-100 is often considered a barometer for Technology company performance. The Index posted a downside key day reversal on May 22 nd and continues to pause in the region of the psychological 3000. It bounced well today but some additional ranging is probably required before the medium-term uptrend can be reasserted. A sustained move below the 200-day MA, currently near 2780, would be required to begin to question consistency of the four-year advance.

If the Nasdaq represents technological development, we might consider the Dow Jones Industrials Average as a barometer for the sale of existing Technology to as wide a global market as a possible. The Average found support this week in the region of 15000 but some additional ranging is likely required to support a reassertion of the medium-term uptrend.

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June 06 2013

Commentary by Eoin Treacy

The Autonomies

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

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

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

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

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

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

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

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



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June 05 2013

Commentary by Eoin Treacy

Some companies likely to benefit from utilising embedded programming products

Eoin Treacy's view - In yesterday's Comment of the Day I reviewed a number of companies that are likely to benefit from demand for embedded processors over the medium-term. The appeal of these products is that the addition of computing power, sensors and communication Technology greatly improves the cost of operating large pieces of machinery and opens up new avenues for development that can lead to even greater productivity gains. The logical corollary is that the companies who make the best use of these products will be among those most likely to raise productivity and so create value.

Servicing large pieces of machinery in the industrial, aeronautics and defence sectors is a costly exercise and the advent of imbedded processors has the potential to significantly impact the sector. This is at least one of the reasons these types of companies have been completing decade long ranges over the last year.

In the defence/aeronautics sector the pace of M&A activity has picked up. Goodrich was acquired by United Technologies, Aerosonic Corp was taken over by Transdigm while EDAC Technologies has been acquired by Greenbriar in a private equity deal.

Northrup Grumman, Raytheon, Lockheed Martin, Boeing, Heico, Genuine Parts, Precision Castparts and BE Aerospace are all somewhat overbought relative to the 200-day MA and susceptible to mean reversion.

United Technologies, Triumph Group, Transdigm Group and Teledyne Technologies are less overextended but some additional consolidation is likely before an additional advance can be sustained.

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June 04 2013

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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May 31 2013

Commentary by Eoin Treacy

Shuanghui May Increase Smithfield Offer to Match Other Bids

This article from Bloomberg News may be of interest to subscribers. Here is a section
Acquiring Smithfield would give China's biggest pork producer access to more advanced production Technology as well as 460 farms that raise about 15.8 million hogs a year, according to Smithfield, Virginia-based Smithfield's website.

Valued at $7.1 billion including debt, the deal would be the largest for a meat producer and the biggest Chinese takeover of a U.S. company, according to data compiled by Bloomberg. Smithfield accepted Shuanghui's offer of $34-a-share on May 29, priced at a 31 percent premium to the close the day before, the companies said that day in a statement. The U.S. producer has 30 days to continue talks with possible buyers Charoen Pokphand Foods Pcl and JBS SA, people familiar said.
Eoin Treacy's view - The USA's meat processing sector is dominated by a small number of companies which represent an oligopoly. By acquiring Sanderson Farms, Shuanghui gains access to a brand but more importantly a foothold in the world's largest consumer market. The medium to long-term outlook for the sector remains positive considering the improving ability of more people to afford greater calorie intake. This is true across the processed food sector and potential for additional M&A activity remains positive. .

Pilgrim's Pride fell to as low as 25 ¢ in 2008 but rallied impressively into 2010. It spent much of the last three years ranging below $8.50. The share broke successfully above $10 earlier this month and rallied to test the 2010 peak near $12.60. While the potential for some consolidation of recent gains has increased, a sustained move below the 200-day MA would be required to question medium-term potential for additional upside.

Tyson Foods broke out to new all-time highs in March and despite some volatility has held a progression of higher reaction lows. A sustained move below $23 would be required to question medium-term scope for additional upside.

Sanderson Farms failed to sustain the break below $38 last year and quickly rallied to break out to new all-time highs. The share is becoming increasingly overextended relative to the 200-day MA but a break in the progression of higher reaction lows would be required to check momentum beyond a brief pause.

Hormel Foods broke out emphatically in January and rallied persistently to test the $43 area where it encountered resistance last week. A consolidation of recent gains is underway but a sustained move below the 200-day MA would be required to question medium-term potential for further upside.

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May 30 2013

Commentary by Eoin Treacy

China: Climbing the Wall of Worry

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

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

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

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

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

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

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

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May 29 2013

Commentary by Eoin Treacy

Musings from the Oil Patch

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

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

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

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

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

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

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

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

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

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May 21 2013

Commentary by Eoin Treacy

Economic Prospects for the Long Run

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

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

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

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

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

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

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May 15 2013

Commentary by Eoin Treacy

Musing from the Oil Patch

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

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

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

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

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

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

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

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

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

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

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May 15 2013

Commentary by David Fuller

Rethink Robotics Opens Up Baxter Robot For Researchers

My thanks to a subscriber for this interesting article from Spectrum on robotics. Here is part of the introduction
Rodney Brooks, founder and CTO of Rethink Robotics, revealed a number of surprising things when Evan and I visited the company last year, just before it unveiled its Baxter industrial robot to the world. There was the robot itself, of course, designed to be safe, versatile, easy to program, and incredibly inexpensive-the opposite of what traditional industrial robots are. Its humanoid features were also a bit unexpected-a factory robot with a friendly face!

But another thing that surprised us was the company's emphasis on software. Rethink doesn't want to be just a robot maker. It wants Baxter to be a platform that anyone can use to improve on existing applications as well as develop completely new ones. To achieve that, Rethink needs to open up its Technology, and last week the company announced a major step in that direction: a version of Baxter designed for researchers.

Sure, Baxter's primary target is still industrial applications. But Rethink knows that, by enlisting the help of the robotics community to push the envelope of what its robot can do, it would have a major advantage over other robots. When Evan and I asked Brooks what he expected other roboticists would do with Baxter, he said he had no idea, and that was a good thing. Brooks recently said he hopes researchers and others will "use their creativity and programming skills to create never before seen applications."

So first let's see what Rethink is offering with its Baxter Research Robot. The hardware is exactly the same as the previous Baxter model. The robot has two 7-DOF arms, powered by series elastic actuators. It has integrated cameras, sonar, and torque sensors on every joint. The base price is also the same: US $22,000. So what's different? Software. The research model does't come with the manufacturing software installed, but rather runs the research software development kit (SDK).
David Fuller's view - This field is in its infancy but is likely to grow exponentially. To see some of the products and experiments, scroll down the article and click on the many links to the right.

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May 14 2013

Commentary by David Fuller

Your Future Will Be Manufactured on a 3-D Printer

Here is a section from this fascinating editorial produced by Bloomberg
Three-D printing a gun, like printing most other things, is pretty simple. You download a digital file for a design you like. The printer reads the file, then shoots out layer upon layer of specialized plastic -- or another raw material -- through a heated nozzle in the specified shape. Not long afterward, your gun parts materialize.

The Technology is roughly 30 years old, but has only recently become cheaply available and widespread. Global sales and services related to 3-D printing reached $2.2 billion in 2012, according to Wohlers Associates Inc., an increase of 28.6 percent over the previous year. The company expects that figure to increase to about $6.5 billion in 2019.

And no wonder. Consider the Urbee 2, a car being produced by Kor Ecologic using a 3-D printer. When completed, it will weigh some 1,200 pounds. Made with about 40 pieces of thermoplastic, it will be resilient, aerodynamic and mind-bogglingly efficient. Its production will require far less material than a traditional car. It will need almost no labor and take little time to assemble. Its designers can employ unorthodox shapes and materials to maximize efficiency, mold the lightweight plastic with precision to strengthen vulnerable areas, and fit most pieces together without joints or welding (although the engine and chassis will still be made of metal). In effect, they're compressing much of an automobile assembly line into a printing device.

The economic potential is stunning. Across a range of industries, R&D costs are already declining and product-development cycles are accelerating as more inventors experiment with cheap 3-D printed prototypes. The question is whether the Technology will transform manufacturing more broadly.

At the moment, 3-D printing is a very small part of the economy. The printers are typically slow, and the material they use is expensive and inconsistent. As the industry advances, however, printing on demand could reduce assembly lines, shorten supply chains and largely erase the need for warehouses for many companies. Reducing shipping and eliminating the waste and pollution of traditional subtractive manufacturing could be an environmental boon.

In a few decades, things could get really interesting. Engineers should be able to blend raw materials in new ways, endow products with nanoTechnology and artificial intelligence, and create objects that interact with their physical environment. Imagine military armor embedded with sensors that track wear and tear, or a turbine blade that monitors its own temperature.

The Technology is already liberating entrepreneurs. As consumer-grade printers improve, a basement enthusiast will be able to make replacement parts for products he owns, invent and sell customized objects online, and potentially create new industries. As Hod Lipson and Melba Kurman write in "Fabricated: the New World of 3D Printing," the Technology will be "the platypus of the manufacturing world, combining the digital precision and repeatability of a factory floor with an artisan's design freedom." In other words, the era of mass customization is quickly approaching.
David Fuller's view - 3-D printers will empower creative and clever individuals in ways that we are only beginning to imagine. On the positive side, these will include artists, healthcare specialists, engineers and all sorts of inventors.

As with most new inventions, 3-D printing will also empower some sociopaths and criminals, but that is a human rather than technological problem.

In addition to empowerment, the biggest contribution of 3-D printing, I believe, concerns the efficiencies that it will create on personal, educational, corporate and governmental levels. It is part of the accelerating pace of technological innovation that Fullermoney often mentions, for which there is no creative limit.

The leading manufacturer of 3-D printers is the US company 3D Systems Corporation (DDD US) (weekly & daily). Having accelerated higher once again, it is currently overextended. It is certainly not cheap, as you can see from this Bloomberg page. However, it should have an exciting future and I would regard it as a speculative buy following a pullback to the 200-day MA.

The main beneficiaries of 3-D printing, I imagine, will be inspired inventors and successful multinational corporations (Autonomies).



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May 13 2013

Commentary by Eoin Treacy

Email of the day

on negative emissions Technology
“I hope the seminar went well, I couldn't make it sadly, hopefully next time.

“This is an interesting link from the guys just around your corner. While it is interesting and sad that the CO2 keeps rising, there is an important point in there saying this.

“Unless as a society we devise ways to remove CO2 directly from atmosphere, such as through negative emissions technologies, we're going to be stuck with a very slow decrease of CO2 from peak levels, and everybody will have to deal with the implications of global warming.

“Negative emissions Technology, that's one we probably can't do without! any ideas? I know you too have faith that humanity will solve problems when motivated enough, so this is hope, I hope.

“All the best”
Eoin Treacy's view - Thank you for your kind words and I look forward to welcoming you to another venue for The Chart Seminar in future. Negative carbon emission Technology is a novel concept but its long-term success is likely to depend on its ability to perform economically.

A number of oil and gas drilling operations inject carbon dioxide as part of their enhanced recovery techniques. However, I suspect some of the more fervent green advocates would quibble that this merely displaces some of the carbon these operations would eventually produce. I'm afraid I do not know of an operation that literally removes carbon from the atmosphere that might provide an investment opportunity. If subscribers can suggest one I would be happy to mention it.

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May 10 2013

Commentary by David Fuller

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

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

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

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

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

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

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May 09 2013

Commentary by David Fuller

Harvard's flying robot insect can now hover and steer

Here is the opening for this fascinating article from Gizmag
Almost since the beginning of their existence, robots have taken inspiration from one of nature's wonders: insects. Technological limitations typically prevents robots from matching the size of their many-legged muses, resulting in larger-than-life examples like Festo's BionicOpter dragonfly. In stark contrast is Harvard's RoboBee, which is the first in the world to demonstrate controlled flight by an insect-sized winged robot.

And:

Currently the RoboBee relies on external sources for power and control since these have yet to be miniaturized, but eventually the Harvard team plans to produce self-contained units. These could then work together in artificial colonies to monitor the environment, pollinate crops, and perform search and rescue or espionage missions. And, as seen with the manufacturing process, any technological innovations developed along the way are valuable in and of themselves.
David Fuller's view - We are fortunate to live during an accelerating rate of technological innovation. New and potentially significant breakthrough developments are revealed on an increasingly frequent basis.

This phenomenon is best described by Edward O Wilson, and my thanks to Tim Price for this quote:

"We have Stone Age emotions. We have medieval institutions. And we have god-like Technology."

Who are the main beneficiaries of these technologies?

They are mankind; our planet, mainly via technologies which reduce pollution; developed economies which encourage and help to fund innovation; developing economies which embrace the technologies available; and most of all, corporations which develop, adopt and most efficiently utilise new technologies.

Those corporations are the Autonomies, frequently discussed, reviewed and favoured by Fullermoney.



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May 07 2013

Commentary by Eoin Treacy

Smart paradigm, uncommon insight

Thanks to a subscriber for this interesting heavyweight (13mb) report from Samsung Securities concentrating on the South Korea Technology sector. Here is a section
ICT integration to accelerate: The smartphone revolution of 2007-2012 was unquestionably disruptive: Smartphones supplanted offline devices (TVs, PCs) and analog media (newspapers, advertising), and their value chain realigned around parts, social network services (SNS) and games, and advertising. Over the next two to three years, we expect integration within the information and communication Technology (ICT) environment to accelerate as smartphones/tablet PCs go mass market and hardware innovation continues. Korean players have responded well to changes in the market and should continue gaining presence and growing earnings.

Korean firms to lead: Innovating in operating systems is becoming more difficult, but smartphone value-chain leaders Samsung Electronics (SEC) and LG Electronics (LGE) should do so in hardware, differentiating themselves with flexible displays and lighter, more durable smartphones, and leveraging global distribution networks and cost competitiveness to overwhelm rivals with volume growth in emerging markets.

A parts revolution: Korean parts makers have had to innovate to keep up with quantitative growth at SEC and LGE, and we expect them to enjoy qualitative growth by moving to greater precision processes, displays that are flexible and unbreakable, and lighter PCB substrates and cases. SK Hynix and Soulbrain should benefit most.

Dilemma facing telcos: The introduction of LTE-advanced Technology should enable wireless networks to offer a user experience comparable to that of 100Mbps fixed line (FTTH), blurring wireless-fixed line experiences. Such developments need time to spark reratings at telcos, however, given: 1) the likelihood of such firms engaging in pricing wars; and 2) the lack so far of increased data usage. Moreover, content usage patterns have hardly differed between 3G and LTE users, which we attribute to a lack of LTE-suitable killer content.
Eoin Treacy's view - The evolution of the handheld devices sector remains a growth market and content providers are responding. Some of the greatest beneficiaries of this development have been the hardware producers and those that supply them with chips. As internet access becomes an increasingly indispensible part of the user experience, providers of wifi are also likely to benefit.

In the devices sector, Samsung Electronics remains in a consistent, step sequence, medium-term uptrend as it continues to pause above the 200-day MA. A sustained move below KRW1.6million would be required to question the medium-term pattern of demand dominance.

In the chip sector, ARM Holdings eased back from the 1000p level from early March in a relatively gradual reversion towards the mean. It surged higher on April 23 rd and a sustained move below 850p would be required to question medium-term scope for additional upside.

In the wifi infrastructure sector Verizon hit a peak last week near $54 and appears to have entered a process of mean reversion.




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May 03 2013

Commentary by Eoin Treacy

The Nasdaq-100 and biotech

Eoin Treacy's view - While the S&P500 has hit new all-time highs and the Autonomy focused Dow Jones Industrials remain in form, the Nasdaq's recent performance has gone relatively unremarked. Until recently, Apple's performance has acted as a headwind for the Index. However, the fact remains that the Nasdaq plays host to a wide array of companies representing the cutting edge of technological innovation.

This table of the Nasdaq-100's best performers this year is heavily weighted by BioTechnology companies. Biotech was among the sectors that crashed hardest in 2000 as investors refocused on the lead times for the commercialisation of therapies. An aggressive process of rationalisation ensued and those that survived spent much of the next decade in lengthy base formations. A significant number of bioTechnology companies broke out of their bases in late 2011 and the larger companies have since extended those advances. (Also see Comment of the Day on October 28th 2011) Having reviewed the sector on a number of occasions over the last few years, I thought it might be timely to revisit it now given its recent outperformance.

Amgen, Biogen, Celgene, Gilead Sciences and Seattle Genetics have accelerated higher over the last three months. They have almost all doubled since their initial breakouts in 2011 and hit at least short-term peaks last week. Potential for some additional consolidation of recent powerful gains has increased, but sustained moves below their respective 200-day MAs would be required to question medium-term potential for further upside.

Regeneron Pharmaceuticals continues to accelerate higher and a clear downward dynamic will be required to check momentum beyond a brief pause.

Alexion Pharmaceuticals pulled back sharply in October and has been ranging in the region of the 200-day MA, mostly below $100, since. A sustained move above $100 would help bolster the medium-term bullish outlook.

Following an initial surge in early 2012, Illumina ranged mostly below $55 until early April when it reasserted medium-term demand dominance. A clear downward dynamic would be required to question potential for additional upside.

Following a steep decline in 2012, Staar Surgical had been ranging mostly above $5. It broke emphatically back above the 200-day MA this week.

ResMed, Cubist Pharmaceuticals, The Medicines and Immunogen have all been ranging with an upward bias since late last year and sustained moves below their respective 200-day MAs would be required to question medium-term potential for further higher to lateral ranging.

M&A activity in the biotech sector remains brisk with Thermo Fisher Scientific acquiring Life Technologies last month. (Also see Comment of the Day on July 10 th 2012). Thermo Fisher Scientific broke successfully above its 2008 and 2011 peaks in January and is becoming increasingly overextended relative to the 200-day MA.

In conclusion while Biotech represents a growth sector, a number of the larger companies have performed extraordinarily well and are becoming increasingly susceptible to mean reversion. As commercialisation becomes an increasingly more viable prospect, the potential for additional M&A activity remains undiminished.


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May 03 2013

Commentary by Eoin Treacy

Copper Surges Most in 17 Months as U.S. Job Gain Revives Outlook

This article by Joe Richter and Agnieszka Troszkiewicz for Bloomberg may be of interest to subscribers. Here is a section
The gains were “to some extent driven by short-covering,” Jesper Dannesboe, senior commodity strategist at Societe Generale in London, said by telephone. “Maybe yesterday's rate b cut from the ECB was a small contributing factor to that.”

LME copper inventories fell 1.2 percent, the most since Oct. 25, to 608,700 metric tons, daily figures showed. That rounded out a 1.8 percent weekly drop, the first since the week ended Jan. 25. Orders to remove copper from warehouses slid 4.9 percent, the most since March 6, to 158,900 tons.
Eoin Treacy's view - If bioTechnology represents one of the best performing sectors over the last four months, then basic resources represents one of the worst. However as overbought conditions among some of the high fliers are at risk of unwinding, the outlook for at least a bounce in the resources sector has improved.

The FTSE 350 Mining Index broke downwards to post a new 3-year low in late April but may now be forming a failed downside break. A countermanding downward dynamic would be required to check potential for a further unwind of the short-term oversold condition.

BHP Billiton, Rio Tinto, Glencore and Anglo American represent more than 80% of the Index. BHP Billiton, Rio Tinto and Glencore are all bouncing from the lower side of their respective ranges while Anglo American has found at least short-term support above 1500p and appears to be unwinding the short-term oversold condition relative to the 200-day MA.

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May 03 2013

Commentary by David Fuller

Fusion Scientists See Progress as Obama Shows No Ardor

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

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

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

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

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

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

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

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

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

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

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May 02 2013

Commentary by David Fuller

An Energy Coup for Japan: 'Flammable Ice

Here is the opening from this article on Japan's pioneering efforts, published by the IHT & NYT (will require subscription registration, PDF also provided)
TOKYO — Japan said Tuesday that it had extracted gas from offshore deposits of methane hydrate — sometimes called “flammable ice” — a breakthrough that officials and experts said could be a step toward tapping a promising but still little-understood energy source.

The gas, whose extraction from the undersea hydrate reservoir was thought to be a world first, could provide an alternative source of energy to known oil and gas reserves. That could be crucial especially for Japan, which is the world’s biggest importer of liquefied natural gas and is engaged in a public debate about whether to resume the country’s heavy reliance on nuclear power.

Experts estimate that the carbon found in gas hydrates worldwide totals at least twice the amount of carbon in all of the earth’s other fossil fuels, making it a potential game-changer for energy-poor countries like Japan. Researchers had already successfully extracted gas from onshore methane hydrate reservoirs, but not from beneath the seabed, where much of the world’s deposits are thought to lie.
David Fuller's view - Most of our non-human problems can and will be resolved by Technology, which is in an accelerated phase of development. These include abundant and acceptable, in terms of emissions, supplies of energy without which modern societies could not exist.

For decades various pundits have predicted that we were doomed in terms of energy supplies, which they felt were running out. Most subscribers will remember the 'Peak Oil', concerns.

Inevitably, some known supplies of oil were being reduced, not least conventional wells in the USA and other developed countries. However, forecasts that they were running out, in terms of what could be recovered, have proved to be premature. We can thank Technology for their additional years in production.

Furthermore, we have known about the existence of shale deposits of oil and gas for over a century. We have also known about methane hydrate supplies for a considerable period. Fortunately, necessity has proved once again to be the mother of invention. Shale gas and oil are being produced in increasing quantities, at least in some parts of the world. I would not bet against the ability of Japan and other nations to develop commercially offshore deposits of methane hydrates.

Some sincere green lobbyists feel that to have any chance of 'saving the planet', we should not develop these fossil fuel deposits. That seems short-sighted to me. Once again, we can use Technology to reduce harmful emissions. Energy companies are increasingly focussing on the production of natural gas, because it is considerably less harmful to the global economy than other fossil fuels.

Natural gas is rapidly becoming the fuel of choice. Surely this is preferable to sapping the economic vitality of economies, as we see across much of Europe, by subsidising inefficient windmills at the tax payers' expense.

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April 30 2013

Commentary by Eoin Treacy

Email of the day

on Bitcoin
“I remember reading your comments on Bitcoin some days ago and I would like
to address some points.

“Bitcoin is not a company - it's an open-source Technology. (And that's why governments are afraid of it - there is no single 'throat to choke', it is distributed around millions of computers on Internet) In a nutshell, it's a digital construct based on really complex math and crypto which

1) determines available supply (more like gold than like US dollar!) and

2) a mechanism to ensure you can't spend it twice (important for digital things!) It had a huge spike this year - from ~15 to ~266, then dropped to ~60. Now it is around ~140 again, very interesting chart pattern.

“Here's one good source for charts: http://bitcoinity.org/markets

“My son is an editor at (UK-originated) Bitcoin magazine and they have both a print edition and a website. Website has some good 'newbie' article, e.g. this one http://bitcoinmagazine.com/category/bitcoin-newbies/
Eoin Treacy's view - Thank you for this informative email and the associated links. Bitcoin is certainly topical.

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April 19 2013

Commentary by Eoin Treacy

TSMC Raises Spending as Mobile Chips Drive Sales Forecast

This article by Tim Culpan for Bloomberg may be of interest to subscribers. Here is a section
Taiwan Semiconductor Manufacturing Co., the world's largest contract maker of chips, forecast record quarterly sales and raised its spending plan amid rising smartphone demand. The stock surged the most since May 2009.

Second-quarter revenue will be NT$154 billion ($5.2 billion) to NT$156 billion, the Hsinchu, Taiwan-based company said yesterday. That's at least 9 percent higher than the NT$141.2 billion average of 21 analyst estimates compiled by Bloomberg. The company's shares rose 6.6 percent to NT$106.50 at the close in Taipei, accounting for 44 percent of the Taiex
Index's 1.8 percent gain.

TSMC posted first-quarter profit that beat estimates as Samsung Electronics Co. and HTC Corp. join Sony Corp. and ZTE Corp. in releasing new smartphones, driving orders for mobile chips. Chairman Morris Chang, whose company gets $7 for every smartphone sold worldwide, raised his capital expenditure plan by as much as 10 percent as TSMC seeks to buy more equipment to meet demand for newer manufacturing Technology.

“The company has already entered a new growth period,” Chang, 81, who is also Chief Executive Officer, told investors yesterday. “We attribute our strength to first, mobile-related applications whose demand remains strong, and TSMC's strong position in 28 nanometer Technology.”
Eoin Treacy's view - The market for desktop PCs continues to contract. However, the evolution of the mobile Technology sector and the advent of imbedded programming are more than offsetting the decline of the pc sector and companies leveraged to this new sales avenue are benefitting accordingly.

Taiwan's various electronics sectors represent almost 50% of the market's total capitalisation. As a result, global perceptions of the Technology's sector growth potential exert a strong influence on this market. The TAIEX Index has rallied back to test the 8000 level and a sustained move above it would confirm a return to medium-term demand dominance.

TSMC has been in a consistent medium-term uptrend since 2009 and a sustained move below the 200-day MA, currently near TWD95, would be required to question medium-term scope for continued upside.

Mediatek has been forming a first step above its 18-month base since early March and firmed this week to test the upper side of its range. A sustained move below the 200-day MA would be required to question medium-term recovery potential.

Elsewhere in the consumer electronics sector, Asustek Computer (P/E 10.28, DY 5.78%) produces motherboards and notebook computers. The share found support this week in the region of the 200-day MA, following a steep pullback. A sustained move below the low near TWD300 would be required to question potential for a further rebound.

HTC collapsed from a 2011 peak following Apple's successful litigation. The share found support near TWD200 from November and base formation appears to be underway. While the 14% yield is unlikely to be sustained, it would still be competitive if the dividend is halved.

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April 18 2013

Commentary by David Fuller

Europe Faces a Crisis in Energy Costs

Here is the opening from this relevant summary by Stanley Reed for the NYT and IHT
LONDON - The signs are everywhere. Britain has been unable to reach a deal for its first new nuclear power station since the 1990s. Spain, once a clean-energy enthusiast, has slashed its backing for wind and solar power.

Even the European Union's flagship environmental achievement of recent years, its Emissions Trading System for carbon dioxide, is beset by existential doubts. On Tuesday, the European Parliament batted away an effort to bolster anemic carbon prices on the E.T.S.

Prices for permits to emit greenhouse gases, which have fallen as low as €3 per metric ton, are just a fraction of what they were a few years ago, meaning that they are no longer doing their intended job of inducing utilities and manufacturers to invest in new Technology and switch to cleaner fuels.

Evidently, members of the European Parliament were more concerned about any further raising of energy costs that some European companies already say are putting them at a competitive disadvantage.

Europe is lurching through an energy crisis that in many respects parallels its seemingly unending economic crisis. Across Europe, consumer groups, governments and manufacturers are asking how their future energy needs can be met affordably and responsibly.

It is a question that is far more acute than in the United States, where the shale gas revolution has done wonders to ease energy angst. "Europeans are getting increasingly concerned about energy," said Corin Taylor, an analyst at the Institute of Directors, a British business group. "Manufacturers are looking at U.S. energy prices with envy, and if they can, they are making investments in North America."

European countries have yet to demonstrate that they can or in some cases even want to exploit their own potential shale gas troves. At the same time, most of Europe's indigenous sources of oil and natural gas are in decline, making increased dependence on imports almost inevitable.

David Fuller's view - Most economic wounds are self-inflected, and this is certainly true of Europe, including the UK. So called green energy was popular with voters, at least in the planning stages, but unproven and economically irresponsible because it could not deliver reliable and competitive energy. Today, it is a massive and increasing drain on individual and governmental resources.

This is a sad situation, not least because shale gas is cheaper, abundant and cleaner than any other fossil fuel. Unfortunately, Europe is not yet developing its game changing shale reserves because many countries rushed ahead with inefficient windmills. These are increasingly unpopular, being towering eyesores and often noisy within two kilometres

Fullermoney often says: Governance Is Everything - not least economic governance which is sorely lacking in Europe. Consequently, this will remain a slow growth and often poorer region relative to many other parts of the world, for many years.

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April 16 2013

Commentary by David Fuller

Email of the day

On the Commodity Supercycle
"I would like to ask your opinion about the current stage of the commodities super-cycle, which some analysts say is over. Here is a recent WSJ article which focuses on commodities significantly underperforming equities after about 5 years of moving in lockstep almost daily. One of the main reasons of the commodities underperformance (and we saw more downward pressure in recent days) is increasing supply, brought to market thanks to high prices in previous years, which begins to exceed tepid demand. Probably nowhere the change in supply-demand balance is evident better than in the oil market. Also, since inflation expectations, despite all the money printing, had not materialized, many investors cut their bets on commodities as an inflation hedge."
David Fuller's view - Thanks for an interesting email.

I think you assessment is basically correct. However, I would also add that commodity supercycles are created by increasing consumer demand, and eventually also speculative purchases at a time when producers of natural resources, having struggled during the previous cyclical downturn, are unable or unwilling to increase supply sufficiently to meet the new surge in demand.

The commodity supercycle accelerated to new highs in 2007 and the first half of 2008, when the economic recovery and also speculation in tracker funds drove prices to unsustainable highs as you can see on this weekly chart of the unweighted Continuous Commodity Index (Old CRB).

There is an important saying in commodity markets: 'The cure for high prices is high prices.' They sap consumer demand while eventually encouraging producers to invest in higher production capabilities. The surge in crude oil prices during the first half of 2008 (Brent & WTI) contributed more to the subsequent economic downturn than most people realise.

However, led by renewed speculative and investment demand for gold and other precious metals, the Continuous Commodity Index (CCI) bottomed in December 2008 and surged higher for over two years, at a time when the global economy was struggling to recover. Adverse weather conditions also lifted many agricultural commodities during the same period. Those headwinds in the form of high commodity prices have been a factor in the generally slow global GDP growth over the last few years.

Nevertheless, they are now dissipating. The declines in gold and silver prices over the last two years have helped to discourage investment in commodities. More recently, less adverse weather conditions have lowered prices for staple foods such as corn, soybeans and wheat. Most significantly, the successful development of fracking Technology by the USA, although not yet widely utilised, is beginning to reduce the risk of another spike in crude oil prices.

In conclusion, if weather conditions are not too adverse over the medium term, agricultural and industrial commodity prices may not pick up significantly until the global economy is clearly stronger. Meanwhile, the currently declining CCI is reducing the commodity price headwind. This Index will have to sustain a move back above 600 to confirm that commodity price inflation is increasing once again.

Currently, the commodity supercycle is in a broadly ranging phase but with a downward bias since it last tested 600 in September 2012. A break in the medium-term progression of lower rally highs will be the first clear signal that demand is regaining the upper hand.



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April 04 2013

Commentary by David Fuller

Cheap energy fails to fuel hiring

This is an informative article by Nelson Schwartz for the NYT & IHT, on an important subject often discussed by Fullermoney (may require subscription registration so here is a PDF version). I have used the IHT's headline, and here is the opening and also a latter section
These are good times for Libbey, a 125-year-old American glassmaker that nearly went bankrupt four years ago. The company's shares have risen to almost $20 from below $1, sales of its tableware are at a record high, and its energy-intensive factories saved more than $5 million in 2012 as natural gas prices fell.

Despite all the upbeat news, however, Libbey recently announced it would lay off 200 workers at its plant in Shreveport, La., and move some production to Mexico as it cuts costs and discontinues several products.

Libbey's decision is just one example of why manufacturing, for all its renewed promise, is likely to fall far short of the claims by industry groups that millions of new factory jobs are about to be created in the United States because of the unlocking of abundant supplies of domestic energy.

"Even though the U.S. is more competitive globally, manufacturing doesn't give you the kind of direct job creation it did in years past," said Joseph G. Carson, director of global economic research at AllianceBernstein, a Wall Street investment firm. "At the end of the day you still want a strong manufacturing base, but there aren't as many people on the factory floor."

Indeed, while the sector has added 500,000 jobs since the recession ended and the value of what the nation's factories churn out is close to a high, there are nonetheless two million fewer manufacturing workers today than in 2007. Ever since the early 1960s, the share of jobs in manufacturing has been on a nearly uninterrupted downward slope, now accounting for less than 9 percent of all employment in the United States.

And:

While demand for their products is improving thanks to a more robust housing market and other factors, don't expect a ramp up in hiring, said Richard A. Beuke, vice president for flat glass at PPG Industries, a Pittsburgh-based glassmaker.

The production lines run 24 hours a day, seven days a week at PPG's plants, including one in Carlisle, Pa., that makes flat glass. It's among the plants benefiting from a rebound in housing.

"Because it is automated, we won't have to add a lot of employees with the upturn in the construction industry," Mr. Beuke said. "You don't touch a piece of glass in our factories." At PPG, production is up 10 percent since the recession - but employment remains flat.

Glass isn't the only manufacturing sector that has struggled to add jobs recently. Other industries identified by American Chemistry Council as potential winners from the energy boom, like paper producers and foundries, have continued to lose jobs in recent months.

It's not that manufacturing itself is disappearing. But nearly all of the American manufacturers that survived the lean years of the last decade are globally competitive companies that depend on high productivity and advanced Technology for their success more than masses of assembly line workers.

"There is this incredibly powerful long-run trend of declining employment in manufacturing," said Robert Z. Lawrence, a professor of economics at Harvard's John F. Kennedy School of Government. "It's the same story as in food and farming. We're producing more food with many fewer workers. The only way we compete with our higher wages is by being more innovative."
David Fuller's view - There are three main themes to this situation: 1) wage costs, which have inevitably narrowed somewhat in the era of globalisation but are still comparatively high in the USA and many other developed economies, relative to competition from Asia and other developing regions such as Mexico; 2) energy costs, which are now lower in the USA than in other industrialised economies, thanks to America's invention and utilisation of fracking Technology; 3) the accelerating rate of technological innovation, which increasingly enables automation and robotics to make many jobs redundant, at both blue collar and more recently, white collar levels.

I think wage costs will gradually become less important as more developing economies prosper.

The USA's energy advantage is probably temporary as many other countries are likely to develop their shale oil and particularly shale gas potential. This will be the most important factor in lowering energy costs, in real terms, as Fullermoney has long forecast. It should happen by the end of this decade, or sooner, depending on how quickly countries can satisfy environmental concerns and develop these resources.

Incidentally, natural gas should eventually replace crude oil as the world's most important source of fuel within the next ten to twenty years. This will lower atmospheric pollution much more quickly and at less cost than often inefficient renewable 'green technologies'. Currently, three of the developed world's largest energy companies, I have heard, are now producing more natural gas than oil: Exxon Mobil, Royal Dutch Shell and Chevron.

Lastly, I maintain that the accelerating rate of technological innovation is the biggest long-term threat to employment. In saying this, I do not doubt that many new jobs will be created, as we have seen following other technological advances over centuries. However, those earlier Technology breakthroughs were much less frequent and slowly adopted. Exponential technological development will certainly outpace job creation. The major beneficiaries will be corporations, particularly Autonomies, frequently reviewed by Eoin. However, the risk of obsolescence is also increasing for firms that fall behind.

Welcome to this exciting new world.

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March 28 2013

Commentary by Eoin Treacy

Monsanto & DuPont Announce Next-Gen Licensing Agreement

Thanks to a subscriber for this interesting report by David Begleiter and colleagues at Deutsche Bank which may be of interest. Here is a section
Under the licensing agreement, DuPont will make a series of upfront and variable based royalty payments for the rights to offer RR2Y soybeans and RR2Xtend in its products. DuPont will make four annual fixed royalty payments from ‘14-'17 totaling $802MM for trait Technology, associated data, and soybean lines to support commercial introduction. In ‘18, DuPont will begin paying royalties on a per unit basis for RR2Y and RR2Xtend for the life of the agreement for continued Technology access, subject to minimum payments thru ‘23 totaling $950MM. We believe this agreement mitigates uncertainty for DuPont around the patent expiry of RR1 in ‘14 and will allow DuPont to offer a strong product suite to its customer base well into the future. The added flexibility to combine RR2Y traits with other traits/genetics is critical for DuPont to compete and maintain its position as the #2 player in global seeds and traits. Additionally, Monsanto has dismissed its RR1 soybean patent lawsuit against DuPont, including the August ‘12 jury damage award of $1B, and DuPont has dismissed its antitrust case against Monsanto. For Monsanto, the agreement is a clear positive as it validates the RR2Y and RR2Xtend platforms. Additionally, the agreement appears $0.35-$0.40 accretive for Monsanto upon full adoption of the next-gen traits by DuPont (in 4 yrs) based on royalties of $10-plus/bag on RR2Y/RR2Xtend (vs ~$1/acre on RR1) on 28MM acres (35% DuPont market share on 80MM US soybean acres). We note that payments in ‘14 will offset the $0.20-$0.25 lost as RR1 comes off patent in Brazil in ‘13.
Eoin Treacy's view - Prior to the credit crisis, there was a high degree of commonality across the agriculture sector but since then performance has been dependent on the individual merits of various companies. Some of the reasons for this include the tightening of lending conditions imposed on farmers following the credit crisis as well as the negative effect on farm incomes of the drought in much of the USA's Mid-West.

Despite these headwinds, the global population continues to expand and more importantly the ability of an increasing number of people to afford a higher calorie intake suggests food demand is likely to remain on an upward trajectory. The fact that two of the most influential companies in the seed and pesticides sector have set aside their differences can be considered a net positive for both shares.

The USA accounts for 55% of Monsanto's (DY1.43%) revenue while Latin America represents its second largest market with 22.5%. The share has held a progression of higher major reaction lows since at least 2011 and has been ranging mostly above $100 since January; in a relatively gradual process of mean reversion. It rallied impressively this week to test the upper side and a sustained move below the MA, currently near $93.50, would be required to question medium-term potential for additional upside.

DuPont de Nemours (3.51%) rebounded particularly impressively following the credit crisis to retest the $50 area which has offered resistance on a number of occasions since 2000. The share has been ranging in a volatile manner and with an overall downward bias since 2011 and will need to sustain a move above $52.50 to break the progression of lower rally highs and indicate a return to medium-term demand dominance. The US accounted for 38% of DuPont's revenue while Europe and Asia Pacific represented 23% each in 2012.

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March 26 2013

Commentary by Eoin Treacy

Two Miles of Sea Covers Big Oil's Next-Generation Field

This article by David Wethe for Bloomberg may be of interest to subscribers. Here is a section
The oilfield of the future is taking shape two miles underwater. As explorers search for energy in ever-greater depths offshore, the technical challenges of ferrying oil and natural gas more than 10,000 feet through the ocean is spurring a drive to relocate production operations to the sea floor. Spending on subsea valves, pipelines and cables that will help build these underwater oilfields will grow to a record $13.9 billion this year, a 66 percent jump over the $8.4 billion spent last year, according to Quest Offshore Resources, an industry research consultant.

Equipment makers specializing in gear designed to handle the intense cold and high pressures of the submarine depths, including FMC Technologies Inc. and Cameron International Corp., are best positioned to gain from the surge in investment. As oil companies improve their ability to operate undersea with new Technology, they'll be able to open up new areas to exploration at lower costs, said Astrid Sorensen, vice president of U.S. offshore field development at Statoil ASA.

“The point now is to stretch the limits so you can put together a toolbox the way you need it,” Sorensen said.

Operating more efficiently in ultra-deep water, with less maintenance and down-time from weather disruptions, can be worth billions to a company, said Martin Craighead, chief executive officer at Baker Hughes Inc. A 1 percent improvement in the oil recovery factor translates into $3.2 billion in the value of some projects, he said. It also carries high risk, as BP Plc's oil spill at the deep-water Macondo well in the Gulf of Mexico demonstrated to the world in 2010.
Eoin Treacy's view - While the US government has been slow to allow drilling in the Gulf of Mexico to recommence, the rest of the world is not so reluctant. Shale oil and gas continues to garner a great deal of investor attention, not least because the prospect of more countries deploying the requisite Technology to unlock their own reserves remains undiminished. Only today, Shell announced it was investing $1billion in Chinese shale oil and gas development.

Despite this positive development for unconventional oil & gas, it is worth considering that a great deal of the world's expected additional supply is also expected to emanate from offshore locations. Companies that drive efficiencies in this sector can be expected to prosper. (Also see Comment of the Day on January 18th).

In the machinery and equipment sector Cameron International broke out of a 2-year range in February and has been consolidating above $60, in a relatively gradual process of mean reversion. Dresser Rand has a similar pattern while Dri-Quip is leading to the upside. FMC Technologies is testing the upper side of its 2-year range.

In the offshore drilling sector Ensco International has returned to test the region of the 200-day MA and the region of the upper side of the underlying range. Noble Corp, Rowan Cos. Transocean, Precision Drilling, Diamond Offshore Drilling and Nabors Industries have all pulled back to test the region of their MAs, where they will need to find support if recovery potential is to continue to be given the benefit of the doubt.

In the services sector Oceaneering International has been consolidating mostly above $60 since early February, allowing a steady reversion towards the mean. A sustained move below $55 would be required to question medium-term upside potential. Helix Energy Solutions Group and Atwood Oceanics also broke out in January and have been in a process of mean reversion for the last six weeks. John Wood is testing the upper side of its range.

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March 25 2013

Commentary by Eoin Treacy

Industrialising the Internet

Eoin Treacy's view - The Technology sector has always been highly competitive and this is unlikely to change. However 2013 is likely to mark an important milestone in its evolution. The trajectory of chip development, which has seen chips sizes halve and speeds double every two years since the 1950s (Moore's Law), is set to decelerate to approximately every three years. The reason for this is because as the “gates” on a chip approach the width of a silicon atom, the issues of heat dissipation and size represent progressively more important challenges. This has accelerated the search for an alternative to silicon and explains why there is such excitement about the potential for graphene and carbon nanotubes.

In the meantime, one of the reasons ARM Holdings has done so well is because the energy efficiency of its designs has made them indispensable for manufacturers of handheld devices. The share broke out of an 18-month range in October and hit a peak near 1000p at the beginning of this month. It is currently consolidating and a sustained move above 1000p would be required to reaffirm the medium-term uptrend. It would be best bought following a reversion towards the mean, represented by the 200-day MA.

While ARM Holdings, Apple and Samsung have garnered the most media attention, there is also a group of companies that are worthy of mention because they have underperformed. The tech bust that followed the boom of the 1990s saw a significant number of companies disappear. Others such as Google waited until after the crash to list. Amazon and Apple were among the first to bounce back and hit new all-time highs. A large number of shares related to the cloud computing sector broke out in 2010. Therefore the companies that remain in base formations today do so for a reason.

Broadcom, Texas Instruments, Cisco Systems, STMicroelectronics, Micron Technology, CA Inc., Xilinx, Linear Technology, Akamai Technology and Fairchild Semiconductor all remain in more than decade-long base formations. Increased demand for internet connectivity from both the corporate and domestic sectors might yet be the catalyst for base formation completion. Seagate Technology and Symantec have completed bases relatively recently while CA Inc. from the above list has the most well-defined progression of higher reaction lows within its base. (Also see David's piece above).

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March 25 2013

Commentary by David Fuller

Email of the day

On Friday's Big Picture Audio
"I very much liked your broadcast on Friday and its emphasis on the five things that will drive the global economy in the future. I agree with placing Technology as one of these key elements. In this vein, I came across this article which may be of interest. The table from the OECD is especially notable.

"'A report from the OECD on the internet of things estimates that a family of four will go from having an average of 10 devices connected to the internet now to 25 in 2017 and 50 by 2022. Every single on of those will have a radio - or multiple radios.'"
David Fuller's view - Thanks for your thoughts on Friday's Audio, plus the links.

My guess is that some people in the Collective of Subscribers will look at the list of 50 internet devices predicted for a typical family of 4 in 2022, and recoil in mock horror. Additionally, most of us have some smart, intellectual friends who thrive without many IT gadgets, preferring to read books and actually talk to people, rather than hunkering down and tapping the screen of a smart phone.

My point is that many of the new products created for consumers are for our so-called entertainment. That's fine and most of us also like computers and the internet because they make our lives more efficient. However, technological developments for industries, including robotics, are almost entirely for the purposes of efficiency. Their development and utilisation is accelerating. This is increasing the efficiency, productivity and often the profitability of successful multinational corporations. These are the Autonomies which Fullermoney often discusses and

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March 15 2013

Commentary by David Fuller

The Facts on Fracking

The Facts on Fracking
OPPOSITION to fracking has been considerable, if not unanimous, in the global green community, and in Europe in particular. France and Bulgaria, countries with the largest shale-gas reserves in Europe, have already banned fracking. Protesters are blocking potential drilling sites in Poland and England. Opposition to fracking has entered popular culture with the release of "The Promised Land," starring Matt Damon. Even the Rolling Stones have weighed in with a reference to fracking in their new single, "Doom and Gloom."

Do the facts on fracking support this opposition?

There is no doubt that natural gas extraction does sometimes have negative consequences for the local environment in which it takes place, as does all fossil fuel extraction. And because fracking allows us to put a previously inaccessible reservoir of carbon from beneath our feet into the atmosphere, it also contributes to global climate change.

But as we assess the pros and cons, decisions should be based on existing empirical evidence and fracking should be evaluated relative to other available energy sources.

And from the last portion of the conclusion:

Europe is currently increasing its reliance on coal while discouraging or banning fracking. If we are going to get our energy from hydrocarbons, blocking fracking while relying on coal looks like a bad trade-off for the environment.

So, should the United States and Europe encourage fracking or ban it? Short-run economic interests support fracking. In the experience of Pennsylvania, natural gas prices fall and jobs are created both directly in the gas industry and indirectly as regional and national economies benefit from lower energy costs. Europe can benefit from lessons learned in Pennsylvania, minimizing damage to the local environment.

The geopolitical shift that would result from decreasing reliance on oil, and more specifically on Russian oil and gas, is one that European politicians might not want to ignore. And if natural gas displaces coal, then fracking is good not only for the economy but also for the global environment.

But if fracked gas merely displaces efforts to develop cleaner, non-carbon, energy sources without decreasing reliance on coal, the doom and gloom of more rapid global climate change will be realized.
David Fuller's view - The extraction and burning of fossil fuels is a messy process but mankind could not prosper without them. So-called clean or green energy is a nice idea. However, countries which have invested heavily in wind farms are now realising just how expensive, unreliable, inefficient, noisy, unsightly and hazardous for wildlife these installations are proving to be.

Solar power is preferable to windmills, not least because it can be used in small units attached to buildings, but it is certainly not a standalone system in most countries. Fossil fuel backup is required for all green energy technologies, which increases the costs considerably.

Pre-Fukushima, nuclear power was regarded as sort of green, albeit with terrifying leakage and waste disposal problems. Consequently, few countries are ready or willing to invest in new nuclear, which is almost certainly safer, although the spent fuel problem needs to be resolved by rendering it harmless.

Fortunately, US fracking Technology has ended the 'peak oil' risk, because global sources of shale oil and natural gas are widely spread and vast. The US economy has been the enormous beneficiary of this unconventional oil and gas production to date. Other countries have access to the Technology but political inertia has largely delayed their use to date, not least in Europe.

Paradoxically, Europe's green energy programmes have increased pollution because of the additional need for backup coal burning plants. Conversely, pollution has actually declined in the USA thanks to the amount of natural gas that is being produced and used. Moreover, the American economy is benefiting enormously from its energy cost advantage.

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March 14 2013

Commentary by David Fuller

SAP as Most Valuable German Company Validates Deals Spree

This article by Cornelius Rahn and Aaron Ricadela for Bloomberg may be of interest to subscribers. Here is a section
SAP's top weapon is homegrown. Hana, a database that the company says is the fastest-growing product it's ever sold, cuts the time needed to analyze data and carry out transactions by orders of magnitude. Hana applications -- mostly developed with customers and startups -- range from weather simulations to predicting track conditions for Formula One racing teams to planning cancer treatments.

In October, SAP used Hana to help the National Football League overhaul its fantasy football offering, including an online dashboard to determine the player of the year. And pushed by co-CEO McDermott, a passionate basketball fan, SAP is providing the National Basketball Association with software to parse decades of statistics.

Hana is also beginning to be used by central banks to supervise lenders. SAP says analysts at its 55 central bank customers can analyze data from commercial banks to find potential risks and weaknesses in seconds, versus poring over financial reports to spot trends.
David Fuller's view - From 2010, cloud computing was heralded as the next big thing in the Technology sector because it offered companies and individuals unprecedented access to information, data, mobile computing and entertainment. With the build-out of data centres, the focus of attention appears to have refocused on application software, not least because cloud computing contributes to increased demand for such processes.

SAP has a solid record of dividend increases, currently yields 1.16% and appeared in the table of European companies that derive at least 40% of their revenue from outside Europe, I posted in Comment of the Day on Tuesday. The Americas and Asia Pacific represent its fastest growing markets. The share has been trending higher since early 2009 and the pace of the advance picked up from 2011. It found support in the region of the 200-day MA from late January and a sustained move below €60 would be required to question medium-term scope for continued upside. (Also see Comment of the Day on July 15th 2010).

Following an impressive advance between 2009 and 2011, Salesforce spent more than 18 months ranging below $160. It broke upwards to new highs in December and a sustained move below $160 would now be required to question medium-term upside potential. Cognizant Technology Solutions and Oracle also spent much of the last two years consolidating and have now returned to test their respective highs. (Also see Comment of the Day on August 1st 2012)

Sage Group is a UK listed S&P Europe 350 Dividend Aristocrat yielding 3.22%. The share broke out to new 12-year highs in February and a sustained move below the 200-day MA, currently near 305p, would be required to question medium-term upside potential.

French listed Dassault Systems is globally diversified and more than 50% of revenue derived outside Europe. The share has been trending relatively consistently since early 2009 and found support in the region of the 200-day from February. It hit a new recovery high this week and a sustained move below €80 would be required to question medium uptrend consistency.

Intuit broke out of a decade long base in 2010, found support in the region of the upper boundary in 2011 and has held a progression of higher reaction lows since. It surged to a new high over the last couple of weeks and while overbought in the short-term, a sustained move below $60 would be required to question the consistency of the medium-term advance. Netsuite and Ansys share broadly similar patterns. In the healthcare sector, Cerner has a similar pattern.

Synopys has trended consistently higher since 2009 and is now testing the 2004 and 1999 peaks above $35. While there is room for some consolidation in this area, a sustained move below the 200-day MA, currently near $32, would be required to question medium-term scope for base formation completion.

Workday was listed in October on NYSE and spent much of the last few months ranging. While the company has yet to turn a profit, the share broke out to new highs at the beginning of the month and a sustained move below $55.50 would be required to question medium-term scope for additional upside.



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March 13 2013

Commentary by Eoin Treacy

Asians Hunt Gas Treasure Locked in Ice Beneath Seabeds

This article by Rakteem Katakey and Tsuyoshi Inajima for Bloomberg may be of interest to subscribers. Here is a section
Nations around the world are seeking new energy sources as demand increases. China, the world's biggest energy consumer, is looking for Technology to produce from the world's biggest estimated shale gas deposit and enhance output from coal seams.

While India imports more than 75 percent of its crude oil and a quarter of its natural gas requirements, Japan buys all its oil and gas from overseas and is seeking to find ways to cut its dependence on Middle Eastern crude oil.

“Countries that highlight the opportunity are those with limited oil and gas production,” said Nathan Piper, an Edinburgh-based analyst at RBC Capital Markets. “Gas hydrates remain challenging due in part to the offshore location.”
Eoin Treacy's view - We have heralded the evolution of shale oil and gas as game changers for the energy sector over the last few years. Among other attributes the development of these resources highlights the fallacy that the world will ever run out of fossil fuels. In our opinion it is impossible to speak of potential future supply without incorporating a price component. The bull market in crude oil and distillate pricing, which has been in evidence for a decade, is best described in terms of the rising cost of production often in nominal terms rather than the exhaustion of supply.

As with shale oil and gas, geologists have known about methane hydrates for decades. However, the breakthroughs necessary to commercialise methane hydrates have yet to be made. Considering the motivations of energy-poor countries to secure domestic supply, the outlook for the sector remains positive. This reinforces our contention that natural gas will play a progressively more important part in the global energy mix over the coming decades.

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March 07 2013

Commentary by David Fuller

Welcome the Robot Revolution, but Beware

This is a good editorial from Bloomberg on a theme which has long been of considerable interest at Fullermoney. Here is the opening
Robots are evoking some deep economic anxiety these days. They're routinely mastering human tasks -- driving cars, trading securities, diagnosing diseases - - that not long ago appeared permanently beyond their capabilities. And as automated Technology advances at an exponential rate, more and more jobs, in more and more fields, will be done by intelligent machines in the very near future.

This transition will involve some scary trade-offs. Growth and productivity will probably accelerate, and low-cost, high- quality goods will probably proliferate. But many workers will find their skills obsolete and their ability to compete diminished. Unemployment could be exacerbated. Wage stagnation for the middle class could persist or worsen. And inequality seems likely to widen.

For all that, we remain optimistic. Throughout history, Technology -- from the steam engine to electricity to the computer -- has upended old ways of doing business and created useful and edifying new fields of human endeavor. This long cycle of creative destruction suggests, however, that the robot revolution will be a time of significant turmoil. And that the more we prepare for it now, the better off we'll be.

As the digital economy churns through old industries, workers will need to become increasingly creative and open to change, and governments will need to grow more nimble in encouraging innovation and cushioning the blow for those left behind. As Erik Brynjolfsson and Andrew McAfee argue in their book "Race Against the Machines," the guiding principle for revamping public policy as this revolution unfolds is flexibility.
David Fuller's view - Good articles on this subject have the potential to both excite and terrify us. They are also relevant in terms of our lives and therefore no longer confined to the realm of science fiction.

I have been talking about an accelerating pace of technological innovation for many years. It is a creation of the human intellect. Consequently, it has always been part of our history, dating from the earliest cavemen and women.

However, at the dawn of mankind's history progress was infinitesimally slow, as primitive humans first discovered tools, starting with the club, and then gradually invented and developed others. Centuries probably passed before our earliest ancestors learned how to create fire, and that was a massive technological innovation.

Fast forward to a few hundred years ago and the pace of technological innovation had increased dramatically. Nevertheless, it was glacially slow relative to what we see today. Most people benefited from social rather than military inventions. Moreover, their pace of development and utilisation was sufficiently gradual to create far more job opportunities than unemployment.

Fast forward to our era and anyone in a developed economy is very aware of technological innovation's accelerating pace. Vastly more people have benefited from this progress but they are also struggling to keep up, at a national, corporate and especially personal level.

Nevertheless, I maintain that we are still in the foothills of technological innovation. Moreover, its rate of development is exponential and only limited by our imagination.

This process is very exciting but it can also be stressful because the flip side of innovation is obsolescence. We see this at a corporate level, not least in the fascinating Technology sector. In recent decades there has been an increasing tendency for tech shares to surge dramatically on an innovative breakthrough, only to fall back sharply a few years later as competition develops and eventually moves ahead.

However, the more serious problem concerns unemployment because there are very few jobs that cannot or will not be replaced by robots and software that is smarter, more flexible and more durable than humans. No doubt new forms of employment will also be created, but usually at a far slower pace than the rate of technological innovation.

Meanwhile, the biggest beneficiaries of technological innovation in its various forms will continue to be corporations especially those that are best able to utilise superior technologies.

(Search Comment of the Day separately for - technological innovation - robots or robotics - to see some earlier comments on these subjects.)

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March 06 2013

Commentary by Eoin Treacy

China Joining U.S. Shale Renaissance With $40 Billion

This article from Bloomberg may be of interest to subscribers. Here is a section
China's energy demand is growing at the fastest pace among major economies even as aging onshore fields fail to keep pace.

China plans to cap its crude imports at 61 percent of total consumption by 2015, according to an energy research paper released by China's cabinet in October. The country's reliance on imported crude was 56.4 percent in 2012, according the National Development and Reform Commission.

Sinopec's purchase of Chesapeake Energy's stake in a shale oil field in Oklahoma announced on Feb. 25 gave the Beijing- based company drilling rights to a field twice the size of New York City for less than one-third of the value estimated by Chesapeake for the asset. The same day Cnooc closed its deal to buy Canada's Nexen.

Cnooc was barred from controlling the Gulf of Mexico oilfields under U.S. terms for its approval of the takeover, people familiar with the matter said this month. The U.S. is officially open to Chinese investment, a position that has been affirmed by President Barack Obama.
Eoin Treacy's view - Chins has been in the market for extraction Technology and access to strategic resources for more than a decade. This is unlikely to change as its economy modernises and as per capita demand trends higher.

With shale assets it appears to be following a similar strategy to that which it took with industrial metal assets following the credit crisis. In 2009 a considerable number of resources companies had fallen into difficulties because metal prices had collapsed, the prices they had paid for resources were in retrospect too high and bank funding evaporated. Chinese companies were flush with cash and were welcomed as investors, where once they would not have been allowed to participate.

The rush to secure leases that characterised the shale oil and gas sector over the last few years has put a number of companies in difficult positions. China's desire on this occasion is the same as it was a few years ago and it can gain access for the same reasons as were evident in 2009.

This should help to facilitate the process of consolidation that is currently underway in the shale oil and gas sector.

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March 05 2013

Commentary by Eoin Treacy

Musings from the Oil Patch

Musings from the Oil Patch
The larger, aggressive independents moved earlier before gas prices fell to the $2/Mcf level to secure stable sources of capital in the form of joint ventures with major integrated oil companies seeking reserves, production and technological knowledge, and national oil companies seeking financial returns and shale intelligence. Some of the small, aggressive operators elected to sell out to these larger oil and gas companies. With gas prices at distressingly low prices, companies of all sizes began sorting out their asset bases and selling less desirables properties. Today, we are in the midst of a major restructuring of the domestic E&P industry as shale Technology leaders, but saddled with a high cost of capital and large debt burdens are being absorbed by larger oil and gas companies with low costs of capital, large research and development budgets to fund further improvements in drilling and extraction Technology and the financial staying power to withstand the time until natural gas prices rise to support the shale gas economics.

While we haven't seen the Barnett Shale study (its results are being presented in five papers submitted for peer review), we doubt it will end the debate over the shale revolution and its future. In fact, we suspect the report may actually heighten the debate as it points out the economics of shale gas, especially because a new model for forecasting well EURs has been developed, pointing out that shale formations are not uniform – either within or between formations. The Bureau of Economic Geology is engaged in studies of the Haynesville, Marcellus and Fayetteville shale formation to be completed by the end of the year. Those studies will add fuel to the debate. We believe the results of the Barnett Shale study will be used aggressively to debunk those who are critical of the economics of shale and to support an expansion of the role natural gas will play in the future U.S. energy picture.
Eoin Treacy's view - Natural gas doubled last year from below $2 to test $4 by November. It has since pulled back to find support in the region of the 200-day MA and a sustained move below $3 would be required to question potential for some additional higher to lateral ranging. A sustained move above $4 will be required to confirm a return to medium-term demand dominance.

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March 01 2013

Commentary by Eoin Treacy

Email of the day

on a vision of the future
“This video is very entertaining and possibly useful for divining the future of personal computing. Although couched an "Ozzie and Harriet" theme (US 50's TV show) the Technology imagined seems reachable. Whether we reach the ideal society depicted in this production is another story!”
Eoin Treacy's view - Thank you for this imaginative video. It is produced by Corning which is a company probably best known for producing the screens for Apple products and LCD TVs. Its view of the future unsurprisingly includes a great deal of glass but as you say most of it is not that difficult to imagine.

Something that has been at the back of my mind for some time is the fact that every major innovation in how we store or communicate information has been associated with a major leap forward in technological development. The internet, cloud computing and social media not only facilitate the pace of discovery, patent lodging and advancement but virtually ensure that we are no longer as risk of losing our collective knowledge as a result of war or natural disaster. Throughout history the destruction of libraries by either of these events set back our collective knowledge sometimes by centuries. We now have the capacity to ensure this never happens again.

Carbon nanotubes, graphene, other nanotechnologies, genetics, robotics and intelligent software all represent major areas of future innovation, efficiency and hence productivity growth that can drive future bull markets.

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February 28 2013

Commentary by David Fuller

Shell seizes chance to meet gas ambitions

This is an informative article from the NYT & IHT. It appears under a different headline on their website and may require subscription registration but here is a PDF copy. Here is the opening
LONDON - Royal Dutch Shell, which has agreed to pay more than $6 billion for the liquefied natural gas businesses of the Spanish company Repsol, is taking advantage of Repsol's weakened balance sheet in order to strengthen Shell's own world-leading position in a business with huge profit potential.

The two companies announced late Tuesday that Shell would acquire Repsol's L.N.G. businesses for $4.4 billion in cash and $2.3 billion in financial leases and assumed debt. The sale attracted more than a dozen bids, according to Repsol, and resulted in a price that was more than double pre-sale estimates, according to Bernstein Research.

Oil companies are trying to add to their positions in liquefied natural gas, and Shell believes global consumption of the fuel will roughly double from now to 2025. Operating L.N.G. facilities are rarely offered for sale.

But the appeal of L.N.G. goes beyond rising world energy use, as the Technology that creates the product - supercooling natural gas so that it can be transported by ship - is helping to turn natural gas into a globally traded commodity like oil.
David Fuller's view - This looks like an attractive move by RDS (historic, weekly & daily) and the market appears to be supporting it, albeit after a sharp pullback from the historic highs commencing in late January.

LNG is the fossil fuel of the future and RDS currently has 8% of this global market, the largest among Western oil companies according to the article above. Resources shares are currently undervalued because of the lengthy global economic slowdown, which may be in its latter years. Consequently, this is a good time for conservative investors to be acquiring RDS which Yields nearly 5% and trades on an historic and estimated PER of just below 8.

In the full disclosure department, RDS B-Shares are the second largest holding in my personal long-term investment portfolio, and I may continue to increase this position.





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February 27 2013

Commentary by David Fuller

Today's interesting charts

David Fuller's view - Price charts show you when the consensus view is no longer sustained by market action.

China's SHASHR Index (weekly & daily) has fallen a little over 7.5% since its recovery highs in February. This setback, which ended uptrend consistency characteristics evident since the early-December low, has clearly been influenced by China's latest efforts to curb real estate speculation.

The reaffirmation of this policy has understandably led to some uncertainty regarding China's monetary policy.

(See also my lead item on Thursday 21st February: China Orders More Cities to Restrict Housing Purchases, which discusses this issue in more detail, prior to an additional chart review.)


Currently, the A-Share Index shown above reveals some loss of downside momentum in a region of lateral trading near 2400. However, a significant recovery from the decline since China's New Year week-long break is required to confirm more than tentative support in this region. Moreover, without any new upward dynamics, a further drift towards the 200-day MA could occur. If that is pressured we can expect a potentially lengthy right-hand extension consolidation phase before the recovery is resumed. With the decennial political handover still underway, China has yet to convince investors that property speculators are an isolated target within a broader reflation of the overall economy.

Vietnam's SE Index (weekly & daily) has backed away from psychological and lateral resistance near 500. Moreover, the downward dynamics seen suggest that the early-February high will not be cleared in the near term. While the reaction looks oversold in the short term, we have yet to see any technical evidence that it has ended. The next region of potential support is near 440.

Japan's Nikkei 225 (weekly & daily) has enjoyed a rare and fully justified initial run to the upside. However, it is overextended in the short term, looks tired and had an upside failure on Monday the 25th. Add in the global corrective / consolidation phase for stock markets and Japan appears temporarily vulnerable to the downside. This would be in line with the USD/JPY (weekly & daily) pullback resulting from a big weekly key reversal, entirely due to the daily key reversal on Monday. I assume that the yen has to weaken once again before Japan's stock market extends its recovery on the improved earnings outlook for Japan's exporters.

The three markets above remain very interesting medium-term recovery candidates. This is particularly true for Japan, provided Shinzo Abe's popularity holds and he is successful in nudging the yen lower in the months ahead. Japan's Achilles' heel in the strategy of partially reversing last year's serially overvalued currency is the cost of energy. Therefore, it needs to restart its remaining nuclear power stations which are still viable, and it also needs a calm pricing environment for gas, oil and coal, most of which it has to import.

The US stock market's recovery yesterday and today, virtually offsetting Monday's big downside dynamics on daily charts for the Dow, S&P, NDX, TRAN and UTIL is encouraging for global investors at a time of understandable nervousness as other stock markets react and consolidate, often from overextended positions where rallies occurred from November through January.

I have also used 10-year weekly charts for these US indices so that subscribers can see how the Dow and S&P are challenging their 2007 highs. Interestingly, the NDX is well above its 2007 levels, despite Apple's fall from iconic status, back to being an important member of the crowd. I attribute Wall Street's performance to four factors: 1) Mr Bernanke's QE which will remain a tailwind while it lasts; 2) 'Export earnings' (that description is no longer adequate for these global players benefiting from globalisation, particularly among NDX companies); 3) The USA's domestic energy price advantage for manufacturers, which is particularly beneficial for those companies which produce capital goods; 4) The accelerating boom in all forms of Technology, which the US mostly leads. These factors are also positive for TRAN and UTIL, albeit slightly less so.

Interestingly, we hear little about the USA's energy advantage, although Fullermoney frequently mentions it, while the financial press remains obsessed with the budget and spending battle. From my admittedly 'across the pond' perspective, Mr Obama holds most of the cards, given the power of the White House and he also has Mr Bernanke on his side.

Lastly, while the US stock market is holding up well, this corrective and consolidation phase probably has several weeks and perhaps longer to run. Therefore, watch the current range lows on daily charts for US indices above. If / when most of them close beneath their ranges, a somewhat larger pullback will have commenced.

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February 25 2013

Commentary by Eoin Treacy

Email of the day (2)

on lithium battery innovations
“Further to your article about lithium for batteries in cars, I attach an email I received today from Imperial Innovations relating to a partnership with Wacker.

“Also at http://www.imperialinnovations.co.uk/news-centre/news/nexeon-secures-strategic-investment-and-partnershi/

“This appears to relate to the Technology for lithium batteries for small devices (laptops etc.) not cars.

“I have no expertise in the battery sector but this may be interesting.”
Eoin Treacy's view - Thank you for this interesting press release contributed in the spirit of Empowerment Through Knowledge. Here is a section:

Nexeon, Innovations' second largest investment to date, is developing silicon materials to replace carbon as the anode of lithium ion (Li-ion) batteries. This will lead to the production of rechargeable batteries with higher charge density, enabling consumers to use their devices, such as laptops and smart phones, for longer before needing to recharge them. Stronger battery performance is also key to the wider adoption of electric and hybrid vehicles.

My piece on lithium appeared in Comment of the Day on Thursday.

Wacker collapsed from its 2011 peak near €175 as demand for solar panels declined. It hit a medium-term low in November near €40 and has since rebounded. The share broke out of its most recent range two weeks ago and a sustained move below €60 would now be required to question medium-term recovery potential.



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February 22 2013

Commentary by Eoin Treacy

HP Turnaround Progressing as Profit Forecast Tops Estimates

This article by Aaron Ricadela for Bloomberg may be of interest to subscribers. Here is a section
Both companies are being dogged by a decline in PC demand. Shipments fell 4.9 percent in the fourth quarter, market researcher Gartner Inc. said. The rise of smartphones, tablets and software that runs via a browser are crimping sales.

There have been some bright spots for Hewlett-Packard in the computer market. Its share of fast-growing ultrathin notebooks was 14 percent in the fourth quarter, according to IDC, second only to Apple Inc. Whitman has also said the company will eventually re-enter the smartphone market, after discontinuing phones using software from its Palm Inc. acquisition in 2011.

The week before Valentine's Day, Hewlett-Packard convened its top 1,100 managers in Anaheim, California for a meeting to see the company's latest products. Starbucks Corp.'s CEO Howard Schultz and Jeffrey Katzenberg, CEO of DreamWorks Animation SKG, spoke at the event.

“The hope is that this is the floor and they've gotten a grip on the business,” said Shaw Wu, an analyst at Sterne Agee & Leach Inc. Wu has a neutral rating on the shares. “They're giving guidance that actually makes sense.”
Eoin Treacy's view - There has been an increasing diversification between the winners and losers in the Technology sector. Those that have failed to keep pace with the rapidly evolving demands of a social media obsessed consumer base have languished while the leaders have taken on iconic status.

However, despite the fact that some of these long established companies have pulled back so violently, it would be a mistake to write them off. They have long experience of the sector, substantial capital to deploy and manufacturing prowess that allows adaption provided they can assert the management vision to make it happen. (Also see Comment of the Day on January 21st)

Hewlett Packard rallied impressively from its November low to close its overextension relative to the 200-day MA. It paused in the region of the trend mean for much of the last couple of months and broke upwards today to reassert demand dominance. A countermanding downward dynamic would be required to question medium-term scope for additional upside.

Xerox rallied to break a more than yearlong progression of lower rally highs by late January and has been consolidating above the 200-day MA since. A sustained move below the trend mean would be required to question medium-term scope for additional upside.

Research in Motion rallied impressively from its September lows but has experienced high volatility over the last month. Provided it finds support above $80, recovery potential can be given the benefit of the doubt.

While not a manufacturer, Yahoo is also worthy of mention. It rallied to test the upper side of its four-year base by December and spent much of the last couple of months consolidating. A sustained move below $120 would be required to begin to question medium-term scope for additional upside.

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February 22 2013

Commentary by Eoin Treacy

Deal Advances Development of a Smaller Nuclear Reactor

Thanks to a subscriber for this interesting article by Matthew Wald for the New York Times which may be of interest to subscribers. Here is a section
The reactor is intended as a direct challenge to natural gas generators, and it is intended to share two characteristics that make gas attractive.

First, the builders say they can be built quickly and be added onto later, so there is less risk of building too much capacity or running short. Second, they are meant to do something that is difficult for existing nuclear plants but easy for gas: change power output rapidly.

Grid operators are increasingly challenged by having to integrate large amounts of power from wind farms and solar installations, which can experience surges or drops in output. Planners are looking for supply partners for those variable generators.

B&W will prepare an application to build four reactors, and the plan is to build two at the site once planned for the Clinch River Breeder Reactor. Licensing can be completed under existing Nuclear Regulatory Commission rules, according to Mr. Mowry, who spoke at a Platts Nuclear Energy conference in Washington.

He said his company wanted to have the first of two units in service at Oak Ridge by 2022, an aggressive schedule that he said was “eight years and change.”
Eoin Treacy's view - The nuclear industry faces multiple challenges. Public perceptions have been deteriorating in the West for decades as issues with the storage and reprocessing of waste and the potential for accidents gained wider attention. In the aftermath of the Fukushima disaster sentiment reached a new low and governments felt they needed to be seen to be acting in the public good by closing reactors.

However, the great benefit of nuclear is that it supplies abundant, affordable energy and can ensure base load for utilities. In an environment where renewable alternatives fail the basic reliability test, the requirement for an adaptable source of electricity that can pick up the slack when needed is incontrovertible.

Germany has been building coal fired stations in order to fulfill this need. The USA has so far focused on dual fuel coal/natural gas power stations which allow utilities to benefit from the arbitrage in commodity prices. From an energy diversity and security perspective there is a compelling argument for developing nuclear reactors and related Technology.

The pinch for investors is that the 2011 disaster set the nuclear industry back by years. Investment in uranium production in the last decade has ensured that the supply of the commodity is ample for today's demand environment and related mining shares remain in lengthy bases.

Demand will need to increase if the medium-term bullish story is to be credible. In order for this to happen, older reactors will need to be reconditioned and new ones built. The advent of an alternative fuel source in thorium represents an additional challenge for the mining sector. With these issues in mind the performance of nuclear facility builders should offer a lead indicator, possibly by years, for a resurgence in the mining sector.

Babcock & Wilcox, mentioned in the above article, is not normally associated with the nuclear industry. The share has been ranging with a mild upward bias since early 2012. A sustained move below $25 would be required to question medium-term scope for a successful upward break.

Atkins broke out of a three-year range at the beginning of the month and a sustained move below $600 would be required to question medium-term scope for additional upside.

Shaw Group was acquired by Chicago Bridge & Iron this month. The latter has rallied impressively over the last few months and is now susceptible to mean reversion.

Toshiba Plant Systems, JGC Corp, Idemitsu Kosan and Korea Electric Power all pulled back sharply in the last few weeks but have found at least short-term support in the region of their respective 200-day MAs. Provided they hold their recent lows, the benefit of the doubt can continue to be given to recovery potential.

Although China is where demand growth for nuclear reactors is expected to be strongest, its nuclear reactor construction sector is underperforming both the global sector and the domestic stock market. Harbin Power Equipment is representative.

The performance of the above shares is supportive of tentative optimism with regard to the nuclear industry and this should eventually begin to be reflected in the performance of uranium mining shares.



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February 21 2013

Commentary by Eoin Treacy

Lithium Air Battery Gives IBM Hope of Power Without Fire

This article by Christopher Martin for Bloomberg may be of interest to subscribers. Here is a section
“We could see a radical advance if our prototype excites a manufacturer with a compatible Technology,” Narayan says. “We'll have a prototype ready next year, and then with our partners we'll look at the engineering timeline. Five to 10 years is a reasonable time to commercialization.” IBM is not alone. Researchers at universities, government laboratories and auto companies are also vying to produce the next-generation battery.

Rival Projects
Toyota Motor Corp. and Bayerische Motoren Werke AG on Jan. 24 announced plans for lithium-air batteries. Scientists at Massachusetts Institute of Technology are working on a product using carbon nanotubes replacing lithium-ion. Seeo, a start-up backed by billionaire Vinod Khosla, is building lithium-ion units that use a lighter, dry electrolyte instead of liquid. There's skepticism whether any of them can succeed. Laboratories working on batteries have failed to replicate the successes they've had with semiconductors in multiplying
efficiencies.

That's because storing electricity is a chemical process where improvements come slowly, unlike the efforts to scale up efficiencies in manufacturing electronics, said Tom Gage, who led production of the Tesla drivetrain at AC Propulsion Ltd. “Moore's Law doesn't apply to batteries,” said Gage. It may take another 10 years to 20 years before the industry can produce an electric vehicle with the range and flexibility consumers expect, he said.
Eoin Treacy's view - Historically high energy prices drive consumers to find more efficient means of producing, storing and using electricity. In addition the growth in demand for portable gadgets such as phones, laptops and tablets has refocused attention on delivering efficient, durable and light weight batteries. Given the considerable difficulty evident in the development of a new battery type, the prospects for lithium based technologies remains upbeat for the foreseeable future.

Among the better performing lithium companies FMC Corp posted a downside weekly key reversal three weeks ago and remains in a process of mean reversion. A sustained move below the 200-day MA, currently near $55 would be required to question the consistency of the medium-term uptrend.

Rockwood Holdings rallied impressively from mid-November to test its 2011 high near $62 where it encountered resistance on Monday. An unwind of the short-term overbought condition appears to be underway, but a sustained move below the 200-day MA, currently near $50, would be required to question medium-term scope for an eventual reassertion of the medium-term uptrend.

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February 21 2013

Commentary by Eoin Treacy

ARM Turns Up Pressure on Intel as Even Cutlery Gets Smart

Thanks to a subscriber for this interesting article highlighting ARM's dominant position in mobile device chips and more recently embedded chips. Here is a section
Embedded processing is the building of computing capabilities and connectivity into devices and machinery that previously stood alone. Companies are rushing to turn vehicles into networks of sensors and minicomputers that can make sure drivers have access to their iTunes libraries or stop the vehicle if the brakes aren't hit early enough.

Everyday equipment like thermostats and electricity meters are being linked up to the Internet, requiring processors to analyze data and transmit or receive instructions. Even some forks now analyze how fast you eat, so you can slow down to lose weight or ease digestion.

Device makers and their chip suppliers are turning to ARM designs because its dominance in smartphones has drawn a flood of software developers and engineers to the Technology, making it easier and cheaper to standardize.

“It has become ubiquitous and everyone wants to design off of it,” said Hans Mosesmann , an analyst at Raymond James & Associates Inc. “It's a monumental task to offset the tsunami that's happening. We're big fans of the non-smartphone part of their business.”

Cambridge, England-based ARM doesn't make semiconductors itself -- it sells processor designs and licenses fundamental chip Technology to companies including Texas Instruments, Samsung Electronics Co. and Qualcomm Inc. ARM's annual sales , which reached $914.4 million in 2012, are a fraction of Intel's more than $50 billion in revenue.

Intel, meantime, is focusing on the automotive, retail and industrial-control markets, trying to bring a greater ability to analyze data locally and keep it secure, said Ton Steenman, who heads Intel's Intelligent Systems group.

Intel's chips and software are now in phone systems, PepsiCo Inc.'s smart vending machines that can vary sales pitches, entertainment systems in cars made by Bayerische Motoren Werke AG and Kia Motors Corp. , and in industrial tools such as automated farm machinery that can run at night, he said.

“We are not building solutions today that control a little valve and doesn't do much more than that,” said Steenman. “We are investing in the type of application where the richness of the data processing is a key attribute. That is where there is a lot more differentiated and sustainable value that can be created.”

While East said it took longer than he expected for non- phone-related sales to become the majority of ARM's revenue, he expects that percentage to keep rising as the surge in smartphone demand lures more software developers and hardware engineers to his company's Technology.
Eoin Treacy's view - The industrialisation of the internet represents a new frontier in the march of technological innovation and promises to create efficiencies and productivity gains that were not previously available. ARM Holdings currently has a significant edge in this sector which is reflected in its share price. (Also see Comment of the Day on November 6th).

As the sector develops, we can expect more diversity in the products offered and more companies entering the market. (Also see David's piece in Comment of the Day on November 26th).

ARM Holdings (0.54%) continues to hold a progression of higher reaction lows and while overextended relative to the 200-day MA, a sustained move below 880p would be required to signal more than a temporary pause.

Intel (4.46%) found support in the region of its 2011 lows near $19 from November and continues to range mostly above $20. A sustained move above the 200-day MA, currently near $22.75 will be required to confirm a return to medium-term demand dominance.

General Electric (3.27%) found support in the region of $20 from November and hit a new recovery high earlier this week. Some consolidation of recent gains appears likely but a sustained move below the 200-day MA, currently near $21, would be required to question recovery potential.

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February 18 2013

Commentary by Eoin Treacy

Shares outstanding

Eoin Treacy's view - Over the last number of years it has been a contention of mine that the shares of globally oriented companies were in many cases becoming collectors' items. This conclusion was based on the fact that monetary conditions remain conducive to share buybacks. In addition brisk M&A activity has also led to shares being delisted which reduced the inventory of stocks even further.

However, some might argue that equity issuance in the USA has been trending higher over the last four years. For example, the value of new equity offering in 2012 hit $220 billion. This is more than 50% higher than the value of equities listed in 1999. Some of this new issuance has been driven by the financial sector and other rights issues. The surge in issuance from the social media sector has also increased the supply of inventory. The question I am concerned with on this occasion, though, is on the quantity of stocks rather than their aggregated value.

In order to corroborate my hunch I went in search of an index displaying the number of shares outstanding on the NYSE. I soon discovered that Bloomberg does not have such an index. Therefore in order to depict this information I had to take a somewhat circuitous route. NYSE publishes data on the percentage of shorts relative to the number of shares outstanding. It also has an index showing the absolute number of shorts at different intervals. With this information I created a proxy index displaying an estimate of the number of shares currently trading on the NYSE.

We would naturally assume that the supply of stock rose during the Technology boom. Demand for equities drove the premium one might receive from listing on the stock market to impressive heights. This encouraged companies to cash in by seeking an IPO. As the market peaked and Technology shares crashed listing activity collapsed. >From 2002 as commodity, real estate and debt markets rallied demand for new share issuance was muted.

As listing fees evaporated stock exchanges were forced to innovate. This is at least part of the reason they embraced high frequency trading with the consequent boost in volume traded. Offering colocation and other services have helped to offset the decline in other parts of their business.

As the credit crisis unfolded investor confidence in the financial markets was shaken once more. The response of politicians has been to pile additional regulation, oversight, reporting commitments and disclosures on listed companies which have increased costs. The stock market volatility that has become such a feature of investor experience over the last few years has contributed to further ambivalence towards the sector not least among corporations. Dell's decision to go private is but one example of this trend.

The above proxy index of shares outstanding on the NYSE has fallen by 13.5% in the last two years, demonstrating that the inventory of shares is decreasing.

One of the reasons we have been so adamant that government bonds represent a bubble that has yet to burst is that supply of bonds has increased so quickly. The Fed's balance sheet currently stands at more than $3 trillion. This represents a rise of 200% since late 2008. Without the artificial support of government intervention this wall of supply would overwhelm demand and yields would inevitably rise.

If a rush to increase supply is symptomatic of a mania then the desire to reduce supply is symptomatic of the opposite condition. Equities are becoming progressively rarer even as sentiment towards the sector remains at best uncertain. It is too early to conclude that equities are about to return to a position of pre-eminence among investors. However, as we teach at The Chart Seminar, one of the necessary conditions for a breakout to occur is that excess supply above the market must be thinned out. We can now say that this is occurring in equities.

If subscribers with more knowledge of the supply of equities have additional information on the efficacy of these conclusions and would like to share their views I would be most happy to hear from you.

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February 18 2013

Commentary by Eoin Treacy

Email of the day (1)

on platinum and palladium
“I recently read an excellent article explaining the supply problems facing platinum and especially palladium - the following link I thought I should share with the collective and is most enlightening:

“This explains why both Palladium and Platinum are up 7% from the beginning of this year to the end of last week, and why they are outperforming gold (-5%) and silver (-3%)

“I attach an article from GS which shows that they too favour Palladium with a price target of $1,050. Given the very severe supply shortages, it seems likely that the price of Palladium and to a lesser extent Platinum, will continue to rise.”
Eoin Treacy's view - Thank you for this informative email which I'm sure will be of interest to subscribers. Here is a section from the report you attached which is dated January 16th:

Palladium: For palladium we reiterate our bullish view on prices as production cuts in South Africa by Anglo American (c.150k oz) and the lack of a supply response from Russia (Norilsk) or North America (Stillwater) is expected to result in a deficit over the short to medium term, even allowing significant ongoing sales from Russian stocks.

Our ongoing thesis is that palladium demand will grow in the autos sector due to: a) majority of growth in global automotive coming from gasoline (petrol) markets (e.g. US, China); b) palladium continuing to substitute for platinum in diesel markets due to Technology improvements; and c) implementation of Euro 6 emissions regulations in Europe seeing a subtle shift back to gasoline (petrol) from diesel, as auto makers seek to minimise implementation costs. This is expected to combine with increased demand from the broader industrial sector on stronger global GDP. Thus we believe palladium will outperform platinum over 2013-2015, and reiterate our 2013-2015 forecasts of $781/$925/$1,000/oz respectively. Other reasons to be bullish on palladium are the scope for further disruption to South African supply as well as the potential for reduced sales from Russia stockpiles.

The palladium/platinum ratio has been ranging mostly between 0.4 and 0.45 since early 2011 and is currently trading towards the upper boundary. A sustained move above 0.45 would be required to confirm more than short-term potential for outperformance by palladium.

In absolute terms palladium continues to hold a progression of higher reaction lows and a sustained move below $740 would be required to signal a deeper reaction. Platinum has been largely rangebound since 2011 and continues to pause near the upper boundary in the region of $1700. A sustained move above $1725 will be required to confirm a return to medium-term demand dominance.

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February 15 2013

Commentary by Eoin Treacy

Buffett Cash Makes General Mills to Grainger Targets

This article by Tara Lachapelle for Bloomberg may be of interest to subscribers. Here is a section
He has shifted his takeover strategy as Berkshire has grown to focus on “capital intensive businesses.” So-called value investors such as Buffett also purchase companies when their stock prices are low by historical standards compared with earnings.

There are 28 U.S. companies with equity values between $15 billion and $35 billion that had capital expenses accounting for at least 10 percent of net fixed assets; generated an average increase in return on invested capital in the past five years that ranked in the top 50 percent; sold for a lower price-earnings ratio than the average stock in the U.S.; and had a return on equity last year exceeding 10 percent, data compiled by Bloomberg show.

General Mills would be a fitting takeover for Buffett after the Heinz purchase because both companies have recognizable brands and sell their products in many of the same stores, said Jeff Matthews, a Berkshire shareholder and Naples, Florida-based author of “Warren Buffett's Successor: Who It Is and Why It Matters.”
Eoin Treacy's view - The purchase of Heinz by such a high profile acquirer has set the media alight with speculation about who will be next. However, the more measured approach is to examine why a company like Heinz is such an attractive target. Its leverage to global consumer growth, competitive yield and leadership within its specific niche are all attractive qualities in themselves. Such companies are desirable investment vehicles for potential acquirers for a reason and are no less attractive as investments regardless of whether they will eventually be taken over by larger organisations.

The list of companies that have the types of fundamental qualities that might be attractive to an acquirer like Warren Buffett mentioned in the above article was interesting because it featured a large number I have reviewed over the last year albeit for different reasons.

In the media sector Viacom is among a small number of beneficiaries from the growth in demand in broadband access fuelled by the bull market in wireless devices. (Also see Comment of the Day on December 12th. The share has been ranging mostly below $45 since July and continues to find support in the region of the 200-day MA. A sustained move below the trend mean would be required to question medium-term potential for additional upside. CBS Corp has rallied particularly impressively over the last few months and is becoming increasingly susceptible to mean reversion.

In the food sector, General Mills ranged above its 2007 peak from 2010 until November when it broke successfully above $40. (Also see Comment of the Day on June 1st 2012). The share surged yesterday on news of the Heinz acquisition. While somewhat overbought in the short term a sustained move below $40 would be required to question medium-term upside potential.

Hershey has been trending consistently higher since 2010 and while somewhat overbought in the short term, a sustained move below the 200-day MA, currently near $72, would be required to question medium-term upside potential. (Alse see Comment of the Day on July 31st).

Yum Brands which generates more revenue from China than the USA, posted a large downside weekly key reversal in November and will need to hold above $60 if medium-term upside potential is to continue to be given the benefit of the doubt. (Also see Comment of November 30th).

In the auto and parts sector Johnson Controls is a leader in battery Technology and also offers exposure to the nanoTechnology sector. The share broke back above the 200-day MA in December. A sustained move below $29 would be required to question medium-term potential for additional upside. (Also see Comment of the Day on February 12 th).

Paccar and Cummins are leaders in the development of natural gas power trains (Also see Comment of the Day on October 29th). Paccar has trended steadily higher since July and has returned to test the $50 area, where some consolidation may be expected. Cummins is testing the upper side of its two-year range.

In the Wholesale sector, S&P 500 Dividend Aristocrat Grainger W.W. broke out of its almost yearlong range this week and a clear downward dynamic would be required to check medium-term scope for continued upside.

In the retail sector TJX lost momentum and entered a process of mean reversion from September (Also see Comment of the Day on August 1st). It continues to find support in the region of the 200-day MA and a sustained move below $42 would be required to question medium-term upside potential.

VF Corp is an S&P500 Dividend Aristocrat and remains in a relatively consistent medium-term uptrend where it continues to find support in the region of the 200-day MA on pullbacks. (Also see Comment of the Day on November 24 th 2011).

Gap Inc (Also see Comment of the Day on September 5th) has pulled back to test the region of the 200-day MA but it will need to continue to hold above $30 if the benefit of the doubt is to be given to the upside.

Elsewhere in the consumer sector Estee Lauder is an Autonomy and has been ranging with an upward bias for much of the last year. A sustained move below $60 would be required to question medium-term potential for a successful reassertion of the medium-term uptrend. (Also see Comment of the Day on January 14th).

The US health insurance sector continues to benefit from the changes wrought by Obamacare. Cigna completed a more than yearlong range in November and while becoming increasingly overbought continues to extend the breakout. (Also see Comment of the day on August 23rd). Cardinal Health is testing the upper side of its 18-month range while Aetna has returned to test the psychological $50 area where it has paused.

In the transportation sector Fedex successfully broke above $100 for the first time since 2007 less than a month ago and continues to extend the advance.

The above companies represent a broad cross section of the US economy and their relative strength supports the view that the recovery remains on track.



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February 12 2013

Commentary by Eoin Treacy

Nanotechnology

Eoin Treacy's view - Following yesterday's review of companies that are likely to benefit from the trend towards further industrial automation, I thought it would also be timely to revisit another sector which is likely to enhance productivity over the next decades; nanoTechnology. (Also see Comment of the Day on December 28th) .

Advances in materials science are increasingly coming through as marketable products, not least in the energy efficiency field. Part of the response to any bull market in energy is that we see advances in how to increase supply. The advent of unconventional oil and gas are the leading contender in this cycle. On the other side of the equation we can expect innovation in how efficiently we consume energy. The nanoTechnology sector promises to deliver these types of innovations over the coming decades.

BASF, Honeywell, Precision Castparts, Calgon Carbon, Hexcel Corp, Schulman A. Corp and Rolls Royce all rallied impressively over the last couple of months but have at least paused and are now in varying stages of reverting back towards their 200-day MAs. Sustained moves below these trend means would be required to question medium-term scope for additional upside.

Cabot Corp pulled back sharply two weeks ago on disappointing earnings but has stabilised near $36.50 and a sustained move below that area would be required to question current scope for some additional higher to lateral ranging.

Sherwin Williams continues to extend its steep uptrend and a break in the progression of higher reaction lows would be required to challenge the consistency of the advance.

Johnson Controls has been consolidating above the 200-day MA since early January and a sustained move below $29 would be required to question recovery potential.

Siemens pulled back sharply over the last three weeks to test the lower side of the underlying trading range and the region of the 200-day MA. It will need to continue to hold above $76.50 if the benefit of the doubt is to continue to be given to the medium-term upside.



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February 12 2013

Commentary by Eoin Treacy

Brazil Prepares to Surprise Drillers This Time With Gas

This article by Rodrigo Orihuela for Bloomberg may be of interest to subscribers. Here is a section
Shale deposits exceed Brazil's so-called pre-salt gas reserves, ANP head Magda Chambriard said last month to reporters, in Rio de Janeiro. Brazil also holds other types of unconventional gas, such as so-called tight sands and carbon gas, according to the ANP. Pre-salt refers to Brazil's off-shore deposits, the world's biggest crude discoveries this century. Shell, already Brazil's third-largest oil producer, is preparing to drill its first on-shore gas well in the second half of the year while it waits for the ANP to issue rules for the December auction, the company's press office said in an e-mailed response to questions.

Shell will drill in the state of Minas Gerais, where closely-held Petra Energia SA is becoming the leading unconventional gas explorer in Brazil, focusing on so-called tight gas sandstones and tight gas carbonates, according to an e-mailed response to questions. The company has discovered gas in 12 of 14 wells it drilled in the Sao Francisco basin.

Unconventional gas gives companies an opportunity to operate blocks in Brazil where state-run Petroleo Brasileiro SA, / or Petrobras, is guaranteed a majority stake in all pre-salt operations.
Eoin Treacy's view - Unconventional oil and gas is a game changer for the North American energy industry. Such has been the effect of increased supply on pricing that the spread between WTI and Brent crudes has moved from relative stability in the decades to 2010 to a substantially more volatile environment since. The development of the Technology to access unconventional reserves was developed in the USA and it has been the first country to benefit from increased supply. However, as this technological knowhow permeates the global energy sector other countries will inevitably also seek to exploit their own unconventional oil and gas reserves.

The short-term outlook for energy pricing remains finely balanced as Middle Eastern politics, Asian demand growth and perceptions of global economic growth potential vie for attention. Over the next decade, as new sources of supply come online, the tightness that has been such a feature of the energy landscape for the last decade should moderate.

In the meantime Brent Crude is testing the $120 area and is somewhat overbought following an impressive rally over the last month. Some consolidation of recent gains appears likely but a sustained move back below $115 would be required to confirm more than a temporary pause in this area.

As well as its involvement in Brazilian unconventional oil and gas development Royal Dutch Shell is also at the forefront of such moves in China and can therefore be considered to offer truly global exposure to the unconventional oil and gas sector. In common with the wider major oil sector, the share encountered resistance two weeks ago and has returned to test the progression of higher major reaction lows. A clear upward dynamic will be required to confirm the return of demand in this area.

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February 11 2013

Commentary by Eoin Treacy

Email of the day (1)

on robotics
“Greetings from snowy Helsinki. Thanks for highlighting the robotics theme, its potential has been mentioned by FM several times over the last year or so. Only recently I have started to see the sector mentioned in the general (financial) media. I was wondering, is the rise of robotics something that you might consider a new Fullermoney theme? Or is there some missing ingredient that puts you off? I'm just curious because the sector certainly got me excited. Also, may I ask you to add Kuka AG to the chart library please? As a disclaimer, I have small longs in several companies involved in the field and am thinking of buying more. As always, your thoughts would be highly appreciated.”
Eoin Treacy's view - Thank you for this informative email and your kind words. The pace of technological innovation in the industrial automation and robotics sectors continues to accelerate. This evolution is in turn contributing to increased manufacturing and industrial productivity for a broad swathe of the wider economy. Companies involved in the production of the machines and robots driving these productivity gains will obviously benefit. However, as the market develops we can anticipate that competition will increase and products will become more homogenous.

Here is a PDF of the constituents of the industrial automation section of my Favourites which may be of interest.

Japanese listed Fanuc pulled back sharply over the last couple of weeks but has found at least short-term support in the region of ¥14000 and the 200-day MA. A sustained move below that area would be required to question medium-term potential for additional upside.

In the USA Rockwell Automation continues to extend its recent advance and a sustained move below $80 would be required to question medium-term potential for additional upside. Cadence Design Systems continues to hold its four-year progression of higher reaction lows. Dover Corp broke out of its 18-month range last week and a clear downward dynamic would be required to check medium-term scope for continued upside. Aspen Technology has accelerated higher since late December and is susceptible to mean reversion.

In Germany Krones AG has held a progression of higher reaction lows since October and found support last week in the region of €44.50. A sustained move below the 200-day MA would be required to question medium-term scope for continued higher to lateral ranging. Kuka AG has accelerated higher since late 2012 and is becoming increasingly susceptible to some consolidation of recent powerful gains.

Among companies that are also involved in industrial automation but are not “pure plays” General Electric is also likely to benefit from the same theme. The share found support in the region of $20 from January and a sustained move below that level would be required to question medium-term upside potential .

There are a number of additional considerations when considering the bullish case for robotics and industrial automation and whether it should be considered an investment theme. Transporting finished products from Asia to Europe and North America is both costly and time consuming. The high cost of energy at present has exaggerated this concern. The difference in energy costs, particularly between North America and everywhere else, in running automated facilities is also a highly relevant consideration. The continued tightening of the spread in labour costs between various jurisdictions has become more relevant since the 2008 crash and makes the decision on capital outlays to build these facilities easier. Additionally, the newfound desire to ensure technological knowhow stays at home, in an increasingly competitive global manufacturing sector, is an additional tailwind for the sector.

Robotics is an important component in the next leap forward for the manufacturing sector. However increasingly dynamic innovation in materials science is equally important. (Also see Comment of the Day on December 28th 2012 for a report on nanoTechnology that helps to knit together the various themes in this sector as well as a review of the relevant shares).

When robotics, materials science, energy, labour and intellectual property concerns are taken together we might consider the resulting Renaissance in Western Manufacturing to be a medium to long-term investment theme. The fact that an increasing number of large industrial companies that benefit from the associated productivity gains associated with this theme are completing decade long bases helps to support this view.

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February 08 2013

Commentary by David Fuller

Slate magazine: The Myth of "Saudi America"

My thanks to a relative for this interesting article by Raymond T Pierrehumbert. Here is his main point on shale
There are certainly huge amounts of oil locked up in shale formations worldwide. In the United States alone, the Bakken and Eagle Ford shales contain up to 700 billion barrels, and the Green River shale under Colorado, Wyoming, and Utah has a whopping 2 trillion barrels. However, only a tiny fraction of this total is recoverable. For Bakken (in Montana and North Dakota) and Eagle Ford (in Texas), which account for most of the current surge in U.S. oil production, the estimated recoverable fraction ranges from 1 to 2 percent. Though all of these deposits are loosely referred to as "shale oil," Bakken and Eagle Ford oil is more precisely called "tight oil," because it is actual, fluid oil that is trapped in the pores of shale, and it can be liberated by fracturing the rock to allow the oil to flow. In contrast, the hydrocarbon in the Green River shale is not really oil at all but a waxy substance that must be cooked at around 500 degrees Celsius to turn it into flowing oil. The Technology for extracting oil from deposits like the Green River shale is far more challenging than what is required to tap into tight oil, and it has never been profitably implemented at any significant scale. There is thus no credible estimate of how much oil can be recovered from the Green River formation.

At the high end of the estimates, predicted production from Bakken and Eagle Ford together amounts to perhaps a two-year oil supply for the United States at 2011 consumption rates. That's significant but not a game-changer. Even if it were to prove possible to achieve production rates comparable to those of Saudi Arabia, that would only mean that we would deplete the resource faster and bring on an oil crash sooner.
David Fuller's view - There is a political tilt to this article, including that "we won't be much better off in the long run if cheap gas only succeeds in killing off the nascent renewables industry and the development of next-generation nuclear power."

In Europe, Germany has pressed ahead with its renewable energy, while also phasing out rather than upgrading its nuclear power facilities. Consequently, energy costs have soared and predictably weakened the productive German economy. German citizens have also discovered that parts of their countryside is now festooned with ugly, gigantic, noisy windmills which soon loose their appeal when one is anywhere near them. They are also having to build more coal fired power stations to prevent blackouts.


The lead article above is much more pessimistic about the amount of actually recoverable oil and gas from tight shale deposits than most of the other articles that I have posted on this subject. I think the graphs of rapidly declining yields shown in that article are somewhat misleading because only a small area is tapped by horizontal drilling and fracking, before it makes more sense to move a little further along the field and drill another well.

Meanwhile, production of oil and gas from shale fields in the US continues to rise. This is without any subsidies from the government and US energy costs are now much lower than in any other large developed economy. Since natural gas burns more cleanly than coal and oil, pollution levels in the USA have actually declined, even though their manufacturing base is expanding once again.

Mr Pierrehumbert's point about the improbability of recovering waxy oil in the huge Green River deposit appears important. Nevertheless, I have always assumed that this was a technological problem worth solving. However, some of you will know far more about this than I do so any thoughts that subscribers would like to contribute on this subject in future will be welcomed.

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February 05 2013

Commentary by David Fuller

Platinum Supply Falls to 13-Year Low as Mines Close

This is an informative report from Bloomberg, and not one-sided. Here is the opening
Platinum supplies are falling to a 13-year low as mines in South Africa, the world's biggest producer, close and automobile sales reach new highs.

Production will drop 2.7 percent to 5.68 million ounces, the least since 2000, according to Barclays Plc, which raised its 2013 shortage estimate sixfold last month after Johannesburg-based Anglo American Platinum Ltd. (AMS) said it plans to idle shafts. At the same time, demand from carmakers, the biggest consumer of the metal, will increase 0.5 percent in 2013, Barclays says. Investors are buying platinum at the fastest pace in three years.

Prices already rose about 10 percent this year, following the same advance for all of 2012, and will average $1,770 an ounce in the fourth quarter, the highest since 2011, according to the median of 15 analyst estimates compiled by Bloomberg. Costs for carmakers will increase because about 53 percent of all metal mined ends up in catalytic converters.

"Supplies are very tight and it's a serious situation," said Mihir Worah, who manages $110 billion in real return strategy funds at Pacific Investment Management Co., in Newport Beach,California. "Not only are there issues on the supply side, we could see surprises on the demand side as well."

And a comment on demand side uncertainties:

"The problems have not disappeared as global growth is uncertain and China is still somewhat cloudy and Europe is slowing," said Walter "Bucky" Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. "It would be difficult to say where the increase in demand will come from unless we see an upsurge in growth. There are supply issues but we need demand to drive prices."

Fewer jewelry purchases and cooling investment this year mean demand will drop 4.6 percent to the lowest since 2009, Barclays estimates.

A contraction in Europe poses a risk to consumption because the region is the biggest market for platinum in catalytic converters, according to London-based Johnson Matthey. Platinum is used with palladium and rhodium in the canisters with honeycomb-like surfaces that convert emissions into less harmful substances.
David Fuller's view - Known supplies of platinum (historic & weekly) are dwindling, and this continues to be reflected by the general underperformance of mining companies which produce it. One hopes that South Africa will resolve its wage disputes, preferably in the interests of all parties. However, this may not be possible if the challenges of producing platinum from ever deeper mine shafts and rising underground temperatures make current wage demands uneconomic.

My guess is that the majority of deep shaft mining jobs will eventually be replaced by machinery, not least for the safety of the people involved. However, the Technology to do this - economically - presumably has yet to be fully developed. Moreover, even if it was available today, empowerment policies in countries with high unemployment would oppose mechanisation, as we have seen elsewhere.


Regarding 'demand side uncertainties' mentioned in the article above, I believe these will be resolved more quickly than platinum's overall supply problems. Additionally, production difficulties for a scarce precious metal, which is also extremely useful, attractive and desirable, will eventually and inevitably attract renewed demand from both investors and speculators.

Palladium (historic & weekly) appears to be in a similar position of supply difficulty, although less is known, or trusted, regarding the state of Russia's miners. Meanwhile, if you read on in today's opening article above, you will see that "Global car sales exceeded 81 million for the first time ever in 2012 and will advance about 2.5 percent to 83 million this year", according to LMC Automotive Ltd. Production problems and increased industrial demand are the reasons why platinum and palladium are currently outperforming gold and silver. However, within closely allied sectors such as precious metals, leadership is more of a rotating than constant characteristic over the medium to longer term.

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January 31 2013

Commentary by David Fuller

German Green Energy Push Bites Hand That Feeds Economy

My thanks to Jackson Wong for this informative article published by Bloomberg. Here is the opening and a few other short samples
Worlee-Chemie GmbH, a family-owned company that has produced resins in the city of Hamburg for almost a century, is trying to escape the spiraling cost of Germany's shift to renewable energy.

A 47 percent increase on Jan. 1 in the fees grid operators set to fund wind and solar investments is driving the maker of paint ingredients to Turkey, where next month it will start making a new type of hardening agent at a factory near Istanbul.

The levy will cost Worlee 465,000 euros ($620,000) this year, the equivalent of 10 full-time salaries, or one-third of the company's tax bill. As German labor costs rise at the fastest pace in a decade, the price of weaning the country off nuclear energy by 2022 is crushing the so-called Mittelstand, the three million small and medium-sized businesses like Worlee that account for about half of gross domestic product.

"It could be the proverbial straw that breaks the camel's back," Chief Executive Officer Reinhold von Eben-Worlee said in an interview. "It comes on top of tax, general production costs, raw-material availability and bureaucracy, which have led to a deterioration of the investment climate in Germany."

And:

That's chipping at Germany's competitive position and the country has been overtaken in theWorld Economic Forum's competitiveness index by The Netherlands, which moved up to fifth place in the 2012-2013 ranking compared with Germany's sixth.

In the aftermath of the financial crisis sparked by the collapse of the U.S. housing market, the Mittelstand helped hold down the unemployment rate, which has sunk to the lowest since reunification in 1990. Small and medium-sized companies added 104,000 jobs from 2007 to 2010, while bigger companies cut 120,000 positions, according to a study by Ashwin Malshe of the ESSEC Business School and Johann Eekhoff of the University of Cologne.

The Fukushima reactor accident in March 2011 in Japan prompted Chancellor Angela Merkel's decision to phase out nuclear power. The government guarantees above-market prices for wind, biomass and solar power that helped build Europe's biggest renewable energy complex.

And:

Taxes and other government charges make up about half of household electricity bills, ZGV's Veltmann said. In addition to the renewable energy surcharge, customers have to pay electricity tax, licence fees, a network surcharge and value- added tax. The cost for households and companies is rising even as electricity prices decline on the wholesale market, he said.

The extra charges are widening a gap between Germany and the rest of the world. The electricity cost for industry was 20 percent higher than the European Union average at the end of 2011. Germany now pays twice as much for energy as the U.S., partly because of cheaper shale gas there but also because of lower surcharges and taxes, according to a McKinsey report.

And:

"The fundamental question is whether we want to push through this crazy 80 percent renewable energy share at the expense of the economy," said Marc Tenbieg, managing director of the DMB Deutsche Mittelstands-Bund, which represents more than 14,000 small and mid-sized enterprises. "Why do we always have to be the trailblazer and show the other countries how it's done? They are laughing their heads off."
David Fuller's view - I have long felt that Germany was the most successful manufacturing country that the comparatively modern world has ever seen, particularly in terms of precision engineering. Inevitably, no country leads in all sectors and Germany is certainly not the first country I think of in terms of information Technology. However, in its areas of specialisation, Germany has a deservedly high reputation for quality and reliability.

This success is too often taken for granted by Germany's politicians, especially since their post Fukushima decision to phase out nuclear energy. That may have been politically expedient, but at a very high price for the German economy if it drives away the so-called Mittelstand, consisting of approximately three million medium to smaller-sized businesses which account for approximately half of the country's GDP.

Similarly, the UK's Conservative Government, which should have known better, has caused energy costs to soar because of its obsession with expensive and inefficient wind farms, which soon become anathemas for those who live anywhere near them. Belatedly, the UK has decided to develop its shale properties as I have mentioned before. They may not lower the cost of heavily subsidised wind farms, at the taxpayers' expense, but will hopefully reduce the risk of power blackouts.

Surely Germany also has commercially worthwhile shale deposits of gas and oil. However, I have heard very little to date about efforts to develop these valuable resources.

(If you are interested in this subject, see also: "the beginning of the reversal in the decline of energy intensive heavy industries within the USA is entirely due to the invention of fracking" - in the Subscriber's Area.)

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January 28 2013

Commentary by David Fuller

Irwin Stelzer: Will Obama's fairer and greener nation flourish?

This is an interesting column by the business adviser and director of economic policy studies at the Hudson Institute, published by The Sunday Times (UK) (may require subscription registration, PDF also provided). Here is a sample
Those who have been complaining about uncertainty, and its negative effects on economic growth, need complain no more. You don't have to read between the lines of the president's second inaugural address, or consult your favourite pundit, to know where we are headed: you need only to have listened to or read the address itself.

Times have changed: our "founding principles" must meet "new challenges". That means a greater reliance on "collective action" - government - to ensure "a shrinking few" do not claim a disproportionate share of the nation's wealth at the expense of a struggling middle class and the poor. What the president's inaugural address lacked in the grandeur of many of his predecessors it amply made up for with candour.

Top of the agenda is reducing income and wealth inequality by raising taxes on upper income families and eliminating some of the deductions from which they benefit. Obama believes what economists of the left have been telling him, that inequality is not only unfair, it also stifles economic growth by denying middle class and poor families incomes they would spend and the richer would not. Never mind whether this makes sense: it is a position increasingly trumpeted by respected academic and activist economists, and is attractive in an era of frozen middle-class incomes.

Then comes restructuring the energy sector as part of a fight to prevent climate change, the existence of which the president believes is beyond question. This will require more subsidies for solar energy and wind farms, both of which have proved wildly uneconomic, and the creation of barriers to the development of the nation's abundant fossil fuel resources. All to be achieved by administrative regulations rather than congressional approval.

As for the deficit, worry not. We can afford existing programmes that protect children and the elderly without over-borrowing and defaulting on our mounting debts. Which is certainly true, since if investors decide that they are no longer willing to lend us $40 for every $100 we spend, we can run the printing presses, and pay off our debts with a depreciated currency. That would continue the huge wealth transfer now under way from creditors - savers and investors, victims of the zero-interest policy being pursued by the Federal Reserve Board - to debtors who will repay creditors with cheap money.

Before you view this as an attack on the president, let me assure you it is not. The president's plan to transform the economy is coherent, and its goal of increasing the role of government clearly stated. It is attractive to a majority of voters, some pursuing self-interest, others believing that Obama's America will be a kinder, gentler place.
David Fuller's view - The USA needs some robust economic growth to reinvigorate its economy and control runaway government debt. During the next few years competitive energy costs will most likely be the key factor in America's economic performance. The USA currently has a huge lead in fracking Technology and development, which the oil and gas companies pioneered with little help from the US Government.

As a consequence, US energy costs are generally much more competitive than what we currently see in Europe and most of Asia. This is encouraging both domestic and foreign companies to increase their manufacturing presence in the USA, reversing the previous trend of many years. If US energy companies are allowed to not only maintain but also enhance this advantage, which they can certainly do given the country's abundant supplies, America's economy will strengthen. This would increase job creation and give the country a chance to reduce its debt, given the political will to do so.

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January 25 2013

Commentary by David Fuller

Email of the day (1)

On the USA
"The CEO of Roland Berger Strategy Consultants offered us a column which we published in Russian. I thought that you and Fullermoney subscribers would be interested in it and asked for an English version which I am sending to you. It is about the rise of - who do you think, China, India, another emerging market? - no, United States."
David Fuller's view - This is thoughtful of you and it may be of interest to the Collective.

The article: "The world's most creative economy", is written by Dr Martin C Wittig of Roland Berger Strategy Consultants. It is certainly upbeat and a best-case prediction for the USA, although not unrealistic, in my opinion. Dr Wittig's case is based on three assumptions: 1) Intellectual and digital dominance; 2) Back to making things; 3) Demographic strengths.

His first point is by far the most important, in my view. The USA has a clear lead in Technology, which it will need to hold onto in an increasingly competitive world, if it is to remain the leading superpower throughout this century. The second point on manufacturing is also very important. The narrowing of wage differentials has helped but robotics, skilled personnel and energy costs are the crucial long-term factors. Currently, the USA has an energy advantage among skilled manufacturing countries. I think Dr Wittig overrates demographics. Intelligence, work ethics and education are more important, in my opinion.

History shows us that the fortunes of countries vary considerably over time. The luck of climatic conditions can be a factor, wars even more so, natural resources can be a big advantage, but governance is the all-important variable. The USA has had an advantage in governance for over a century, although its own standards continue to fluctuate.

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January 25 2013

Commentary by David Fuller

Japan May Save 30% on Power by Restarting [Ed: Nuclear] Reactors, IEEJ Says

This is an informative report by Chou Hui Hong for Bloomberg Businessweek. Here is the opening
apan can cut its power costs by 30 percent if it restarts at least half the country's 50 nuclear reactors by 2014, a government adviser said.

The savings would amount to 1.8 trillion yen ($20.3 billion), the Institute of Energy Economics, Japan, a Tokyo- based research group known as IEEJ, said in report posted today on its website. The country paid an estimated 6 trillion yen last year for its liquefied natural gas imports, twice as much as the year before, Yukio Edano, the country's former trade and industry minister, said at a conference in September.

LNG replaced nuclear power as Japan's primary power fuel after an earthquake and tsunami hit reactors at Fukushima in March 2011. Safety checks later that year and scheduled maintenance reduced the number of nuclear reactors operating to just two. Japan paid 5.48 trillion yen for its LNG imports from January to November 2012, according to data from Japan customs.

And:

Phasing out oil-indexed long-term LNG prices would better reflect supply and demand in the LNG market, which isn't tied to crude, and help lower Japan's energy bills, the IEEJ reiterated.

Long-term LNG contracts are typically linked to Brent crude or Japan Customs Cleared crude prices. Two western Japanese utilities, Chubu Electric (9502) and Kansai Electric (9503), signed long-term contracts incorporating gas links as part of the price formula with BP Plc (BP/) last year.

To reduce the "Asia premium" for LNG prices, the IEEJ said Asia's LNG buyers should jointly purchase the fuel while investing in LNG and natural gas production assets.

The price of LNG spot cargoes delivered in four to eight weeks rose to $17.95 in northeast Asia, the World Gas Intelligence, an energy research company, said Jan. 14. Gas for February delivery traded as low as $3.566 per million British thermal units in electronic trading today on the New York Mercantile Exchange.
David Fuller's view - Restarting nuclear plants may not be popular in Japan, at least initially for understandable reasons but the financial argument is compelling provided they are up to standard.

Meanwhile, Asia is not producing anywhere near enough natural gas judging from the $17.95 price shown in the article paragraph immediately above. The Asian region is known to have substantial reserves of shale gas and oil, although possibly not in Japan. However, Japan could develop the Technology to produce shale supplies in other Asian countries. Surely this is on Shinzo Abe's agenda for a Japanese economic recovery.

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January 24 2013

Commentary by Eoin Treacy

Lenovo Says RIM Bid Among Possible Options to Boost Mobile Unit

This article from Bloomberg News may be of interest to subscribers. Here is a section
Lenovo Group Ltd. is assessing potential acquisition targets and strategic alliances, including a deal with BlackBerry maker Research In Motion Ltd., as the second-largest producer of personal computers tries to bolster its mobile-device business.

“We are looking at all opportunities -- RIM and many others,” Chief Financial Officer Wong Wai Ming said today in an interview at the World Economic Forum's annual meeting in Davos, Switzerland. “We'll have no hesitation if the right opportunity comes along that could benefit us and shareholders.”

RIM began a review of its strategic options last year after losing market share to smartphones such as Apple Inc.'s iPhone and Samsung Electronics Co.'s Galaxy, raising speculation that it could be a takeover target. Beijing-based Lenovo, which bought International Business Machines Corp.'s PC unit in 2005, is considering acquisitions and adding new products as competition from tablets hampers profit growth.

“Long term, we are in a declining PC market,” said Jean- Louis Lafayeedney, an analyst at JI Asia in Hong Kong. Still, Lenovo “can leverage the scale they have in PCs to develop the mobile Internet side of the business.”
Eoin Treacy's view - Research In Motions reputation suffered when its messaging system failed last year and its core of business customers could not communicate. This issue has apparently been tackled in the next generation of products by allowing corporations to run the service over their own networks. There is also a great deal of optimism about the prospects for the company's newest line of phones. The success of this product launch is likely to be of existential importance for the company. Rumours of a potential takeover represent an additional catalyst for appreciation and are particularly relevant considering the extent to which the share price has fallen from its 2009 peak. (Also see Comment of the Day on January 17th) .

Dell's efforts to go private and Lenovo's attempts to gain market share are representative of the competition in the sector but also potential opportunity as the pace of M&A activity remains robust. Nokia has also rallied of late and shares a similar pattern to Research In Motion, might it also be a takeover candidate?

As highlighted in Comment of the Day on Monday, a number of previously depressed Technology shares are rallying from historically low levels. Yahoo, Hewlett Packard, Xerox and Juniper Networks are some examples and one could not rule out that some of these companies could become takeover candidates.

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January 22 2013

Commentary by Eoin Treacy

Biotech and Pharmaceuticals

Eoin Treacy's view - Biotech represented a major theme during the Technology bubble of the late 1990s but the majority of therapies, equipment and medicines promised were, for the most part, years from commercialisation if viable at all. Over the intervening 13 years there has been a great deal of consolidation within the sector. M&A activity remains brisk as companies vie with one another to capture intellectual property particularly in the genetics sector where therapies are close to being brought to market.

I last reviewed a number of Nasdaq-100 listed healthcare companies in October 29th . For a more comprehensive review of biotech shares please see Comment of the Day on July 10th.

Biogen remains in a relatively consistent medium-term uptrend and has unwound its overbought condition relative to the 200-day MA over the last few months. It will need to continue to find support in the region of the MA if the benefit of the doubt is to continue to be given to the medium-term uptrend. Amgen has lagged somewhat but has a broadly similar pattern. It pulled back rather sharply last week and will also need to find support in the region of the 200-day MA.

Alexion Pharmaceuticals pulled back sharply from the $120 area in September but found support in the region of the 200-day MA and has held a progression of incrementally higher reaction lows since November. A sustained move below $91.75 would be required to question potential for additional higher to lateral ranging.

Illumina, Cubist Pharmaceuticals and Myriad Genetics have all found at least short-term support in the region of their respective 200-day MAs and sustained moves below their trend means would be required to question medium-term scope for additional upside.

While the above shares represent those which have been reverting towards their respective means and have returned to areas of potential support, there is also a significant number that are rallying rather impressively and breaking out of relatively lengthy consolidations in the process.

Celgene paused below $80 for much of 2012 but found support in the region of the 200-day MA in November and exploded out of its range two weeks ago. While overbought in the short-term a clear downward dynamic will be required to check momentum and to suggest a process of reversion is underway.

Life Technologies rallied impressively last week to post new all time highs and while there is scope for consolidation of this gain, the benefit of the doubt can be given to additional medium-term upside provided it continues to hold above the 200-day MA.

Seattle Genetics found support in the region of the 200-day MA three weeks ago and has rallied to retest the all-time peak near $30.

The Medicines has been trending reasonably consistently for more than two years but has rallied by more than 50% since the November lows and is becoming increasingly susceptible to mean reversion. Immunogen has been more volatile but has posted a similar sized rally from the November lows.

Gilead Sciences broke out to new all-time highs in July and continues to trend consistently higher. It reasserted its uptrend again two weeks ago and a sustained move below $70 would be required to question the consistency of the advance.

ResMed broke out of its two-year range in August and also continues to extend the advance. While mildly overbought in the short-term a sustained move below the 200-day MA would be required to question medium-term upside potential.

Among the smaller companies in this sector GTX, with a market cap of only $300 million, is notable because of the rounding characteristic evident within its base formation that suggests accumulation.

Given the above evidence of considerable bullish interest in this sector, in conjunction with the pace of M&A activity, the outlook for the Biotech sector from an investment perspective remains upbeat.

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January 19 2013

Commentary by Eoin Treacy

Dell Said to Hire Evercore to Seek Higher Bids After Buyout

This article by Serena Saitto and Jeffrey McCracken for Bloomberg may be of interest to subscribers. Here is a section
Dell Inc., which may announce this week it's being taken private by a group led by Silver Lake Management LLC, hired Evercore Partners Inc. to advise a special committee of the board and to test whether the company could get a better offer, said two people with knowledge of the matter.

Dell hired the boutique investment bank to run a so-called go-shop process should a buyout be formalized, said the people, who asked not to be identified because the process is private.

Dell expects shareholder lawsuits if a deal is announced, said the people, and the go-shop process will show whether there are superior offers from other buyout firms or companies.

JPMorgan Chase & Co. is the main bank advising Round Rock, Texas-based Dell on its talks with Silver Lake, people familiar with the process have said. Dell sees the hiring of Evercore and other steps it's putting in place as protections against lawsuits and other criticisms of the buyout, said one of these people.
Eoin Treacy's view - Dell have clearly decided that they would be better off away from the pressure of quarterly reporting as they struggle to remain relevant in a world so quickly evolving and refocusing on tablet computers and mobile Technology. Dell halved in 2012 before finding support near $8 in November and has since rebounded on speculation it is about to be taken private.

A considerable number of Technology companies have struggled to keep pace with the rapidly changing environment. Their shares have underperformed as a result. However, it would probably be a mistake to write these companies off. They often have substantial reserves and a proven capability to manufacture attractive and functional products. They have lagged but the challenge now is whether they will succeed in reinventing themselves.

Hewlett Packard fell from a 2010 peak near $50 to a November low near $11 and has since rebounded to close the oversold condition relative to the 200-day MA. It will need to sustain a move above the trend mean in order to break the medium-term downtrend and suggest a return to demand dominance beyond the short term.

Yahoo has been overshadowed by Google in the search engine market for a decade but the share is showing renewed signs of life as it continues to hold the breakout from a four-year base. A sustained move below $18 would be required to question medium-term scope for additional upside.

Xerox has been drifting lower since late 2010 and halved in the process. Its rally from the November lows has seen the share sustain a close above the 200-day MA for the first time since early 2011 and a move below $6.60 would be required to question potential for additional upside.

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January 18 2013

Commentary by Eoin Treacy

Email of the day (1)

on US listed China funds offering exposure to the consumer sector
“Hope this message finds you both in good health and spirit.

“I have been looking to add some exposure to the China middle class growth theme. The Asian Prosperity Fund suggested by Tim Price seemed an interesting choice since it attempts to marry value, dividend growth, and the growth of the middle class consumer in China. Unfortunately, it is domiciled in Luxembourg and not available to U.S.investors. I have not looked at other mutual funds, but in the ETF space, the only fund that seems to have any similarity is CHIQ, run by Global-X Advisors. Any suggestions on alternatives in this space, preferably un-hedged. I also have interest in the Chinese Health Care and Environmental sectors.”
Eoin Treacy's view - Thank you for this question which others may also find of interest. US investors are presented with a number of challenges in accessing overseas funds because of the onerous demands put on fund houses by the IRS. An additional challenge in locating funds that offer exposure to the Chinese consumer, healthcare and environmental sectors is that these are comparatively small segments of the overall market and most funds tend to track the benchmark by buying large caps.

Following a search of Bloomberg this morning, The Global-X products you mention appear to be the only funds available to US investors that offer a pure play on Chinese sectors. The Guggenheim China Technology ETF holds a number of Technology and green energy companies and may merit some additional investigation. If subscribers can suggest any others I would be happy to add these to the Chart Library.

One point to consider is that while the focus of official policy is to promote a consumer economy, actions to date have been supportive of the banking sector. The changing of restrictions on how many bank shares insurance companies can own and the raising of QFII and RQFII limits have helped to increase investor interest in the sector. Most of the banks are dual listed in Hong Kong.

A review of China related closed-end funds from December 14th may also be of interest.


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January 18 2013

Commentary by David Fuller

Email of the day

On the 787 Dreamliner's Lithium Batteries
"Re: 787 Lithium Batteries
FullerMoney always brings up a wide range of subjects of great interest. Our company uses large amounts of rechargeable batteries, and we have shied away from lithium for high power use, as is the case on the 787 which uses electric actuators to replace many hydraulic ones. The failure of just one cell in a battery pack, in which there are many, can heat up and set off a reaction of nearby cells to cause a nasty fire. I will guess that the vibrations in an airplane over time coupled with perhaps a small defect in a cell may well turn out to be the cause of Boeing's electrical fires. I still vividly remember my 9th grade science teacher holding a sealed glass vial with a grain of pure lithium inside, over a beaker of water. He then broke the vile and dropped the lithium grain into the water, causing a violent reaction with the water which boiled out over the beaker. I won't be riding in a 787 for a while, and I'm a Boeing lover."
David Fuller's view - Thank you so much for this informative email. One of the great perks in producing this service comes from the insights forwarded by our knowledgeable subscribers.

Boeing has backed cutting-edge Technology in building this plane. This was a bold move but not without some risks.

If you are interested in this subject, here are some related articles on lithium batteries: How Lithium-ion Batteries Work - Battery University: Is Lithium-ion the Ideal Battery? - BBC News:Dreamliner's lithium ion batteries probed - Mail Online: Boeing's flagship 787.


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January 17 2013

Commentary by David Fuller

FAA Studying Bad Batteries as Possible Cause of 787 Fault

This a topical article from Bloomberg. Here is the opening
U.S. officials and Boeing Co. (BA) are investigating whether defective batteries from the same batch caused incidents in two 787 Dreamliners that triggered the plane's worldwide grounding, according to two people familiar with the incidents.

If that proves to be true, it could show a flaw causing the incidents was confined to a small number of 787s, rather than a systemic fault with the plane's engineering, design or manufacturing, and could speed the resumption of flights on the jet. The people, who weren't authorized to speak publicly, said the information is preliminary and investigators haven't yet ruled out other causes.

The Federal Aviation Administration, which certified the plane in 2011, ordered flights on the 787 halted until airlines can show the plane's lithium-ion batteries "are safe and in compliance," according to an agency statement yesterday. It didn't say how the carriers should accomplish that.

The FAA's move, its first in 34 years to ground an entire plane model, set off a race to find and fix whatever caused the battery-fault warning on a 787 operated by All Nippon Airways Co. (9202) and a fire on a Japan Airlines Co. jet. The two Japanese airlines yesterday parked their 24 787s, almost half the global fleet, after the battery warning forced pilots of an ANA domestic flight to make an emergency landing.

"Nobody knows what the fix is because they don't know what the problem is," John Goglia, a former member of the U.S. National Transportation Safety Board, said in an interview.

Accident investigative agencies in the U.S. and Japan, as well as the FAA, haven't said what started the fires.

Battery Flaws

The batteries were made by Kyoto, Japan-based GS Yuasa Corp. (6674), which has said the Dreamliner's faults may go beyond the batteries.
David Fuller's view - It seems almost too good to be true, at least for Boeing and the reputation of US Technology, if the main problem turns out to be a bad batch of imported batteries.


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January 16 2013

Commentary by Eoin Treacy

First Savings Drop Since 1999 Limits Rate-Cut Room

This article by Jeanette Rodrigues for Bloomberg may be of interest to subscribers. Here is a section
“Inflation remains sticky,” Harihar Krishnamoorthy, Mumbai-based treasurer at the Indian unit of FirstRand Ltd., South Africa's second-largest financial services provider, wrote I a Jan. 11 e-mail. “Thus it's unclear whether there could be space for larger policy cuts, especially in the light of deposit growth lagging advances in the banking sector.” While gains in the benchmark wholesale price Index slowed for the third straight month to 7.18 percent in December, official data showed Jan. 14, they have exceeded 7 percent since December 2009. Consumer prices accelerated for the third month in December to 10.56 percent, compared with increases of 5.84 percent in Brazil, 6.6 percent in Russia and 2.5 percent in
China.

RBI Governor Duvvuri Subbarao said yesterday inflation remains “quite high” and policy makers lack room for stimulus measures. Economic growth remains a concern, and India will be lucky if gross domestic product expands 5.5 percent in the year to March 31, he told management students in the northern Indian city of Lucknow. That would be the slowest pace in a decade. The central bank will lower its benchmark repurchase rate by 25 basis points, or 0.25 percentage point, to 7.75 percent at its Jan. 29 policy review, nine of 11 analysts said in a Bloomberg News survey last week.
Eoin Treacy's view - China and Japan have garnered the majority of column inches over the last month as political and macro factors drove rallies from relatively depressed levels. However the Indian stock market's performance is also noteworthy.

Bottlenecks in the supply chain and an inefficient bureaucracy have long contributed to not only high inflation but the sticky nature of this phenomenon. This is why Manmohan Singh's decision to embrace reform last year is so important. Inflation remains high but there is now the prospect that some of the factors gumming up the system will be dealt with.

The Rupee has at least stabilised against the US Dollar and a sustained move above INR56 would be required to question current scope for some additional firming.

The Bombay Banks Index continues to trend higher relative to the Bombay 500 Index and while somewhat overbought in the short-term, a sustained move below 1.72 would be required to question medium-term potential for further outperformance. In absolute terms, the Sector has returned to test its 2010 peak near 15,000 and while there is potential for a consolidation of recent gains in this area, a sustained move below the 200-day MA, currently near 13,000 would be required to question medium-term scope for additional upside.

The Nifty Index has rallied to test the 6000 area and appears likely to consolidate as it unwinds the overbought condition relative to the 200-day MA.

Among Indian ADRs and GDRs, HDFC Bank continues to unwind an overbought condition relative to its 200-day MA but a sustained move below $37 would be required to question medium-term scope for additional upside. ICICI Bank has held a progression of higher reaction lows since December 2011. While overextended relative to the MA in the short term, a sustained move below $40 would be required to question medium-term scope for continued upside. State Bank of India has a similar pattern.

In the Technology sector, both Wipro and Infosys have rallied over the last two weeks to break their medium-term progressions of lower rally highs and sustained moves below their respective 200-day MAs would now be required to question recovery potential. Satyam Computer is testing the upper side of a first step above its base.

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January 15 2013

Commentary by David Fuller

Best Forecasters See Asia Rebounding to Lead Gains: Currencies

This is a realistic assessment, in my opinion, reported by Bloomberg and broadly in line with the Fullermoney view. Here is the opening
For the first time in three years, Asia will lead a rally in emerging-market currencies as rising global trade lifts the region's exports, according to the most- accurate foreign-exchange forecasters.

India's rupee will climb 4.8 percent in 2013 after losing 17 percent over the past two years, according to Oversea-Chinese Banking Corp Ltd., the best forecaster based on data compiled by Bloomberg. The Philippine peso will gain 4 percent to its highest since 1999, said Standard Chartered Plc and Wells Fargo & Co., which tied for second. That would put them among the top- five developing-nation currencies, Bloomberg data show.

Asia is poised to benefit as the International Monetary Fund estimates global trade will accelerate from the smallest increase in three years. Asia, which contributed to 44 percent of the world's economic growth last year, accounted for half of the top 10 currencies in 2010 as the world emerged from the worst financial crisis since the Great Depression.

"The global economy is a bit brighter compared to six months ago, so that bodes well for the export cycle in Asia,"

Emmanuel Ng, a strategist in Singapore at OCBC, Southeast Asia's second-largest lender, said in a Jan. 7 interview. "We are getting signs of life out of China. It will continue to exert influence on Asian currencies."
David Fuller's view - A few months ago, a consensus among somewhat cautious investors favoured Wall Street among stock markets. The USA has some advantages, in addition to liquidity and transparency, not least being its competitive energy costs thanks to the fracking Technology which it pioneered to develop its vast reserves of shale oil and gas.

This is an enormous advantage for a large industrialised economy, not least due to the intense competition resulting from globalisation. Fracking Technology was a private development, as I have mentioned before, in which the Obama administration had little interest. Now the White House is engaged in a tedious and acrimonious struggle with the Republican controlled Senate over the additional tax increases and higher debt ceiling that the President wants. The global financial world is unimpressed.

Meanwhile, Asia's two largest economies have morphed from serial underperformers to outperformers. The new governments in Japan and China, led by Shinzo Abe and Xi Jinping, are off to a flying start judging from their stock market performances since mid-November and early December, which coincided with the political changes. Additionally, Asia's third largest economy, India, has seen its best rally since 2010 since Prime Minister Manmohan Singh abandoned his Socialist coalition partners.

Given the additional and generally stellar performance of ASEAN Indices, many more internationally-oriented investors are showing a renewed interest in Asia. This should continue to ensure a competitive performance for the region, not least as it will not have the overhanging risk of an inevitable end to QE, Japan excepted. However, in a global economy Asia would be affected by a significant downturn in the USA, should that occur.

US QE aside, of currently known factors, the biggest risk for Asia is likely to be either food price inflation or eventual economic overheating. The former would depend on the vagaries of weather and economic overheating is unlikely to be a problem before yearend 2013, at the earliest. There is also a small, outside risk that political tension between China and Japan flairs up. However, this is unlikely to be in either of their interests, so hopefully it does not happen.

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January 11 2013

Commentary by Eoin Treacy

The Insourcing Boom

Thanks to a subscriber for this fascinating article by Charles Fishman for the Atlantic, focusing on GE's repatriation of some manufacturing jobs to the USA. Here is a section
Even then, changes in the global economy were coming into focus that made this more than just an exercise—changes that have continued to this day.

Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.

The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)

In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.

American unions are changing their priorities. Appliance Park's union was so fractious in the '70s and '80s that the place was known as “Strike
City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can't save much money chasing wages anymore.

So much has changed that GE executives came to believe the GeoSpring could be made profitably at Appliance Park without increasing the price of the water heater. “First we said, ‘Let's just bring it back here and build the exact same thing,'?” says Kevin Nolan, the vice president of Technology for GE Appliances.

But a problem soon became apparent. GE hadn't made a water heater in the United States in decades. In all the recent years the company had been tucking water heaters into American garages and basements, it had lost track of how to actually make them.

The GeoSpring in particular, Nolan says, has “a lot of copper tubing in the top.” Assembly-line workers “have to route the tubes, and they have to braze them—weld them—to seal the joints. How that tubing is designed really affects how hard or easy it is to solder the joints. And how hard or easy it is to do the soldering affects the quality, of course. And the quality of those welds is literally the quality of the hot-water heater.” Although the GeoSpring had been conceived, designed, marketed, and managed from Louisville, it was made in China, and, Nolan says, “We really had zero communications into the assembly line there.”
Eoin Treacy's view - As the pace of technological innovation increases, robotics become a more integral part of the manufacturing process, the USA's competitive advantage in energy persists and labour becomes more pliable, there is scope for more manufacturing jobs to return to the USA. As these factors force a more nuanced approach to factory location we will find out exactly what can and cannot be manufactured domestically.

The global landscape for manufacturing is likely to continue to become more competitive, particularly as China becomes less competitive in low cost manufacturing. The march of Technology versus the allure of low manual labour, energy, transport costs and taxation will force some tough decisions for companies with global ambitions. What has become increasingly evident is that despite having been on the side lines of investor interest for much of the last couple of years, industrial manufacturers turned to a position of outperformance over the summer.

In the USA, General Electric found support near $20 last week and a sustained move below that level would be required to question medium-term scope for additional upside. Illinois Tool Works consolidated in the region of its 2008 peak from September and at least partially unwound its overbought condition relative to the 200-day MA. A sustained move below $60 would be required to begin to question medium-term upside potential. Honeywell continues to extend its breakout to new all-time highs. Eaton Corp is somewhat overbought as it tests its 2011 peak near $56.50. However, a sustained move below the MA, currently near $48 would be required to check medium-term potential for additional upside. Ingersoll-Rand continues to hold its progression of higher reaction lows as its tests the 2011 highs near the psychological $50. Parker Hannifin is testing the upper side of its range near $90. Flowserve is somewhat overbought in the short-term following its surge to new all-time highs but a clear downward dynamic would be required to check momentum beyond a brief pause.

In Europe, Siemens is temporarily overextended relative to its 200-day MA, but a sustained move below it, currently near €76.70, would be required to check medium-term scope for additional upside. Rolls Royce continues to hold its progression of higher reaction lows and a sustained move below 850p would be required to question medium-term upside potential.


Email of the day (1) – on infant formula:

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January 09 2013

Commentary by David Fuller

Email of the day (1)

On China's interest in thorium-fuelled reactors
"China blazes trail for 'clean' nuclear power from thorium - Telegraph.

" The Chinese are running away with thorium energy, sharpening a global race for the prize of clean, cheap, and safe nuclear power. Good luck to them. They may do us all a favour."
David Fuller's view - Thanks for this informative article from Ambrose Evans-Pritchard of The Telegraph. Here is the opening:

Princeling Jiang Mianheng, son of former leader Jiang Zemin, is spearheading a project for China's National Academy of Sciences with a start-up budget of $350m.

He has already recruited 140 PhD scientists, working full-time on thorium power at the Shanghai Institute of Nuclear and Applied Physics. He will have 750 staff by 2015.

The aim is to break free of the archaic pressurized-water reactors fueled by uranium -- originally designed for US submarines in the 1950s -- opting instead for new generation of thorium reactors that produce far less toxic waste and cannot blow their top like Fukushima.

"China is the country to watch," said Baroness Bryony Worthington, head of the All-Parliamentary Group on Thorium Energy, who visited the Shanghai operations recently with a team from Britain's National Nuclear Laboratory.

"They are really going for it, and have talented researchers. This could lead to a massive break-through."

The thorium story is by now well-known. Enthusiasts think it could be the transforming Technology needed to drive the industrial revolutions of Asia -- and to avoid an almighty energy crunch as an extra two billion people climb the ladder to western lifestyles.

At the least, it could do for nuclear power what shale fracking has done for natural gas -- but on a bigger scale, for much longer, perhaps more cheaply, and with near zero CO2 emissions.

The Chinese are leading the charge, but they are not alone. Norway's Thor Energy began a four-year test last month with Japan's Toshiba-Westinghouse to see whether they could use thorium at Norway's conventional Halden reactor in Oslo.

The Japanese are keen to go further, knowing they have to come up with something radically new to regain public trust and save their nuclear industry.

My view - This last short paragraph is highly important, and not just for Japan. Other users of conventional nuclear power are extremely nervous, because while the nuclear industry has one of the best safety records in terms of deaths - check the evidence in this article from Pro Publica.

However, it was published days before the Fukushima plant was struck by a huge tidal wave, caused by a severe earthquake, and then went into meltdown. When things go wrong with nuclear power, it is really terrifying.

Moreover, most of the conventional nuclear power plants still in operation date back to the 1970s and 1980s, making them outdated and geriatric in terms of life expectancy. Following Fukushima, few countries dare commission the modern version of nuclear plants, China excepted, because of public opinion, costs, security risks and the worrying problem of storing highly toxic nuclear waste which has yet to be rendered safe.

These problems will eventually be resolved, perhaps by China which will soon be the major provider of nuclear power from uranium. China's interest in thorium reactors is more recent so it will take more time to develop them. Meanwhile, the Fukushima accident has revived interest in thorium reactors within a number of other Asian and also Western countries, as the article above details.

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January 07 2013

Commentary by David Fuller

Tim Price: Out of the frying pan into the frying pan

Tim Price: Out of the frying pan into the frying pan
We highlighted before Christmas Russell Napier's suggested asset split: cash, equities, gold. As we wrote, this doesn't seem at all bad. But if you buy our thesis that the investment world is more than usually fraught precisely because we're at the tail-end of a multi-decade expansion in credit, then you may in turn buy our thesis that it makes sense to be more than usually diversified by discrete types of asset. Since we haven't held Gilts for years, we don't have any problem with Ian Cowie's vote against them. But we still see some merit in owning objectively high quality bonds issued by the world's creditor sovereigns and quasi-sovereigns, especially when we can earn a yield of roughly 5% from doing so. We also like exposure to non-western economy currencies.
David Fuller's view - There are plenty of uncertainties in today's financial world, not least involving ballooning debt levels in the West and Japan, plus an experiment in QE which exceeds the morally justifiable government bailouts following WWII.

My own concern over government debt levels persuades me that Tim Price is correct in favouring "high quality bonds issued by the world's creditor sovereigns and quasi-sovereigns, especially when we can earn a yield of roughly 5% from doing so." However, not everyone has easy access to those markets, which can cause them to feel less appropriate. Fortunately, most investors have easier access to currencies and equities in creditor nations. Those assets are worthy of consideration.

Lastly, among the most important developments of our time are globalisation and the accelerating rate of technological innovation. Technology is not a one-way street to prosperity because it can hasten obsolescence for countries, companies and individuals who fall behind. More importantly, however, Technology is creating opportunities and leading to achievements that would have been regarded as science fiction only a few years ago. Practically everyone benefits from technological advancements but the biggest financial gains are accrued by successful corporations. The Autonomies covered by Fullermoney benefit from both globalisation and the accelerating rate of technological innovation, which could persist for a very long time.

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January 02 2013

Commentary by David Fuller

Email of the day (1)

More on the march of Technology
"May I wish all the team a very Happy New Year. Thanks for the interesting comment on production and labour costs in China. In 2012 I read an article in which it was predicted that by 2050 80% of all world production would be made by 20% of the world's population. If the shift to production by robots does occur and billions of workers lose their jobs, where will the buying power come from to absorb all that production? Won't we need social-democratic income redistribution on a massive global scale? Won't we need some form of "world government" to achieve that?"
David Fuller's view - I think the prediction you quote is probably correct, at least in terms of assembly line manufacturing. This is not a new trend, if we consider the rows of desks within secretarial departments and also for paper-shufflers, mostly male, in white collar industries of earlier decades, before computers increased our efficiency and GDP growth. Most of those people went on to find more creative jobs including within service industries.

However, the rate of mechanisation is increasing and that will create some adjustment and educational problems. Nevertheless, we are a creative species and I view the replacement of assembly line jobs with machines as a form of liberation. The same can be said of mechanised farming.

While living wages should be a goal within countries, I hope and suspect that the 'solution' need not be "income redistribution on a massive global scale", let along "some form of world government". Meanwhile, my impression is that the long-term trend in terms of social mobility and personal development continues to improve for the majority of people, although not necessarily exponentially.

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December 31 2012

Commentary by Eoin Treacy

Shale-Gas Revolution Spurs Wave of New U.S. Steel Plants

This article by Sonja Elmquist for Bloomberg highlights another energy intensive industry where the USA's low natural gas prices contribute to its competitiveness. Here is a section:
The U.S. shale-gas revolution, which has revitalized chemicals companies and prompted talk of domestic energy self-sufficiency, is attracting a wave of investment that may revive profits in the steel industry.

Austrian steelmaker Voestalpine AG said Dec. 19 it may construct a 500 million-euro ($661 million) factory in the U.S. to benefit from cheap gas. Nucor Corp., the most valuable U.S. steelmaker, plans to start up a $750 million Louisiana project in mid-2013. They're among at least five U.S. plants under consideration or being built that would use gas instead of coal to purify iron ore, the main ingredient in steel.

“That Technology has been around 30 years, but for 29 years gas prices in the U.S. were so high that the Technology was not economical,” said Michelle Applebaum, managing partner at consulting firm Steel Market Intelligence in Chicago. “This is how steel will be built moving forward.”
Eoin Treacy's view - An advantage in energy costs is unlikely to provide enough of a boost to make the USA's steel industry competitive when compared to the breadth of China's lower cost sector. However, it may act as a deciding factor in speciality production where labour costs are less of a consideration.

As a speciality steel producer Worthington Industries has been a relative outperformer. The share has held a progression of higher major reaction lows since 2009 and found support in the region of the 200-day MA from early November. It has since rallied impressively to test its 2007 highs and while overbought in the short-term, a sustained move below $21 would be required to question medium-term scope for additional upside.

Japanese steel makers, in line with the wider domestic market, have benefitted from the Yen's recent weakness, JFE Holdings and Nippon Steel have both rallied back above their respective 200-day MAs and are challenging their downtrends. The benefit of the doubt can be given to the medium-term upside provided they continue to hold their short-term progressions of higher reaction lows.

Chinese steel makers are responding to renewed impetus in infrastructure development. BaoSteel retested its 2006 lows in September and has held a progression of higher reaction lows since. It pushed back above the 200-day MA earlier this month and a sustained move below HK$4.70 would be required to question medium-term scope for additional upside. Taiwan listed China Steel Corp has a similar pattern.

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December 31 2012

Commentary by David Fuller

Focus: (Not) made in China

This is an excellent, futuristic article by Simon Duke of The Sunday Times (UK) (subscription required for full online access, PDF also provide). Here is the opening:
America's tech giants are starting to move production away from the People's Republic as a new breed of robots cancel out the advantage of cheap labour

For the creator of the Raspberry Pi, there was one business decision that did not call for much soul-searching. When it came to finding a factory to build the stripped-down computer - one of 2012's most hyped gadgets - Eben Upton concluded it could not be built in Britain. Only China could offer the rock-bottom production costs needed to slash the price of the credit-card-sized machine to just £15.

That has started to change, however. The latest batch of the lo-fi device designed to get kids into computer programming have the words "Made in Britain" etched on the side. In September, production was shifted to a site operated by Sony in south Wales, where most Raspberry Pis are now assembled.

"When we were setting up, China was cheaper all round," said Upton. "Labour costs were lower and manufacturers had greater proximity to where the components are made."

With between 100,000 and 200,000 Raspberry Pi units now being shipped every month, the business has enough clout to secure a more cost-effective deal with a British-based manufacturer.

Upton is not the only Technology guru looking to move his production out of China, in spite of its reputation as the workshop of the world. Apple, the world's biggest Technology company, is also beating a retreat after switching production of its new iMac computers back to America for the first time in a decade. The Silicon Valley giant is also considering moving the assembly line for its Mac Mini computer back home. Google, meanwhile, is making its Nexus Q internet television player in America.

It may not yet be a stampede, but experts believe that an exodus of western firms from the world's most populous nation is under way. In years to come, far fewer of the gadgets we pull from our Christmas stockings will have been made in China.

The seismic shift has nothing to do with a desire to bolster debt-laden home economies. For the likes of Apple and Google it comes down to cold, hard cash. The harsh truth is that China is steadily losing its competitive edge.

The typical Chinese worker still earns between 10% and 20% of what his counterpart would take home in developed nations such as America and Britain. However, the gap is closing rapidly. Chinese wages have doubled over the past decade, while take-home pay in the developed world has stagnated, according to the International Labour Organisation (ILO).

"China's huge attraction to western companies hasn't worn off totally, but it is already being undermined by rising labour costs," said George Magnus, an economic adviser to UBS investment bank, in a recent research paper.

Rocketing energy prices are also forcing the hand of profit-hungry gadget makers. The crude oil price has more than trebled since 2003, making it more expensive for firms to ship finished products back from the Far East.

Advances in robotics and other innovations such as 3D printing are likely to further erode the advantages of a cheap and compliant workforce.

Right now the factories where more than 100 million Chinese workers labour to produce digital cameras, laptops and millions of other gadgets are in the ascendant. However, the technological tide could soon be potent enough to swing the balance of power back towards America and Europe.
David Fuller's view - The exciting, somewhat scary and often predictable speed with which manufacturing assembly policies can shift between Asia and the old world, the latter represented mainly by the USA and to a lesser extent Europe, is due to three primary factors: globalisation, the race for a competitive advantage, and especially the accelerating era of technological innovation, often mentioned by Fullermoney in recent years.

To put this latter factor in perspective, when financial people talk about trend acceleration, we are usually referring to a short to medium-term unsustainable market advance, before prices fall back sharply as these bubbles burst.

I have never viewed Fullermoney's forecasts of an accelerating era of technological innovation as a bubble, although it will contain some price bubbles within it as that is the nature of financial markets, at least while they remain controlled by humans.

The era of exponential advances in our technological development is still in its foothills, in my opinion, although almost everyone will recognise that the pace and breadth of innovation is increasing in line with mankind's scientific knowledge. Theoretically, it probably has no logical end in terms of scientific innovation or breakthroughs. However, it will end, because everything does, but probably due to an unavoidable misfortune rather than a logical limit to mankind's growing understanding and harnessing of scientific potential.

Lest you conclude, dear reader, that I am losing my marbles, or have been indulging too much over the holidays, or have perhaps been carried away by the excitement of yearend 3-D films for grownups, all of which may be true, consider your own evidence.

How many of us who are over the age of 50 had any idea as a child that smart phones and tablet computers would be indispensable accessories in the developed world by yearend 2012? How many of us expected to be skyping with friends and family around the around the globe for almost no cost, or running your affairs from inexpensive computers which happen to be infinitely more powerful than anything built only 30 years ago? How many of us over the age of 50 anticipated as children that we would be communicating and receiving our information almost entirely online?

One can easily think of numerous other examples of our rapidly evolving technologies. History has numerous examples life-changing developments of enormous importance: the printing press, calculators, the telegraph, electric lights, railroads, telephones, radios, automobiles, vaccines, television and computers, to mention just a few. Initially, these breakthroughs occurred at a glacial pace over centuries, which gradually increased. Today, most of us feel privileged to have seen a dramatic acceleration in innovation and technological progress during our own lives, most of which have occurred within the last 20 years. The future will be even more exciting.

Returning to The Sunday Times article above, lest we become too concerned about China, which Fullermoney maintains is now one of the most interesting investment plays, please read the excellent reader's 'comment' from John Broom, which I included in the report and also reproduce below:

"Yes , but the most important point is contained in the almost throw away mention of Foxconn planning to install One Million robots into their production processes! So not just a couple of dozen then.

"China is moving from the phase of people-intensive production into the next phase, of automation. And they'll do it faster, bigger, and better than anyone else. As someone who has worked with Chinese factories, I have total confidence in their ability to accomplish this change."

Lastly, the beginning of the reversal in the decline of energy intensive heavy industries within the USA is entirely due to the invention of fracking. This has made America much more competitive in terms of energy costs within developed economies. It is worth remembering that this did not occur with much help from the current government. In fact, the Obama administration opposed fracking and restricted it to land that was privately owned. I suggest that it has been saved by fracking.

From Europe to Japan, we have seen a number of developed economies fall behind economically because they favoured green energy policies which were either insufficiently developed, unproven, unreliable and much more expensive. Atmospheric pollution has also increased in most of these countries because their green systems required backup, usually in the form of coal for reasons of expediency. In the ultimate irony, atmospheric pollution has actually declined in the USA due to all the natural gas that is being produced.

We are all green at heart but let us get there through sensible economic progress which funds more beneficial innovation. Our economies are not ready to move away from fossil fuels because heavy reliance on green technologies will weaken most of them, as we are seeing. People are also noticing that so-called green technologies can have unpleasant side effects. For instance, those of us who have spent some time near wind farms or even a solitary windmill will have noticed the unacceptable levels of noise pollution when there is sufficient wind to produce energy.

None of us want our children or grandchildren to be traumatised by significant climate change, which may or may not occur anytime soon. However, if that is what they face, for what every reasons albeit increased by humans, is it not better if our economies and populations mostly have the resources to address the problem more effectively?

See also, Skilled Work, Without the Worker, on 20th August 2012, plus companies which manufacture robots in 21st August.

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December 28 2012

Commentary by Eoin Treacy

Nanotechnology And The Built Environment: The Transition to Green Infrastructure

Thanks to a subscriber for this fascinating report by Crystal Research Associates for Livingston Securities covering the companies most likely to benefit from the commercialisation of nanotechnologies. As well as listed companies, this report also carries details of a number of companies that may seek an IPO next year. While dated November 17 th , it is equally valid today. Here is a section:
The need to stay current on nanoTechnology developments is particularly evident for the global, large-cap companies with operations targeting the built environment. To this effect, leading multinationals are investing in energy platforms and specific software, as well as entering into acquisitions and strategic partnerships.

In July 2011, diversified Technology company Johnson Controls, Inc. (profiled on page 16) completed the acquisition of EnergyConnect Group, Inc., a provider of smart grid demand response services and technologies, for $32.3 million. Prior to that, in May 2010, Honeywell International Inc. (also profiled on page 16) acquired its own smart grid arm, San Rafael, California-based Akuacom, a provider of automated demand response Technology and services for the smart grid. Similarly, global chemicals company DuPont (DD-NYSE) completed the acquisition of California-based solar startup Innovalight, Inc. ( www.innovalight.com ) in July 2011 (as further described on page 38).

Siemens AG (profiled on page 17) is also invested in smart energy technologies. InDecember 2010, its Building Technologies Division acquired Texas-based Site Controls, LLC, a supplier of enterprise-wide energy management solutions for multisite commercial businesses. Siemens is further partnered with smart grid company Tendril Networks Inc. (profiled on page 53). Since 2000, Siemens' venture capital arm has invested more than €30 million in smart grid technologies, systematically building a portfolio of companies that provide technologies and solutions for grid management, energy efficiency, demand response, and electric vehicle infrastructure (Source: Tendril's June 13, 2011, Press Release).
Eoin Treacy's view - The vast majority of the listed companies mentioned in this report have appeared in various chart reviews of interesting sectors over the last year. However, where this report is particularly helpful is in how it reveals a common thread between the engineering, chemical, building and materials sectors. Since a great deal of capital is required to commercialise such new technologies, the pace of acquisitions is likely to remain brisk.

BASF found support in the region of the 200-day MA from mid-November and rallied impressively to post new all-time highs. Some consolidation of this powerful six-week rally looks likely but a sustained move below the 200-day MA, currently near €63, would be required to question medium-term potential for additional upside. (Also see Comment of the Day on August 7th).

Sherwin Williams doubled in the year to October and has lost momentum somewhat as it reverts towards the mean. A sustained move below the 200-day MA would be required to question medium-term upside potential. (Also see Comment of the Day on October 24th).

General Electric broke out of its base in July and has been consolidating mostly above $20 since. It has returned to test the region of the 200-day MA and a sustained move below $20 would be required to question medium-term scope for additional upside. (Also see Comment of the Day on December 20th).

Siemens has been ranging below €80 since mid-2011 and broke successfully back above that level three weeks ago. While slightly overbought in the very short term, a sustained move below the 200-day MA, currently near €76, would be required to check medium-term scope for additional upside.

Honeywell has been ranging in the region of its previous peak since October and found support near of the 200-day MA from November. It rallied to post a new all-time high this week and a countermanding downward dynamic would be required to check potential for further upside. (Also see Comment of the Day on November 16th).

Johnson Controls has found support in the region of $25 on successive occasions since late 2009 and bounced from that area again six weeks ago. While overbought in the very short term, a sustained move below the 200-day, currently near $28, would be required to check medium-term potential for further upside. (Also see Comment of the Day on August 10th).

Precision Castparts moved to acquire Titanium Metals earlier this month. The share spent most of the year ranging below $180 but rallied impressively from November to post a new all-time high. While some consolidation of this gain appears likely, a sustained move below $170 would be required to question medium-term upside potential. (Also see Comment of the Day on May 31st).

Among medium sized companies, Cabot Corp rallied to break its six-month progression of lower rally highs earlier this month and while mildly overbought in the short-term a sustained move below $37.50 would be required to question medium-term upside potential.

Calgon Carbon Corp has been confined to a range since 2008 and has exhibited a downward bias for nearly two-years. It has rallied over the last six weeks to test the progression of lower rally highs but a sustained move above $15 will be required to confirm a return to demand dominance beyond the short term.

Hexcel Corp has been ranging in the region of the 2008 highs for most of the year and rallied to retest the upper boundary over the last month. While overbought in the short-term, a sustained move below $25 would be required to question medium-term scope for further upside. (Also see Comment of the Day on February 2nd).

Schulman (A.) Inc. has been confined to a volatile range since 2006 but rallied impressively from mid-November to post new all-time highs. The share is overbought in the short term so some consolidation of recent gains is becoming increasingly likely. However, a sustained move below the 200-day MA, currently near $24, would be required to check medium-term scope for additional upside.

David's piece on industrialising the internet from Comment of the Day on November 26th may also be of interest. In this regard, Rolls Royce is also worthy of mention and as a truly globally oriented company also qualifies as an Autonomy. The share continues to find support in the region of the 200-day MA and a sustained move below 800p would be required to question medium-term potential for continued higher to lateral ranging.

In conclusion, the return of the industrial sector to a position of outperformance has been evident since Q3. In the first half of the year the perceived wisdom was: recessions in the world's major economies were all but inevitable but since then the Eurozone has moved into convalescence, China exhibits a renewed sense of vigour and despite short-term concerns about the fiscal cliff, the US economy has a number of internal strengths. Since the industrial sector is sensitive to global growth perceptions it has therefore attracted investor interest.

In addition, as the above report explains, the evolution of nanoTechnology is swiftly approaching commercial success and this could represent a significant growth avenue for related companies. This is particularly noteworthy because of the number of shares breaking out to new all-time highs and completing lengthy consolidations in the process. While short-term overbought conditions are evident for a number of these shares, the benefit of the doubt can continue to be given to the medium-term upside, provided they hold in the region of their 200-day MAs during their occasional corrective phases.


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December 27 2012

Commentary by David Fuller

The Weekly View: A Slope Not A Cliff: Most Tax Cuts Likely To Be Extended

My thanks to Rod Smyth, Bill Ryder and Ken Liu of RiverFront for their ever-interesting market tactics letter. Here is the opening paragraph:
We continue to believe that most of the fiscal cliff's impact will be avoided next year. We had hoped for a deal before year end, which would have lessened economic and investment uncertainty. However, a grip over the cliff looks increasingly likely and thus, tax rates will increase before congress acts. Republicans seem to believe the appearance of lowering most Americans' taxes after they go up, rather than raising taxes on a small percentage of high-income earners, will provide the political cover necessary to allow a compromise with the Democrats. We think there is little difference in the outcome except for a near-term loss of confidence (and an even lower opinion of Congress). The fiscal cliff is actually more of a slope, with the spending cuts and tax increases taking effect incrementally over time. If the fiscal cliff is resolved in the first few weeks of 2013, its economic impact should be minimal.
David Fuller's view - I think this is about as favourable an assessment as one can make over the inability of the White House and Congress to govern in a manner which creates confidence. So far, markets have been reasonably relaxed, albeit with the benefit of a massive quantitative easing (QE) tailwind, although the S&P 500 (weekly & daily) has been slipping beneath a lower high since 19th December.

As I see it, a lefty Democrat White House and an ideological Republican-controlled House of Representatives are refusing to agree on a sensible fiscal compromise (the art of governance) for reasons that probably do not matter all that much to the majority of US citizens. We have seen this before but it probably matters more this time, given the USA's runaway government debt.

Mr Bernanke's QE has postponed a reality check in the form of a sliding stock market, until recently, although the S&P 500 has been underperforming since October (see graph in The Weekly View posted above). Crisis-oriented US politicians are pressing their luck.

In a press release late this afternoon, the US House of Representatives has just announced that it will hold a session on the 30th, creating some optimism that a budget deal will be agreed before yearend. I certainly hope so because the USA's reputation as a safe haven has been diminished, judging from the relative performance of stock markets in 4Q 2012.

The US still holds the world's main reserve currency; it has mostly maintained its Technology lead, and it now has a huge advantage in energy costs relative to other developed countries thanks to its successful development of fracking Technology. Nevertheless, when evaluating financial opportunities in global markets, investors understandably take note of the trend of governance.

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December 20 2012

Commentary by Eoin Treacy

The Autonomies

Eoin Treacy's view - Despite short-term overbought conditions having developed over the last couple of weeks, the prospects for global stock markets in 2013 continue to improve. While the uncertainty with regard to the fiscal cliff remains a source of potential volatility, anxiety about the Eurozone is receding while the macro outlook for China is improving and the Japanese economy looks set to receive a significant boost from the devaluation of the Yen. Against this background I thought it would be timely to review the Autonomies because they represent a group of companies that are truly global in perspective.

This proxy index of the 66 companies we currently regard as Autonomies can be found in the Chart Library in the Global Stock Indices section. It assumes an equal weighting and is denominated in US Dollars. The Index remains in a consistent medium-term uptrend and a sustained move below the 200-day MA, currently near 5840, would be required to question medium-term scope for additional upside.

In the Technology sector Apple continues to range above $500 and will need to hold in this region if the medium-term consolidation hypothesis is to be given the benefit of the doubt and a further test of underlying trading is to be avoided. Google, IBM and Qualcomm continue to find support or at least hold in the region of their respective 200-day MAs. Sustained breaks below them would be required to question medium-term scope for continued upside. Samsung broke out to post new all-time highs last month and while increasingly overbought, a clear downward dynamic would be required to check momentum. LAM Research, Microchip Technology, Microsoft, Intel and HTC have all found at least short-term support and sustained moves below their respective recent lows would be required to question potential for additional upside. Among previous laggards Cisco Systems has had one of the more impressive rallies of late, to post its first higher high in quite some time.

In the pharmaceuticals sector Novo Nordisk, Fresenius SE, Biogen, Merck, Pfizer and Johnson & Johnson remain in consistent medium-term uptrends and found support in the region of their respective 200-day MAs over the last month. Eli Lily, having experienced a sharp decline has found support in the region of the MA but some time is likely required in order to restore confidence. Sanofi broke successfully above €70 three weeks ago but is quite overextended relative to the 200-day MA. A break in the short-term progression of higher reaction lows would suggest more than a temporary pause. Fresenius Medical Care and Bristol Myer Squibb continue to hold below their respective 200-day MAs and will need to sustain rallies back above them to signal returns to medium-term demand dominance.

In the drinks sector Anheuser Busch, Diageo, SAB Miller, Pernod Ricard and Remy Cointreau have all paused and are experiencing relatively steady reversions back towards their means. Heineken broke out to new all time highs in September and continues to hold a progression of higher reaction lows. Coca Cola has held a progression of lower highs since August and will need to find support in the current area if the medium-term uptrend is to remain consistent. PepsiCo has a similar pattern.

In the restaurants sector McDonalds posted a failed downside break last month and has returned to test the region of the 200-day MA. It will need to sustain a move back above the trend mean, currently near $50, to suggest a return to more than temporary demand dominance. Yum Brands posted a large downside weekly key reversal last month and has paused in the region of the 200-day MA. It will need to continue to hold above $60 if the potential for a further test of underlying trading is to be avoided. Starbucks experienced a deep decline from the April high but found support in the region of the 200-day MA and broke out of the short-term range two weeks ago. A sustained move below $50 would now be required to check current scope for additional upside.

In the processed foods and consumer goods sectors, Nestle, Mondelez International, Procter & Gamble, Colgate Palmolive, Kimberly Clark and Uni-Charm have been mostly ranging in a process of mean reversion for the last few months. Sustained moves below their respective 200-day MAs would be required to question medium-term scope for continued upside. Heinz is becoming increasingly overextended relative to the MA, but a break in the progression of higher reaction lows would be required to check momentum. Unilever and Reckitt Benckiser broke out of their respective ranges in the last month. Hengan International posted a lower low last week for the first time in three years. A clear upward dynamic and break in the short-term progression of lower rally highs is now required to check potential for an additional test of underlying trading.

In the nutrition sector Mead Johnson remains in a consistent downtrend, characterised by a progression of lower rally highs. Herbalife broke downwards to new reaction lows this week to extend its downtrend. NuSkin Enterprises has fallen to test the psychological $40 area but commonality with the sector would suggest a clear upward dynamic will be required to check downside potential.

In the luxury sector Prada, LVMH and Christian Dior have completed lengthy consolidations with upside breaks in the last few weeks. Compagnie Financiere Richemont is leading but is becoming increasingly overextended and susceptible to mean reversion. Estee Lauder has lost momentum over the last year and will need to hold above $56 on the current pullback if the benefit of the doubt is to be given to potential for additional higher to lateral ranging.

Among lifestyle shares Nike has a broadly similar pattern to Starbucks but will need to sustain a break back above $100 to confirm a return to demand dominance beyond the short term. Disney found support in the region of the 200-day MA last month and a sustained move below it would be required to question medium-term scope for additional upside.

In the retail sector Wal-Mart completed a more than decade long range with an impressive advance earlier this year and is now consolidating that move. It has returned to test the 200-day MA and will need to hold above $65 if the breakout is to hold. Tesco has been ranging above 300p since January and will need to sustain a move above 350p to confirm a return to medium-term demand dominance.

In the materials sector BHP Billiton and Rio Tinto are currently breaking out of their respective bases. Air Liquide and Linde continue to trend consistently higher and found support in the region of their 200-day MAs this month. Praxair retested the $110 area again this week but will need to sustain a move above it to confirm a return to medium-term demand dominance. Exxon Mobil and Royal Dutch Shell continue to hold progressions of higher reaction lows.

In the engineering sector Siemens broke out of a 15-month base last week and a clear downward dynamic would be required to check current scope for additional upside. General Electric found support in the region of the upper side of its base and the 200-day MA in November. A sustained move below $20 would be required to question medium-term scope for additional higher to lateral ranging. Emerson Electric has rallied to test the upper side of the 18-month range and a clear downward dynamic would be required to question potential for a successful upward break. Intertek Group has become quite overextended relative to the MA following an impressive advance and is becoming increasingly susceptible to mean reversion.

In the financial sector Visa and Mastercard remain in consistent uptrends defined by progressions of higher reaction lows.

A clear rotation is evident in the above shares from this year's early leaders in the consumer and Technology sectors to previous laggards in the materials, engineering and luxury goods sectors.


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December 17 2012

Commentary by David Fuller

Email of the day (2)

More on the US shale deposits in Federal lands:
"Here is the written testimony before the House of Representatives dating back to May 2012.

"1) One may wonder why this is going out now? (Elections ended and lobbying Obama?)

"2) In any case gas shale is already a game changer and if my calculations are right (based on assumptions commonly reported on future gas production), the US will see its trade balance improve in the tune of $450 bn a year by 2025, i.e. +3% of GDP coming above trend. The energy cost advantage the US is enjoying relative to the rest of the productive world will compound this (gas price ratio between Europe and the US or Asia and the US is 3:1/4:1; spread between Brent and WTI is 20%). I feel this is not yet discounted by markets.

"As you know, this made me turning bullish on the US (and not only for real estate) despite mounting debt (and do not forget student loans...) and despite all uncertainties surrounding long-term forecasts."
David Fuller's view - This email was kindly contributed by Pascal Morin of P&C Global Wealth Managers SA.

I am not sure why this item is surfacing now. However, a quick review of the testimony linked above suggests that the development of this vast site on Federal lands will be strongly resisted by not only environmentalists in the USA, but also elsewhere, lest it open doors in their own countries. Moreover, there will be at least covert support from conventional oil producing countries, increasingly aware that vast supplies of shale oil and gas reserves around the world now have the potential to weaken considerably the economies of oil producers who previously felt the world was at their mercy.

Personally, I would be surprised if the Obama administration opened the door to development of shale reserves on Federal lands, since that would be a radical change from policies during his now expiring first term. Moreover, unconventional oil and gas production is still surging in privately held regions of the USA. Additionally, Technology breakthroughs such as horizontal drilling are extending production from conventional fields.

I do expect that shale reserves on Federal lands will eventually be granted development rights by future US presidential administrations. More importantly, as far as other countries are concerned, including the UK, we are still in the foothills of global shale oil and gas development. Its importance cannot be overemphasised. Countries which choose to develop their shale oil and gas resources in the years ahead will improve their economies by stimulating growth and lowering government debt.

Lastly, environmentalists will continue to have concerns about a whole new era of fossil fuels development. They need to be developed responsibly, not least because of risks to the environment. However, an increasing number of countries are aware of these risks. The pace of technological innovation will continue to enable cleaner extraction of these essential resources, while also lowering their emissions when consumed as fuel.

The fact is, green technologies are not yet capable of replacing fossil fuels. However, their development will continue, as it should. In another 20 or 30 years we will be much more dependent on them, and they will work more efficiently. Meanwhile, this developmental process is at a more advanced stage for nuclear power, the cleanest and / or least obtrusive energy source of all, once the dangers of old nuclear are largely removed.

See also the enlightened email on 6th December: Molten Salt Nuclear Reactors, provided by a most knowledgeable delegate at Eoin's last Chart Seminar in London. See also Eoin's item on nuclear below.


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December 17 2012

Commentary by David Fuller

Email of the day (1)

On US shale reserves (from Switzerland):
"This is earth-shattering if true…how can it be? Can you please check this out through the Collective? This changes the world, potentially…USD 37 trillion of non-tax revenues! You hardly need to tax the [wealthy] on top. USA better than slow growth Euroland too…see UK turning around on shale too?"

"A thought provoking quote from Wikipedia (I take no responsibility for authenticity etc):

A stretch of largely vacant federal lands in Utah, Wyoming, and Colorado may hold more recoverable oil than all the rest of the world put together. That is what Anu Mittal, Director of Natural Resources for the General Accounting Office, informed the House Science Subcommittee on Energy and the Environment in her written testimony on May 10:

The Green River Formation - an assemblage of over 1,000 feet of sedimentary rocks that lie beneath parts of Colorado, Utah, and Wyoming - contains the world's largest deposits of oil shale. USGS [U.S. Geological Survey] estimates that the Green River Formation contains about 3 trillion barrels of oil, and about half of this may be recoverable, depending on available Technology and economic conditions.....

Because this oil is largely on federal lands, an enormous amount of federal revenue could be generated through lease options and royalty payments without raising tax rates at all.

How much? The standard royalty payment in the oil and gas business is "one-eighth of production free and clear of costs" or 12.5 percent of the value of the oil extracted. Assuming that the 3-trillion barrel figure is accurate and that the price of oil remains in the neighborhood of $100 per barrel, then the federal non-tax revenue from royalties alone could be as high as $37.5 trillion. However, that figure is no doubt an overestimate of revenue. As more oil is extracted, the price of oil will drop, and hence it will not be economically feasible to recover more of the oil at that point.

But even if only 30 percent of those royalty revenues flowed into the U.S. Treasury, that would be enough to pay off the entire national debt without raising tax rates or cutting federal spending. Moreover, state taxes on oil and gas produced would enable state governments to keep tax rates low without affecting government operations....

"Wow! That makes the glass look half full from an economic point of view - or half empty from an ecological one - depending on your take...

"View full article on Wikipedia under Green River Formation oil shale..."
David Fuller's view - I understand your excitement; the implications of the Wikipedia article are astonishing.

There is also an informed second email on this subject, also from Switzerland.

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December 17 2012

Commentary by David Fuller

Irwin Stelzer: Fed gambles with inflation to give jobs boost

This is an informative view from the Hudson Institute director and columnist for The Times (subscription required for the full column, PDF also provided). Here is the opening:
The fiscal cliff is a diversion, designed by politicians to conceal their inability to come to grips with the facts that they continue to spend too much, and refuse to reform a tax structure that reduces the competitiveness of American companies in world markets. No matter what deal is cut, whether before or after the new year, it will at best nibble at the edges of the trillion-dollar annual deficits that are being piled up.

The real action has shifted from America's inactive politicians to our hyperactive central bankers, the members of the monetary policy committee, who are making Las Vegas high rollers look like risk-averse wimps. And the highest roller of all is the bewhiskered former Princeton economics professor who presides over the Federal Reserve Board's printing presses. Ben Bernanke, the board's chairman, has an advantage over his Vegas counterparts: he can't run out of money because he can always print more.

Bernanke's "risky bet", to borrow a characterisation from The Wall Street Journal, is that he can safely keep pumping money into the economy until the unemployment rate drops from its current level of 7.7% to at least 6.5%. Unless, of course, the decline in the unemployment rate is due to a drop in the labour force participation rate, in which case quantitative easing will continue. If you think none of this matters because Bernanke will exit stage left in 2014, consider that his likely successor, vice-chairman Janet Yellen, says the Fed's complex mathematical models show that interest rates should not reach 1% by 2017 if unemployment is to reach acceptable levels.

And the conclusion:

To be fair to Bernanke, it is not clear that he has got it wrong. First, it is arguable that his launch of QE1 and QE2 created vehicles that could and did throw life rafts to financial institutions that were drowning in flawed debt instruments, and that QE3 boosted post-recession growth. To mix my metaphors, another dose of an efficacious medicine might just be in the patient's interest. Second, a new QE that dare not speak its name - make no mistake, the new policy is QE4 - might well be needed if fiscal policy tightens when taxes go up and spending comes down, as will happen in 2013 no matter how the fiscal cliff is resolved, or even if no deal is made.

Finally, Bernanke believes that the economy will grow at the unsatisfactory rate of 1.7%-1.8% this year, and 2.7% next year (the central point of the predicted range), in part because uncertainty over the governability of the nation is driving down consumer confidence and stifling business investment.

There you have it. The Fed has been buying $40bn of mortgage-backed securities and $45bn of long-term Treasuries every month, but until now it has also been selling $45bn in short-term government securities. Those sales have stopped, so net purchases will go from $40bn per month to $85bn. Do that for a few months, and you have to print a lot of money. Do that until 2017 and you just might have a currency so debased that paying off the national debt will be a snap. So unless you are sitting on a batch of Uncle Sam's IOUs, as are the Chinese, don't worry, be happy. We will print our way out of our debt.
David Fuller's view - This is an unprecedented and therefore uncertain situation, except that the rise in US government debt will not be reduced by anything that President Obama's administration will be able to push through in addressing the so-called fiscal cliff. In fact, his policies will almost certainly ensure that the debt continues to spiral higher. For this reason, I would have preferred Mitt Romney's economic steerage, although social aspects of the Republican Party's platform, which I did not like, made it improbable that the President would be defeated in the last election, despite the USA's ballooning debt and weak economy.

Nevertheless, there are at least two and possibly three known wildcards which could mitigate the damage.

1) By far the most important US economic factor, so often discussed by Fullermoney in recent years, is its huge lead in developing the USA's vast reserves of unconventional shale oil and gas deposits. Ironically, President Obama and his party are the main political beneficiaries of this ground breaking (pun intended) development. They opposed it, including blocking the development of shale deposits on government land, in favour of so-called green energy which remains both expensive and commercially inefficient, being ahead of its developmental time. Today, the USA is by far the most competitive energy producer of any diversified economic power. The economic benefits of the USA's vast shale deposits and its Technology to develop them, have the capacity to transform the US economy for many years ahead, including reducing the country's ballooning government debt.

2) During the USA's dreadfully long election process and now the fiscal cliff tedium, we often hear what Erwin Stelzer mentions above as "…uncertainty over the governability of the nation is driving down consumer confidence and stifling business investment." Well, yes, to an extent but successful US Autonomies and Dividend Aristocrats, which this service continues to discuss and review at length, are often economic powerhouses, benefiting from technological innovation, continued growth in Asian-led economies, globalisation and a rising global population. The USA has more Autonomies and Dividend Aristocrats than any other country, and while these firms may have been biding time to assess US political and economic developments, they have been busy elsewhere and will soon face fewer uncertainties in terms of US economic policies. Fullermoney likes these companies, subject to timing in volatile conditions, which we can all monitor on the price charts.

3) Federal Reserve Chairman Bernanke's controversial policies have certainly taken us into the unknown and are often described as a gamble. Fullermoney takes a broadly agnostic view of what Mr Bernanke is doing, if only in an effort to maintain analytical equilibrium. In other words, we are less concerned about the 'right' or 'wrong' of his efforts to avoid Japanese-style deflation and perpetually slow GDP growth since the early 1990s. Instead, we want to know how to invest in this environment, preferably by avoiding bubbles and also by seeking out value. In today's environment, that leads us to quality equities on a global basis, plus gold and other precious metals. There are also cyclical opportunities in the broader commodity markets which we will continue to highlight.

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December 14 2012

Commentary by Eoin Treacy

Junior lithium producers in spotlight as takeover targets for Rockwood

This article by Kip Keen for Mineweb which may be of interest to subscribers. Here is a section:
Khan favoured Canada Lithium in a notably tight field of lithium producers that might be bought because he sees it as fulfilling part of Rockwood's desire to gain Chinese market share. As Khan noted, Canada Lithium has signed an offtake agreement with a Chinese industrial company for the bulk of its lithium production over the next five years.

Khan also pointed out that Canada Lithium will be producing higher priced lithium carbonate as opposed to the lower priced lithium concentrates that Talison sells (albeit in great quantities and from a very high-grade lithium deposit).

“We would also add that while TLH is blessed with an exceptionally high-grade resource, it currently produces and sells spodumene (lithium concentrate) and only has preliminary plans for building a chemical plant to produce lithium carbonate,” Khan wrote. “CLQ, however, is starting off with selling lithium carbonate - a value-added and higher margin product - and expects to be delivering by 1H of 2013.”
Eoin Treacy's view - The lithium sector represents an oligarchy since it is dominated by a comparatively small number of large producers, namely SQM, FMC Corp, Rockwood and Chengdu Tainqi following is acquisition of Talison Mines. Smaller producers have tended to underperform by a considerable margin.

Canada Lithium has been notable for its outperformance among the smaller producers and has held a progression of higher reaction lows since June. It found support in the region of 64¢ from last week and a sustained move below that level would be required to question current scope for additional upside.

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December 12 2012

Commentary by Eoin Treacy

Wireless Cloud Computing Strategy

Thanks to a subscriber for this fascinating report by Timothy Horan for Oppenheimer which offers an original and highly informative look at the development of wireless Technology and it implications for the consumer electronics sector. If you read one report on Technology, I would recommend taking the time to look at this one. Here is a section:
If we are correct, we believe that the leaders in the wireless industry can gro w revenues in the 6% area, EBITDA at 9% and FCF at 12% over the next five years. We examine three core areas for improved EBITDA growth throughout this report. These new revenue opportunities should help customer lock-in and churn, the major expense item for carriers. In addition, we evaluate the primary enablers of the wireless cloud computing strategy—cloud computing, LTE, and HTML5.

We believe that the communications industry will undergo major structural change over the next five years with traffic shifting to wireless networks and applications to remote data centers. This in turn should drive more centralized computing storage and processing, which should significantly increase the competitiveness of simple low-cost devices. When cloud computing matures, consumers will be able to access their content over any screen/device.

Cloud computing is still in its infancy, but it is evident that wireless access has become a core enabler in transforming computing into a utility sold over the Internet (Amazon is the current leader in this application); the ability to access content/computing power through dozens of new wireless and wireline devices has tremendous appeal to consumers as well as enterprises.

We believe that there is a natural marriage between mobile connectivity and cloud computing, and that the carriers can take advantage of this to reshape the industry for their benefit. The carriers are positively adjusting their underlying pricing model with a complete shift from voice and text usage to data. Some of the major implications of this will be a huge proliferation of new enduser devices ("thin" devices), greater data usage, and more network-based computer storage and processing. The primary leverage that the carriers have is control of the wireless (spectrum) pipes that connect what is relatively commoditized hardware (end-user devices and data center-based servers), and partially commoditized content/applications.
Eoin Treacy's view - In order to explain the role of network providers let us compare the wireless networks sector with natural gas. In the case of natural gas, the proliferation of new supply has depressed pricing. As more manufacturers enter the mobile devices market, pricing will contract. As natural gas prices came down, demand increased not least because it became competitive with coal. As the cost of entry falls, demand for mobile devices will increase and there will be even fiercer competition for market share. The sector that has done best from the natural gas revolution have been pipeline companies since all that new supply has to be transported to market. As demand for wireless devices increases, consumers can have any device they want but the number of networks they can use is quite limited. (Also see Comment of the Day on October 25th).

Verizon (4.63%) found support in the region of the 200-day MA and the upper side of the underlying trading range in November and has since rebounded impressively. A sustained move below $40.50 would be required to question medium-term scope for additional upside.

AT&T is an S&P 500 dividend aristocrat and yields 5.25%. It pulled back sharply from the September highs but has found support mostly above $33 and a sustained move below that level would be required to question medium-term scope for additional upside.

Sprint has been ranging below $6 for the last few months but will need to sustain a move above that area to complete its three-year base.

Among service providers to the sector, AMDOCS (1.52%) completed a 30-month range in August and a sustained move below the 200-day MA would now be required to begin to question medium-term scope for additional upside.

Viacom (2%) found support at the lower side of its range earlier this month and a clear downward dynamic would be required to check potential for additional higher to lateral ranging.

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December 11 2012

Commentary by Eoin Treacy

Intel in Bond Gambit to Rescue Ailing Stock

This article by Charles Mead and Ian King for Bloomberg may be of interest to subscribers. Here is a section:
Intel Corp. is taking advantage of bond interest rates below its dividend yield as the world's largest semiconductor maker borrows to buy back stock battered by its lagging share in the smartphone and tablet markets.

The firm issued $6 billion of debentures in a four-part sale yesterday with an average coupon of 2.38 percent that will help fund its stock buyback program. That's lower than Intel's indicated dividend yield of 4.5 percent on equity that trades at a lower price relative to earnings than every profitable firm in the 30-member Philadelphia Semiconductor Index.

Intel is enriching shareholders with borrowed money for the second time in 15 months after selling $5 billion of debt in September 2011. While its shares have underperformed as the Santa Clara, California-based firm and Microsoft Corp. Struggle to combat Apple Inc. in the $63.2 billion tablet market, bonds of the industry's biggest generator of cash trade at tighter relative yields than the average for Technology companies.

“They're essentially doing an arbitrage by borrowing at cheaper rates and retiring higher-cost equity,” Alan Shepard, an analyst at Madison Investment Advisors Inc., which holds Intel debt and oversees about $16 billion in Madison, Wisconsin, said in an e-mail. “Given that Intel has relatively low leverage, this shouldn't affect its ratings.”
Eoin Treacy's view - Intel has lost market share by not adapting fast enough to the brave new world of mobile devices but it remains a major player in the chip market. The share currently has a dividend yield of 4.48%, P/E of 8.62 and fell abruptly in November to test the 2011 lows near $20. This represents a potential area of support and a sustained move below $19.25 would be required to question potential for at least an additional unwind of the short-term oversold condition.

On a weighted average cost of capital basis, short and long-term debt makes up a negligible proportion of the company's liabilities so it has room to increase its debt load in order to buy back its shares. This is a trend which has been evident across the equity sector for much of the last year as low interest rates, demand for debt and ambivalence towards the equity market make balance sheet optimisation more attractive.

I performed a search of Bloomberg this morning for European and US shares whose dividend yield is greater than the average coupon they pay on their debt. Here is the list of 159 shares. These represent companies who may be tempted to use new debt to buy back their shares. Some of the more notable entries are:

Vodafone announced today that it had bought back 7.5m shares. It currently yields 6.7% and is testing the lower side of its almost two-year range near 160p. A sustained move below that level would be required to question current scope for an additional bounce. A number of other European telecoms appear on this list.

Nestle is an S&P Europe 350 dividend aristocrat and currently yields 3.19%. While the company has an impressive record of returning money to shareholders, there is an argument for reducing the supply of stock. The share found support in the region of the 200-day MA four weeks ago and a sustained move below it would be required to begin to question medium-term upside potential.

Costco remains one of the better performing shares in the USA and paid a special cash dividend of $7 in November. It normally yields closer to 1.1%. A sustained move below the 200-day MA would be required to question the consistency of the medium-term uptrend.

Following a steep decline following the US Presidential election Southern Corp's yield has risen to 4.46% and the attractiveness of buying back its shares has increased. The share found support in the region of $41.80 three weeks ago and a sustained move below that area would be required to check potential for an additional bounce.

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December 11 2012

Commentary by Eoin Treacy

ESN Value Monitor

Thanks to Bernard McAlinden of NCB Stockbrokers for this edition of his report which I'm sure will be of interest to subscribers, not least for the charts of real earnings for a range of markets. Here is a section:
Over recent years, corporate earnings have benefited from major sustained structural forces . Globalisation, free trade, migration, the opening of China, Technology advance, the spread of capitalism, etc have greatly enhanced the supply and productivity of labour on a worldwide basis progressively since around the mid 1990's. The bargaining power of capital relative to labour has therefore seen major sustained improvement and margins / returns on capital have expanded accordingly. In the current global economic expansion, earnings have again been benefiting considerably from the combination of structural margin expansion and renewed cyclical growth in global demand (albeit erratic and geographically uneven).

In the established environment of increasingly free and efficient global markets, it is inevitable that market forces would eventually compete margins and returns back down to the long run required levels , whereupon earnings would structurally revert to the long run trend line. On the assumption that the forces of globalisation etc are unlikely to go into reverse, it would take ongoing reflation of the global economy to achieve such structural mean reversion. Global final/consumer demand would have to expand to the point where global labour markets tighten sufficiently to allow labour to claw back some pricing power at the expense of capital. Meanwhile, the outlook needs to be bright enough to tempt the global corporate sector to more aggressively chase the supernormal returns on offer by stepping up capital spending to create sufficient new capacity to eventually compromise the pricing power of capital relative to labour. Periods of cyclical economic weakness such as the recent “great recession”, when worries focused on the risk of demand deflation, put earnings under significant downward cyclical pressure, but also delay any structural mean reversionary process because they weaken the labour market while restraining investment in new capacity by the corporate sector.

The success of companies in aggressively managing costs and defending margins in the recent recession suggests that the structural environment is still quite favourable for earnings as they recover cyclically with capital maintaining pricing power at the expense of labour . US earnings had recently been recovering surprisingly quickly from their headlong collapse below the 32-year trend line. They are already back well above trend but are now suffering from more recent deceleration in the economy. However, they can yet make new highs if, as we expect, the economy continues its cyclical recovery. European earnings are once again under recessionary pressure due to the Eurozone debt crisis, but will ultimately be governed by the same global structural and cyclical forces that pertain to the US.
Eoin Treacy's view - Corporations have demonstrated their ability to contain costs and drive efficiency gains since the onset of the credit crisis and this has translated into margin expansion which has flattered earnings. The rebound in earnings has helped drive a relative compression in P/E ratios despite the S&P500 more than doubling since 2009. With earnings now close to historic peaks it is reasonable to ask how sustainable this trend is. As it becomes increasingly difficult to wring additional benefits from such rationalisations, a more broad based recovery will probably be required to sustain earnings momentum.

The fiscal cliff continues to grab headlines but the rebound in stock markets over the last three weeks suggests the benefit of the doubt is being given to an agreement. If the rebound in housing continues and unemployment figures improve further, there is potential for earnings to improve but they are likely to become increasingly dependent on growth.

At this stage, Europe represents an interesting proposition. The charts in the above report depict a rather depressing situation where earnings have, on aggregate, been deteriorating and are below trend. The issues Europe is presented with are neither fleeting nor trivial; however one has to query how much these concerns have been amplified by negative perceptions of future cohesion. If as appears likely, the Eurozone is prepared to do what is necessary to hold together, then there is additional potential for a rerating of stock market potential.

The Stoxx 600 Index found support in the region of the 200-day MA from late November and hit a new 17-month high this week. A sustained move below the MA would be required to question medium-term scope for continued upside.

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December 11 2012

Commentary by David Fuller

China: 2013 Outlook

My thanks to a subscriber for this excellent (232 page) report from Oriental Patron in Hong Kong. Here are a few samples from the opening sections:
Chinese leadership tends to be slightly conservative in setting the growth target, we believe China's GDP growth for the next 5 years will more likely to be in the range of 7.5-8.5% as a result of the following growth drivers: Urbanization, Demographic Composition, Investment in Information Technology and Universal Healthcare. We also see the GDP growth drivers shifting from East to West demographically [Ed: within China].

Despite a challenging global economy and numerous social problems internally in China, we do not see the risk of significant slows down in China's economy as the Chinese government still have a lot of leeway to stimulate its economic growth given its low debt level, huge foreign reserve, and continuing inflow of foreign direct investment.

China's debt as percentage of GDP at the end of 2011 is only 43.5%, versus 205.5% for Japan, 67.8% for U.S and 165.3% for Greece.

China's debt as percentage of GDP at the end of 2011 is only 43.5%, versus 205.5% for Japan, 67.8% for U.S and 165.3% for Greece.

Urbanization: The driver for next decade
Urbanization in China has experienced a number of key phases since China was founded in 1949, including: Phase 1: 1949 -1957 (Steady Development) Phase 2: 1958 -1963 (Fluctuation) Phase 3: 1964 -1978 (Stagnation) Phase 4: 1978 -Present (Accelerated Growth). For the next decade, we believe the urbanization process will move to the next phase from Industrialization promoted urbanization to government leading the urbanization process. And rapid urbanization is usually associated with very swift economic expansion as historical data shows in other countries.

The next great challenge for Chinese government to tackle in order to continue its exceptional growth through rapid urbanization is income inequality. However, given its track record, we believe heavily investment in infrastructure, effective urban planning and wider social program should ensure its high growth associated with successful rapid urbanization if the new government is able to control the spread of government corruption.

Urbanization in China over the next decade will bring significant changes to the country, resulting the emergence of 13 Mega-cities, 4 Mega-regions, and 7 Mega-corridors in 2025. These Mega Cities will grow to become the major hubs for commercial and business activity. In a bid to support urbanization, the Chinese government has announced to invest RMB 17 trillion on infrastructure, such as power supply, transportation, water, aviation between 2011 and 2015.

Long term Outlook: China to accounts for 1/3 of global GDP in 2030
According to OECD Report in September 2012 titled: "Looking to 2060: Long-term growth prospects for the world". China is projected to surpass the Euro Area in a year or so and the United States in a few more years, to become the largest economy in the world, on the basis of 2005 purchasing power parities (PPPs). China's global share of GDP on a PPPs based will increase from 17% in 2011 to 28% in 2030, while U.S will shrink from 23% to 18% and Japan will be reduced from 7% to merely 4%. China and India will experience more than a seven-fold increase of their income per capita by 2060.
David Fuller's view - I like long-term forecasts because so much research understandably focuses on the short to medium term, usually meaning the next few months to a year. However, there is inevitably a considerable degree of conjecture in all multiyear projections, to which we should add the caveat: if all goes according to plan, which of course it seldom does.

However, the Oriental Patron report also contains a wealth of medium-term projections, including Industry Profiles. Additionally, considerable data on a number of Hong Kong listed mainland Chinese shares is also provided. Given Fullermoney's interest in China at this time, Eoin will be reviewing many of the shares fundamentally assessed in the report from a technical perspective later this week.

Returning to the caveat: if all goes according to plan, there are plenty of concerns about most countries and not least a dictatorship of China's size. My initial impressions of Xi Jinping are favourable but will he be able to reduce political corruption throughout China? Will a privileged ruling class be tolerated by China's increasingly educated and often entrepreneurial managers who do not have strong political connections? Or will those people just focus on achieving short-term commercial success before they get out? Political stability is essential for China's development but its leaders also need to encourage the skills and aspirations of the entire population. If China can achieve this it will probably flourish and ideally liberalise the system, as we have seen in Singapore.

There are also environmental concerns in China. The country appears to be gaining control over pollution and reducing it. However, the scarcity of potable water presents an enormous challenge.

Additionally, while China's post Mao economic growth remains a huge and probably unprecedented achievement for any country of size, this does not necessarily mean that foreigners investing in China participate equally in the success. Those of us without first hand or even insider knowledge will need to rely on our medium-term trend running skills.

Despite these concerns, China remains an economic powerhouse and the timing appears right.

See also Eoin's and my earlier comments on China posted over the last week.

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December 06 2012

Commentary by Eoin Treacy

Molten Salt Nuclear Reactors

At the drinks reception following the latest Chart Seminar in London the conversation led to a discussion of molten salt reactors. I asked the most knowledgeable delegate on the subject if he could send through some information because I believe this Technology will be of interest to the Collective. He was kind enough to contribute the following informative email and the attached reports in the spirit of Empowerment Through Knowledge.
The Molten Salt Reactor (MSR) is probably the most exciting alternative nuclear reactor design as it offers:

- inherently safe design (passive components)

- operates in atmospheric pressure so no need for pressure vessel

- no CO2 emissions with only a fraction of dangerous waste (volume and containment period)

- cost

- ample availability of fuel (thorium)

- higher efficiency in terms of size flexibility, deployment, temperature/steam/turbines

I have no doubt that the efforts in renewables, like wind and solar, will have its limitations, at least with the current Technology. With the growth in energy demand seen from the emerging markets it is evident we will still have to rely heavily on fossil fuels, with negative implications for the environment. Therefore nuclear will also certainly play a role in the future, despite decisions by e.g. Germany to abandon this energy source.

Therefore we will, and are seeing, efforts being made to develop new and safer nuclear reactor types that can provide a substantial base load of energy supply in the future. I believe the MSR is a very promising Technology (that is based on an already proven reactor type built by the USA in the 1960ies). In the meantime Light Water Reactors (LWR) and other traditional reactor types are being built around the world.

There is vast information on liquid salt reactors; most commonly termed MSR (Molten Salt Reactor) or LFTR (Liquid Fluoride Thorium Reactor), available on the web. I don't know how much time you want to spend on this, so I suggest you do it in steps and go as far as you want.

Step 1 - intro:

http://www.youtube.com/watch?v=EbucAwOT2Sc - first five minutes give snapshot of LFTR by Kirk Sorensen (nuclear engineer) http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8393984/Sa

fe-nuclear-does-exist-and-China-is-leading-the-way-with-thorium.html - Telegraph article http://www.guardian.co.uk/environment/2011/jul/04/thorium-nuclear-power

See also the New Scientist article attached.

Step 2 - starting to dig in:

When digging more into the MSR, you might see there is a lot of talk about Thorium as a fuel source and a potential savior of our energy future. I believe the clue is the MSR Technology and not the thorium fuel. As Canadian physicist and MSR designer says to people developing an interest in the subject: Join for Thorium, Stay for MSR. David [LeBlanc] was part of our MSR project team last year.

The Weinberg Foundation (UK foundation led by Baroness Worthington, House of the Lords) provides a good web site with information that is well organized and fairly easy to go through: http://www.the-weinberg-foundation.org/ . Here you can play around to learn more about MSR and Thorium.

An interesting article is this one:

http://www.thoriumenergyalliance.com/downloads/American_Scientist_Hargraves.pdf

The UK has an All-Party Parliamentary Group looking into alternative energy and has produced this paper on MSR/Thorium:

http://www.the-weinberg-foundation.org/wp-content/uploads/2012/09/APPG-on-Thorium-Energy-Thorium-Fuelled-MSRs-Briefing-Paper-July-20121.pdf

Step 3 - really digging in:

Resources with articles, videos, news:

http://itheo.org/

http://thorea.hud.ac.uk/

http://energyfromthorium.com/

http://www.thoriumenergyalliance.com/

Presentations on the subject (also linked on websites referred to above):

http://www.youtube.com/watch?v=8F0tUDJ35So - Google Tec talk by David LeBlanc Kirk Sorenson also has lots of presentations on YouTube.

A more in-depth study of nuclear innovations is available at a price:

http://www.kachan.com/research/emerging-nuclear-innovations-report#form
Eoin Treacy's view - Here are links to an article by David LeBlanc in Mechanical Engineering Magazine dated 2010, an additional informative report by the same author and a table offering a comparison of competing nuclear technologies, all of which were forwarded by the same subscriber.

Also see David's piece on nuclear energy in yesterday's Comment of the Day. I last commented on Thorium reactors and potential investments in that metal in Comment of the Day on March 21st 2011.

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December 06 2012

Commentary by David Fuller

Email of the day (4)

More on global warming:
"I apologise for returning to the ever-lasting theme of global warming. My contention was that our resources are better spent in preparing for the inevitable, than attempting to prevent it. It does seem unlikely that human activity was the major cause of the cold mini-cycle starting at the Conquest and the warm one starting some 500 years ago. Our sister planet Mars is also going through a warming phase. I wonder why? In 200 hundred years time the UK's main crop could be GM modified rice grown in the salt marshes of the Thames estuary. We shall have to learn to use chopsticks!
David Fuller's view - I agree and am only interested in what most of us would regard as enlightened preventions. For instance, our costal cities need better flood defences because they have been and will continue to be damaged by the occasional severe storm, even if global warming proves to be negligible. I have long said what should be obvious - polluting the planet is irresponsible, not least because it is not only our home but also the home of everything that lives on earth. Education and Technology are long-term solutions for many negative impacts on the planet which we have had, not least in terms of pollution and climate change. Unfortunately, we have exterminated or marginalised too many other species and there is no realistic solution to this problem.

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December 05 2012

Commentary by David Fuller

Email of the day (2)

On the new generation of nuclear power:
"If we as a race are really interested in finding ways to mitigate the risk of "global warming", I suggest we should take off our collective "nuclear goggles" and stop looking at nuclear power through the prism of 1950s and 1960s Technology. Jane Fonda, Chernobyl and Fukushima et al have little to do with modern nuclear Technology. Let's have a good look at flat bed reactors with fresh eyes and see if the introduction of graphite into the fuel mix can remove the risk of meltdowns and contamination from spent fuel.
David Fuller's view - Thanks for an outstanding email. Militant greens have had their way with wind, for which we all have to pay. Modern nuclear power stations, which will never stop evolving and become safer and more affordable in the process, are the ultimate smart solution to mankind's main contribution to global warming. We may have to wait a little longer, particularly if the evidence of global warming remains debatable, because the world is gradually moving towards the time when it is awash in conventional and unconventional oil production, as Fullermoney has often forecast, not to mention all the subsidised so-called green energy.

Meanwhile, you can read all about modern developments in nuclear reactors in this Safety Report Series 43: Accident Analysis for Nuclear Power Plants with Graphite Moderated Boiling Water RBMK Reactors. This should also be sent to our governing politicians. I would also welcome more authoritative reports and articles on this subject from similarily interested members of the Collective.

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December 04 2012

Commentary by David Fuller

Email of the day (1)

On last Friday's lead item: "Polar Ice Sheets Shrinking Worldwide, Study Confirms":
"So, the ice sheets are shrinking. We can't change the weather, so what would you suggest we do about it, buy a 3 pack of CFL bulbs and a Prius so we can at least assuage our guilt? Maybe we should sign a petition in support of the extermination of ¾ of the globes population to get back to a sustainable number as some population control types like Bill Gates and Warren Buffet suggest? How about writing our congressman in support of a UN mandate prohibiting with immediate effect, all the countries that aren't yet civilized from ever emerging from their Hobbesian existance? I certainly don't want to be the one [Ed: to] inform the Chinese and the Indians, "sorry chaps, game over, you missed your chance at a better life because we got there first and ruined it for you. We've got to "save the planet", so back you go, off to your mud hut and please stop burning that cow dung!".

"In my part of America - Portland, Oregon, we are overrun with Global Warming fanatics - they are all hypocrites. These same people that want to "fight global warning" don't have the first clue about what it takes to lower the temperature of the planet one degree, and furthermore would never make the sacrifice to get us there if they did. I think the minute you tell them they have to give up their 5000sqft McMansion and move into a studio flat, that they are limited to one child, that they can't fly the family to Disneyland next summer-or for that matter fly anywhere ever again, that they have to stop eating beef, and that they have to give up their cars and use public transportation, you'll have a riot on your hands.

"It strikes me as somewhat optimistic that the same Americans who don't have the discipline to curb their junk food intake and get regular exercise to prevent their premature demise, are going to lead the charge to a greener lifestyle. Call me crazy, but I just don't see them altering their lifestyles completely for an abstract societal goal that will only benefit future generations.

"Anyway, not to worry, government has all the answers and will solve this problem for us. I'm quite confident that Barack Obama now that he's been re-elected, is on the case. As soon as he's done transforming the 1/6th of the economy that is responsible for healthcare into something akin to the NHS, he can "solve" global warming by taking over housing, transportation, and agriculture for the greater good of mankind. The same government that brought you AMTRAK, the US Postal Service, and the TSA will solve this inconvenient truth. All we have to do is sit home, and wait for our check. Hope and change! Hope and change!"
David Fuller's view - I thoroughly enjoyed this, as you described some of the proposed policy choices with considerable humour. You also touched on the impossibility of securing global cooperation for any draconian "solution" to the risk of global warming. That is sensible because the "solution" proposed by some impractical types would most likely be worse than the global warming problem during anyone's lifetime, assuming it continues.

I maintain that the best chance of a successful humanitarian solution to the apparent risk of global warming will evolve from sensible and practical policies. These are evolving because we are fortunate to live at a time when technological innovation is occurring at an accelerating pace.


We need smarter solutions and will discover them, provided the pace of global warming does not increase too rapidly in our lifetimes. So called "solutions" to global warming such as turning back the clock with regressive policies, vary from the unimaginative to sadistic madness.

Lastly, see also Eoin's "supremely ironic" comment on 31st October, in response to the article he posted: "Gas Golden Age Darkens in Europe on U.S. Coal".


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November 30 2012

Commentary by Eoin Treacy

A review of the Autonomies

Eoin Treacy's view - The post election sell-off has given way to a more level-headed appraisal of opportunities as investors weigh the likelihood of a compromise against the fact that a considerable number of assets have retreated to potential areas of support with an increasing number bouncing rather emphatically. Nevertheless, volatility remains a considerably possibility ahead of the 2013.

While US taxes may or may not rise at the end of the year, the rest of the world will continue on as normal. European stock markets in particular have rebounded to test their respective highs which may be viewed as a testament to the perception of value in those markets as the prospect of a Euro break-up recedes and additional liquidity provision by the ECB remains open ended. At this juncture I thought it would be opportune to revisit the Autonomies.

I last reviewed the Autonomies on November 7th and used an equally weighted proxy index I created on Bloomberg in order to monitor the aggregate performance of the basket. This Index can be found in the Chart Library by searching for Autonomies or via its listing in the Global Stock Indices, Funds, ITs & ETFs section. (Please note that because this is the representation of a basket created through the Bloomberg portfolio system, it does not update automatically. I will manually run the macro to load the price history once a week and this will then be reflected in the Chart Library). Earlier this month, the Index had returned to test the region of the upper side of the underlying trading range and the region of the 200-day MA. It has since bounced and a sustained move below the MA would now be required to begin to question medium-term upside potential

A considerable number of the Autonomies have found support in the region of their MAs over the last month. Disney, Google, Qualcomm, Novo Nordisk, Fresenius SE, Johnson & Johnson, Siemens, Eli Lilly, Biogen, Merck, Pfizer, Anheuser-Busch, SAB Miller, Remy Cointreau, Pernod Ricard, Coca Cola, Pepsi, Nestle, Mondelez International (formerly Kraft), Proctor & Gamble, Colgate Palmolive, Kimberly Clark, Estee Lauder, LVMH, Wal-Mart, Air Liquide, Linde, Exxon Mobil, Siemens, General Electric and Emerson Electric all share this characteristic and would need to sustain moves below their recent lows to question medium-term upside potential.

Samsung Electronics, Sanofi, Diageo, Heineken, Unilever, Heinz, Reckitt Benckiser, Prada, Compagnie Financiere Richemont, Christian Dior, Intertek Group, Visa and Mastercard have all posted new highs in the last week and while some such as Diageo are becoming increasingly overextended relative to their MAs, clear downward dynamics would be required to check momentum.

Apple, IBM, Cisco Systems, Bristol Myer Squibb, Starbucks and Nike all dropped below their respective 200-day MAs but have firmed of late and the benefit of the doubt can continue to be give to the upside provided they continue to hold above their November lows. Royal Dutch Shell, Hengan International, Uni-Charm Corp, Praxair, Herbalife and Nu Skin Enterprises have been ranging mostly below their MAs but will need to sustain breakouts from these short-term congestion areas to confirm returns to demand dominance.

Microsoft, Intel, Microchip Technology, Fresenius Medical, McDonalds and Mead Johnson have experienced technical deterioration and will need to break their progressions of lower rally highs to question the downward bias. Yum Brands posted a downside weekly key reversal this week following an unexpected drop in Chinese sales. This suggests a peak of at least near-term and potentially medium-term significance has been reached. LAM Research has rallied to test the 200-day MA, following a consistent downtrend, but will need to sustain a move above it to suggest a return to demand dominance beyond the short-term. HTC Corp has steadied somewhat following a steep decline but a further period of support building is likely required before confidence is restored.

Tesco, BHP Billiton and Rio Tinto exhibit base formation characteristics but will need to sustain breakouts from their congestion areas in order to confirm returns to medium-term demand dominance.

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November 27 2012

Commentary by Eoin Treacy

Email of the day (2)

on valuing rural land from a mining/energy perspective:
“What would you use to project 30 years of rural property prices going forward if you had good data:

“Apart from interest rates and Ag commodities, what would you use.

“Or how would you address it in your country as would be similar methodology?

“I am trying to project rural prices in Qld Australia in CSG mining areas which produce gas for 30 years and reward property owners based on valuation projections. ”
Eoin Treacy's view - Thank you for this question which is an area we are not particularly familiar with. European governments generally retain the mineral rights on property regardless of who owns it, so we are presented with a situation quite different to that in Australia and North America. In order to gain some additional intelligence I contacted a subscriber whose wife has land in Texas which sits on top of a shale gas and oil region and asked for his input. Here is his generous response:

As to your nat gas question, my wife has been approached a number of times to sell all or a portion of her mineral rights. As the evidence of viable reserves has mounted, the offers went up (quite substantially). I believe the issue for your subscriber hinges on the level of certainty that the reserves exist, and the quantity that can be extrapolated as being able to be captured, generally based on production nearby. In addition, we have found that Texas oil and gas regulations require pooling of land to ensure fairness to all owning the land from which the gas is being extracted. I do not have knowledge of Australian laws, but as an example my wife's property is a small part of a pool of some 1,000 acres. My best effort would involve a present value of a future stream of income, with assumptions on the price of an mcf of nat gas, as well as how much gas can reasonably be captured . Finally, my wife's property was essentially worthless until the Technology of "fracking" evolved, and made reserves not previously able to be extracted at a profit suddenly of great interest to oil companies.

There are no doubt many, many other factors -- some unknown and unknowable. There is obviously the technique of utilizing the value of nearby properties that have sold recently, but that doesn't seem to address current values accurately. It would seem to be a very complicated problem that ultimately ends with "it's worth what someone will pay for it". The leader in the area of my wife's property is EOG Resources, and they have made a strong case (based on their stock price) for the value of very large blocks of land with nat gas reserves, some proven and others more speculative. Sorry I'm not more help, and I'm happy to talk through this in more detail at your convenience.

If other subscribers with knowledge of this area would like to share their input I would be happy to post it. The global natural gas industry remains on a growth trajectory but pricing is likely to ebb and flow with perceptions of economic growth.

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November 20 2012

Commentary by David Fuller

Stock Selection Themes

My thanks to Bernard McAlinden for his informative, bullet-point report on this important subject. The author's name is likely to be recognised by some other veteran subscribers and I am delighted to post this useful report published by the European Securities Network (ESN). Here are the 2nd and 3rd of 22 well-considered guideline pages:
Themes to seek exposure to:

• Favour branded exposure to emerging market consumer demand
• Favour exposure to German domestic demand
• Favour exposure to healthcare demands of an ageing Western population and to increasing incidence of Western lifestyle diseases in emerging economies
• Favour exposure to unconventional (shale) Oil and Gas
• Favour exposure to US Construction
• Maintain some exposure to secular commodity theme
• Maintain selective exposure to emerging markets Infrastructure theme
• Favour beneficiaries of ongoing automation and application of robotics
• Don't shun "quality" cyclical exposure
• Favour solid and consistent financial metrics

Themes to avoid:

• Avoid the victims of Chinese competition
• Avoid fiscal victims
• Avoid Technology victims
• Avoid state-ridden sectors
David Fuller's view - This report has medium to longer-term value and is a very helpful background check for equities that many of us will wish to consider for our portfolios. I would also use the Fullermoney Chart Library for timing.

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November 19 2012

Commentary by David Fuller

S&P 500 in Cheapest Bull Market Since Ronald Reagan

Here is the opening from this interesting article by Whitney Kisling, Inyoung Hwang Rita Nazareth of Bloomberg:
The post-election rout in U.S. stocks has driven the Standard & Poor's 500 Index (SPX) down so far that it would have to advance 26 percent to reach the valuation of bull markets since John F. Kennedy was in the White House.

Investors have seen $806 billion erased from the value of American equities since President Barack Obama was re-elected Nov. 6 in the biggest decline since May. The combination of falling stocks and rising profits as the economy recovers has left the S&P 500's price-earnings ratio below the ending level of eight of the nine bull markets since 1962 and beneath the average of any since Ronald Reagan was in power.

Bears say the 4.8 percent drop in the S&P 500 and valuations show investors are losing confidence that Congress and Obama will reach a budget compromise that would keep the recovery from stalling. Bulls, including the top strategists at six Wall Street firms, say that the declines are another reason to buy and that stock prices from Apple Inc. (AAPL) to Dollar Tree (DLTR) Inc. are bound to improve as earnings increase.

"The stock market looks cheap because people are way too pessimistic about what growth looks like for the next 10 years," said Brian Jacobsen, who helps oversee $208 billion as chief strategist at Wells Fargo Advantage Funds and predicts the S&P 500 will rise 47 percent to 2,000 in 2014. "You can get big and rapid moves in the market when expectations are so low."
David Fuller's view - Our 'Austrian School' friends will quibble about the paragraphs above and not without justification. After all, the S&P 500 Index trades on a historic PER of 13.94 and yields only 2.24%. The US economy remains on financial steroids in the form of quantitative easing (QE). Corporate taxes will go up during at least the early years of President Obama's second term. Taxes on dividend payments are also certain to rise. While US corporations have been generally prudent in terms of controlling overheads, they have also flattered earnings through share buyback programmes.

Nevertheless, there are good reasons for not being too bearish. Without having to worry about unemployment, corporations have been generally responsible in terms of curbing overheads. QE remains a massively benign tailwind and is currently scheduled to continue over the next year or more. This will ensure plenty of liquidity and very low interest rates. Multinational companies have often profited additionally from stronger GDP growth in the Asian-led economies. The USA's advantage in tapping shale oil and gas has made its economy more competitive.

A generally beneficial secular theme of Fullermoney's is the accelerated rate at which Technology continues to develop. This is unprecedented throughout human history and therefore hugely important. While it does carry the risk of an accelerated rate of obsolescence, the overall cost of Technology continues to decline. Therefore, it is available to many more corporations and individuals than ever before, and offers the capacity for them to become much more efficient.

Returning to equities, while Wall Street is moderately valued, there are plenty of cheaper stock markets around, not least in the greater Asian region. While stock markets tend to be volatile, Fullermoney maintains that successful Autonomies and Dividend Aristocrats are much more attractive than government bonds which have been driven to record low yields by QE. We maintain that they are now the great bubble of this decade.

See also Friday's lead item: Too many investors are falling under the spell of false omens.

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November 16 2012

Commentary by David Fuller

Too many investors are falling under the spell of false omens

My thanks to a subscriber for this excellent article by Ian Harnett, managing director of Absolute Strategy Research, which was published by The Times (UK) today (subscription required but here is a PDF). The subscriber forwarded the article with this email comment:
"I thought the attached article from today's Times was a good reminder to stay calm and make sure we don't ignore the big trends when deluged by so much noise."

I agree and will discuss this below but first, here are some samples from the article, starting with the opening:

How many black swans have you spotted recently? The fall in trading volumes on stock markets appears to reflect a world full of potential black swans: eurozone collapse, US fiscal cliff, Middle East conflict, all set against a backdrop of debt-induced low growth - economies sustained, zombie-like, only by ever larger bouts of quantitative easing.

And:

Into this apparently serene world flew a strange, rare, bird - the black swan. The original notion of the black swan, propounded by the philosopher Karl Popper, was based on the idea that if someone saw that all the swans on a particular village pond were white, they would have a good working hypothesis that all swans were white. This would be reinforced by visiting the next village etc.

The trouble is that searching for more white swans can never prove that all swans are white, while the sighting of a single black swan disproves the hypothesis completely.

The key lesson for investors is that "anomalies matter".

During the great moderation, searching for black swans was not a popular pastime and few wanted to hear about the anomalies, or the emerging risks. The credit crunch ushered in a different zeitgeist. Today, the only things worth analysing appear to be "fat-tailed events", and only potential black swans get attention. Everyone is seeking the next black swan, and the more people search for them the more they spot.

Unlike the villagers in Popper's narrative, we now appear to inhabit a world where all the swans on our local pond are black. Our Facebook friends tell us of the black swans in their village, and Twitter is abuzz with stories of the black swans that inhabit the ponds of the eurozone, US and Asia. Increasingly, the majority of investors appear convinced that all swans are black.

While this phenomenon may be real, and the proportion of black swans really may have increased, it could just be that this apparent rise in black swans is one of perception.

In his book Thinking, Fast and Slow, the psychologist Daniel Kahneman explains how our minds subconsciously overestimate the probabilities of unlikely events and compound this by overweighting unlikely events in decision-making. The framing of questions and statements also has a big impact on our perception of probabilities. The mind responds better to vivid stories than to abstract data.

The implications of Mr Kahneman's work for investors' views about black swans are readily apparent.

With so many people searching for them, it is easy to overestimate their numbers. If these risks are framed as something that "could" happen, rather than the probability that they "will" happen, they become more believable. If they are then presented in a strong narrative, our natural tendency is to believe it. Mr Kahneman also warns that frequent repetition encourages affirmation of ideas - regardless of veracity. Thus, those who shout the loudest and most often may have the largest followings on their blogs or appear more frequently on TV. They will probably have their views accepted.

Investors need to be aware that just because the consensus is repeated loud and often it need not necessarily be true. Investors would do well, as Mr Kahneman advises, to overcome the "urges of intuition" and focus instead on time-consuming, detailed analysis - anchoring their views in the "base rate probabilities" of events instead of believing that "this time is different". In the post-credit-crunch new order, many investors perceive that few reliable macro-to-market relationships survive. These "white swans" are now the anomalies.
David Fuller's view - There is wisdom in these comments and I recommend that you read the full article by Ian Harnett.

Experienced investors will have observed that in a lengthy bull trend many people lose the ability to identify risk. They become complacent and rationalise higher valuations as evidence that risks have been reduced by a combination of our superior skills (sic) and Technology.

However, following a burst bubble as we saw in 2000, and then a further meltdown in 2008 as additional excesses were exposed, the collective mood ranges from cautious to extremely bearish, despite far more realistic valuations and dividend yields that are, on average, considerably higher than in the last secular bull market's later years.

Sure, there are plenty of economic and financial problems, often of an ever changing nature. I am tempted to reply: 'And thus it always was.'

The creation of market bubbles masks our perceptions of risk. Similarly, the return to more attractive valuations that we have seen in recent years often heightens our perception of risk.

Yes, our standard of living may have deteriorated in recent years, particularly in the west. However, stock market valuations have improved and we should not lose sight of this.

There is one additional factor that has intensified our perception of risk, which I have mentioned frequently in recent years. It is high-frequency trading (HFT) which often accounts for over half of our daily volume on major exchanges. HFT is largely responsible for the 'risk-on' and 'risk-off' banality. It leads to slow motion melt-ups and somewhat larger and faster melt-downs than we have seen on average in earlier years. You can see the evidence on this 10-year chart of the S&P 500 Index.

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November 08 2012

Commentary by Eoin Treacy

China Leadership Change Boosts Consumer Stocks, Matthews Says

This article from Bloomberg news may be of interest to subscribers. Here is a section:
Valuations on the Shanghai Composite have fallen to 9.8 times estimated profit, compared with an average multiple of 17.8 since Bloomberg began compiling weekly data on the gauge in 2006. The MSCI China Index of mostly Hong Kong-traded stocks is valued at 10.2 times profit after gaining 14 percent in 2012. “The overall valuations of Chinese companies are still quite attractive,” Gao said. While declining to name which stocks he is buying, Gao said he favors companies such as supermarket operators, department stores, Technology firms and gaming stocks.

BlackRock Inc., the largest money manager in the world, recommends buying China stocks for long term investment on “attractive” valuations. Investment opportunities which could follow structural reforms are “enormous,” Jing Ning, a BlackRock portfolio manager, wrote in an e-mailed note today.
Eoin Treacy's view - The Chinese market has been waiting for a catalyst to initiate investor demand for stocks which have returned to historically attractive valuations. The decennial transition of power within the Communist Party begins today and the new make-up of the Politburo will be announced next week. The full handover will be completed over the next six months as Xi Jinping consolidates his rule. On its own this might not be enough to spur investor interest. What the new administration does to foster economic growth, by potentially lowering short-term interest rates, increasing spending, cutting taxes or other measures will probably have more of an impact.

The evolution of a vibrant middle class remains the central policy goal of the Chinese administration. At present China is a middle income country on a PPP basis. If it is to achieve its lofty ambitions, it will need to add an additional aspect to its growth strategy. The challenge has long been how to unlock the massive pool of savings held by consumers. Supports for social security, medical care, the minimum wage, workers rights and the environment have all been aimed at achieving this goal.

The CSI300 Consumer Staples Index has been largely rangebound since late 2010 and has paused in the region of the lower boundary, near 5000, since August. It will need to hold above that area if the medium-term upside is to be given the benefit of the doubt. The MSCI China Consumer Staples Index which includes Hong Kong listed shares exhibits a more well-defined upward bias and continues to rally from the lower side of its range.

The Hong Kong Hang Seng Index encountered resistance this week in the region of 22,000 following six consecutive weeks to the upside. At least a pause and consolidation is underway but a sustained move below 21,400 would be required to question medium-term potential for continued higher to lateral ranging.

The US listed Matthews China Fund, mentioned in the above article, invests in mainland China and Hong Kong and has the capability to also invest in Taiwan listed companies. It has a 0.68% management fee and a 2% early withdrawal fee. The fund retested the 2007 high by early 2010, pulled back and has been ranging above $20 since mid 2011. A sustained move below $21 would be required to question medium-term scope for continued higher to lateral ranging.

The Atlantis China Healthcare fund is listed in Ireland, has a management fee of 1.41%, performance fee of 20% and a back load of 3%. It has been trending consistently higher since May and is approaching the 2010 peak. While somewhat overbought in the short-term, a sustained move below the 200-day MA, currently near $1.17, would be required to question medium-term scope for additional upside.

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November 06 2012

Commentary by Eoin Treacy

Apple Said to Be Exploring Switch From Intel Chips for Mac

This article by Adam Satariano, Peter Burrows and Ian King for Bloomberg may be of interest to subscribers. Here is a section:
Intel helped allay some of Apple's most pressing concerns when it announced that it would develop chips that don't require as much power as existing chips, this person said. That pledge to prioritize power conservation led some within Apple to conclude the company has a few years before it would need to make any change, if it makes a switch at all, this person said. And if Apple can't design ARM-based chips that are far more powerful than current models, the company would probably need to stay with Intel to satisfy Mac power users, who need lots of computing performance for tasks such as developing software or doing high-end graphics.

“This is a geek technical issue, but the ultimate question is could Apple keep up with what Intel is doing in terms of speed and graphics?” said Tim Bajarin, an analyst at Creative S trategies Inc. “At this moment, I'm not sure.” Even so, Apple continues to explore moving in a new direction. The iPhone, iPad and Mac operating systems are increasingly sharing features. Yet the different chip Technology makes it difficult to build features that work together seamlessly. For example, the thousands of applications for the iPhone and iPad and some of Apple's newest features, such as the Siri voice-command tool, don't work on Intel-based Macs.
Eoin Treacy's view - In the high stakes Technology sector, the risk of obsolescence is never to be ignored. As mobile devices continue to evolve and become increasingly popular they will force decisions on chip and hardware manufacturers that will have far reaching consequences.

ARM Holdings' (0.59%) mobile device chip Technology gives it a competitive advantage in this rapidly developing market. The share is becoming increasingly overbought following its breakout three weeks ago but a sustained move below 400p would be required to question medium-term scope for additional upside. (Also see Comment of the Day on October 25th).

Qualcomm (1.66%), through its dominance of the wireless communications Technology sector, is also a potential beneficiary of the continued growth in mobile devices. The share broke out of a five-year range in 2011 and has held a progression of higher major reaction lows since. A sustained move below $57 would be required to question potential for some additional higher to lateral ranging.

Intel (4.12%) has a solid record of increasing dividends but the share pulled back sharply over the last month to test the three-year progression of higher major reaction lows. It will need to find support above, or in the region of, $20 and subsequently sustain a move above the 200-day to confirm a return to medium-term demand dominance.

Samsung Electronics had become overextended relative to the 200-day MA when it hit a medium-term peak in May. It found support in the region of the trend mean from July and has held a progression of higher reaction lows since. A sustained move below 1.2M KRW would be required to question medium-term uptrend consistency.

Apple continues to hold in the region of its MA following a more than $100 decline since late September. A sustained move above $625 will be required to confirm more than temporary support in this region.

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October 29 2012

Commentary by Eoin Treacy

Nasdaq-100 review

Eoin Treacy's view - As the USA's east coast is battered by Hurricane Sandy and uncertainty about the outcome of the Presidential election remains a concern, not least because of the candidates widely differing views on how to tackle the fiscal cliff, investors have been subdued by a steady decline on Wall Street over the last month.

The Nasdaq-100 has pulled back to test the region of its 200-day MA. Over the last three and a half years, the trend mean has offered an area of support on a number of occasions and while the Index has dropped below it on occasion, it has successfully pushed back above it within a number of weeks of the breakdown.

If we address the market from the consistency characteristics we base so much of our analysis on, then a pattern of lengthy ranges is evident since the early 2009 lows, with each finding support above the previous congestion area.

The 2010 range peaked near the psychological 2000, had an amplitude of 359 points and persisted for approximately six months.

The 2011 range unfolded following a test of 2500, had an amplitude of 404 points, found support near the upper side of the 2010 range and persisted for eleven months.

The 2012 range has held more of an upward bias but the April to June reaction also found support in the region of the upper side of its underlying range. The 200-day MA currently offers a potential area of support. However, the failed upside break posted in September raises the possibility that the lower side of the range near 2500 will be retested. If the benefit of the doubt is to continue to be given the upside, the Index will have to find support between 2500 and 2600.

A sustained move below 2500, held for more than a week of two, would constitute a major inconsistency and would force a reassessment of the medium-term bullish hypothesis.

In the Technology sector, Apple has pulled back to test the region of its MA. IBM is not in the Nasdaq but is emblematic of the Technology sector and has also pulled back to test the area of its 200-day MA. Google, Qualcomm and Teradata have similar patterns. Amazon and Oracle found at least short-term support near their MAs last week. Microchip Technology, Autodesk, Altera and EMC Corp have pulled back to test potential areas of support near their most recent respective lows. Citrix Systems and Check Point Software are trending lower, and while oversold in the short-term, breaks in their progressions of lower rally highs will be required to question the medium-term downward bias. Both Microsoft and Intel have pulled back to potential areas of support but clear upward dynamics will be required to check momentum.

In the healthcare sector, Amgen tested the $90 area last week and looks susceptible to mean reversion. Gilead Sciences has paused in the region of $70 and a process of mean reversion appears to be unfolding. Biogen is in the process of reverting to its mean. Alexion Pharmaceutical pulled back sharply from its overextended peak last week. At a minimum some time will be required to rebuild investor confidence before the uptrend can be resumed. Celgene, Holologic and Life Technologies have all paused in the region of previous areas of resistance and are testing their respective 200-day MAs.

Express Scripts (pharmacy) broke out of a more than yearlong range in August and is consolidating above the previous peak as it unwinds the short-term overbought condition. A sustained move below the 200-day MA would be required to question medium-term scope for continued upside.

Stericycle (biomedical waste) posted an upside weekly key reversal last week from the region of the 200-day MA and is now testing its all-time peak. A sustained move below $40 would be required to begin to question medium-term scope for continued upside.

Cerner (healthcare management systems) also posted an upside weekly key reversal from the region of its 200-day MA last week.

Mylan (generic drugs) rallied impressively last week from the region of the 200-day MA to post a new all time high. A countermanding downward dynamic would be required to question potential for additional upside.

Elsewhere in the Index, some of the previous high fliers such as Monster Beverage, Bed Bath & Beyond and Dollar Tree Stores have lost uptrend consistency and will need to sustain moves back above their MAs to question supply dominance. Starbucks has so far held its move below the trend mean and will need to sustain a move back above it to question potential for an additional test of underlying trading.

Ross Stores, Costco, Autozone, O'Reilly Automotive and Whole Food Markets have at least paused in the region of their respective 200-day MAs and will need to at least hold in the current area if the benefit of the doubt is to continue to be given to the upside. Expedia remains in a consistent uptrend.

Adobe Systems is testing the upper side of its yearlong range and a sustained move above $35 would confirm a return to medium-term demand dominance.

Paccar rallied impressively from the region of the 200-day MA last week and a sustained move below $40 would be required to question medium-term scope for additional upside.

From the above shares, it is increasingly evident that a process of mean reversion is underway, particularly among some of those which had been most overextended. However, against this background, there are still a number of shares which are in the process of completing lengthy consolidations and look more likely than not to advance.

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October 25 2012

Commentary by Eoin Treacy

Shale Glut Becomes $2 Diesel Using Gas-to-Liquids Plants

This article by Andrew Herndon and Brian Swint for Bloomberg may be of interest to subscribers. Here is a section:
So-called gas-to-liquids Technology has been proven on a larger scale, primarily at Royal Dutch Shell Plc's plant in Qatar. Smaller production typically is targeted for areas producing gas that's “stranded,” or unserved by pipelines. The economics depend on the feedstock staying relatively cheap.

While U.S. natural gas prices are currently about $3.50 per million British thermal units, the futures curve shows prices rising to more than $6 per mmBtu during the next 10 years. Every $1 increase in the price of gas boosts the cost of producing a barrel of diesel by $9, Oxford Catalysts said.

Oxford Catalysts can produce a barrel of premium diesel for $66, or $1.57 a gallon, using gas at $4 per thousand standard cubic feet ($3.89 per mmBtu) at plants with a capacity of just 1,500 barrels a day. The unprofitable Technology developer said a plant that size can be built for about $150 million and would last for 20 years.

It costs about $124 a barrel, or $2.95 a gallon, to make premium diesel from oil, the company estimated. The U.S. average price for diesel at the pump is about $4.12 a gallon.
Eoin Treacy's view - Simple economics dictate that when the supply of a vital commodity increases and its price relative to competing products declines, that demand will rise. The surfeit of natural gas in North America virtually ensures that investors will attempt to profit from the arbitrage and gas-to-liquids Technology is another such avenue.

Since both Exxon Mobil and Royal Dutch Shell produce more gas than oil, it is natural that they are investing in Technology and machinery to produce high margin products from that feed stock. Qatar is an obvious location for Gas to Liquids (GTL) plants since it has some of the world's largest reserves and cheapest to recover natural gas. However given the surge in US natural gas volumes, there is a convincing case for siting GTL plants in the USA.

Sasol is the global leader in coal-to-liquids and gas-to-liquids Technology. The South African listing has been mostly rangebound since early 2011 and encountered resistance at the upper boundary in September. It found support today in the region of the 200-day MA and potential for an additional bounce can probably be given the benefit of the doubt provided it holds above today's lows. The weakness of the Rand versus the Dollar has exaggerated the decline experienced by Sasol's ADR which is listed in New York. It has returned to test a previous area of support near $40 and a clear upward dynamic would confirm the return of demand in this area.

Oxford Catalysts has a market cap of £84 million and analysts expect its burn rate to continue into 2015. The share has returned to test the psychological 100p level following an impressive rally. Having paused below 100p, the share is susceptible to mean reversion.

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October 25 2012

Commentary by David Fuller

Email of the day (1)

On energy dependence:
Once again you have mentioned the US becoming energy independent which is clearly a game changing prospect. There have been a few newspaper comments recently about North America becoming energy independent but not about the US becoming energy independent. I assume you do mean US rather than North America. If so what effect do you think it will have on Canadian energy production, some of which is very expensive? More interesting still, how do you think world politics will change if the US no longer needs Arabian Oil? A possible US withdrawal from the Middle East?"
David Fuller's view - Thank you for your important questions on a topic of considerable interest to Fullermoney and our Collective of Subscribers. When we first started talking about US energy independence several years ago, it was regarded as a pipe dream within the financial community. They underestimated the US-led march of energy Technology, inspired by a 'needs must' reality within the fossil fuel extraction industry.

Technology is also developing the renewable energy industry but this will take more time to perfect, in terms of scale and competitive costs. Wasteful government subsidies which rush through often ill-conceived, unreliable and uncompetitive renewables for politically correct reasons do not advance the cause. Instead, they are a drain on taxpayers and a threat to energy independence.

Fullermoney has long maintained that US energy independence was achievable within the first half of the next decade, and we regard that as a conservative estimate. If it does not happen, it will be due to politics, not a lack of Technology or supplies.

The USA has long been known as the 'Saudi Arabia of coal'. Coal is currently out of favour in the US and many other developed countries, and regarded as a pariah industry due to environmental damage during extraction and particularly the high CO2 emissions from coal-fired power stations. The extraction of any commodity from the earth is a messy process. However, Technology and responsible regulation can and will, if allowed, progressively reduce environmental damage. Governor Romney has said that he wants to develop clean coal and this sounds sensible to me.

The USA also has the largest known reserves of shale oil and the second largest reserves of shale gas. I have been hearing about it since the 1960s although there was no commercially viable method of extracting this unconventional oil and gas. However, in the 'needs must' tradition that inspires so many inventions, George Phydias Mitchell, a native of Texas, is generally regarded as the father of hydraulic fracking.


The process remains controversial, not least because of concern over possible pollution of aquifers due to leaks, and also because of the large quantities of water required for the process of fracking. Nevertheless, this is a new industry that is developing rapidly. For instance, engineers have now developed non-hydraulic so-called dry fracking. This is a process that uses gelled propane instead of water, the premise being that less volume is required and it reverts back to gas which is pumped out along with the fuel sought. This article from Gizmag explains the process under development by Chimera Energy and others. This interview from Huffington Post indicates that the waterless fracking was invented by the Canadian Robert Lestz of GasFrac.

Caution - the poor share performance of these two companies (Chimera has been suspended) which are not in the Library, says more about the competitive pressures for start-up firms, rather than the viability of technologies, in my opinion. We see this in all developing fields, from automobiles near the beginning of the last century to tech companies post-2000. Many are drawn to a new field, often with good ideas, only to be out muscled and winnowed during the ruthless competitive process.

I mention all of the above because the US is in a strong position to become energy independent, subject to internal politics. Canada, of course, is already energy independent and a major exporter of oil and gas. Some expensive Canadian energy production, mentioned in the email above, will be subjected to the rigours of mostly and preferably free market prices, just like any other industry. Assuming the email question was primarily in reference to the Alberta tar (oil) sands, I can remember the debate within Canada many years ago, concerning this source of energy. On the question of whether or not to develop or preserve it, I recall (mostly paraphrase) an Alberta official saying that if they did not develop this valuable resource, they would be left with "dirty sand." He was right and presumably familiar with the adage: "The stone age did not end because people ran out of stones."

Regarding the last two questions in the email above, I hope and suspect that world politics would be better off without the US being dependent on Arabian oil. Oil and gas are fungible commodities and US energy independence would mean that more was available for everyone else. This would help to support Fullermoney's view that energy prices will be lower, in real terms, on average in the next decade.

If there is a caveat to this forecast it concerns Jevons Paradox, last mentioned by Eoin on 16th October and 29th February. We assume that in the next decade at least half the global population will have a smart phone and / or a tablet, not to mention all the other energy consuming necessities and luxuries.


Lastly, the US is already withdrawing ground troops from the Middle East. Hopefully and preferably, it will only need to maintain a military presence in the region as part of an international force to maintain peace, although I appreciate that this is a best-case scenario.

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October 23 2012

Commentary by Eoin Treacy

A review of the Autonomies

Eoin Treacy's view - With approximately a quarter of S&P500 companies reporting earnings this week, the focus of attention is on the stock market. More particularly some notable earnings misses have put the uptrend which has been in evidence since early June under pressure. Investors appear to be weighing up the competing influences of ever more quantitative easing versus further evidence of economic slowdown and the result has been a greater degree of variability in stock performance. (Also see David's piece “ The air is thinner up here ” on October 9th).

I last reviewed the Autonomies on August 13th when the underperformance of companies such as McDonalds and Starbucks was been counter balanced by breakouts by healthcare, breweries and industrially oriented shares. I thought now would be an opportune time to revisit the sector.

Apple, Google, Samsung Electronics, IBM, Qualcomm, Cisco Systems, Biogen, SAB Miller, Pernod Ricard, Coca Cola, Pepsi Co, Air Liquide, Praxair, Linde, Siemens, and General Electric have all pulled back and are in the region of their respective 200-day MAs. If their medium-term uptrends are to remain consistent, they will need to find support in this region.

Microsoft, Microchip Technology, Intel, McDonalds, Remy Cointreau, Starbucks, Mead Johnson, Nike, LAM Research, Christian Dior, Royal Dutch Shell, Emerson Electric and Tesco have dropped below their respective 200-day MAs and exhibit a greater degree of uptrend deterioration. Clear upward dynamics will be required to check their declines and sustained moves back above their MAs will be needed to begin to restore investor confidence.

Novo Nordisk, Fresenius SE, Fresenius Medical, Johnson & Johnson, Eli Lilly, Sanofi, Merck and Pfizer have been among some of the most impressive performers over the last few months but are becoming increasingly overextended relative to their 200-day MAs. Eli Lilly in particular is susceptible to mean reversion.

In the drinks sector, Diageo and Anheuser-Busch remain in relatively consistent uptrends while Heineken is susceptible to some additional mean reversion.

Nestle, Unilever, Mondelez International, Heinz, Procter & Gamble, Colgate Palmolive, Kimberly Clark, Reckitt Benckiser, Hengan International, Uni-Charm, Estee Lauder, Intertek Group, Visa, Mastercard and Exxon Mobil remain in close proximity to their respective peaks and breaks in their progressions of higher reaction lows would be required to question medium-term scope for additional upside. Wal-Mart in particular is susceptible to mean reversion.

Bristol Myer Squibb, Yum Brands, Herbalife, NuSkin Enterprises, LVMH, Compagnie Financiere Richemont, BHP Billiton and Rio Tinto all found support in the region of their MAs over the last month and sustained moves below their recent lows would be required to question potential for continued higher to lateral ranging.

There has definitely been some deterioration on aggregate over the last few weeks. If Wall Street's weakness persists, the potential for mean reversion among some of the better performers is an increasingly more potent risk. However, the relative strength of a large portion of the above shares continues to demonstrate that well capitalised companies with exposure to the global economy have a competitive advantage despite the more uncertain macro environment.

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October 19 2012

Commentary by David Fuller

Another week of ranging consolidation on Wall Street and for many other share indices

David Fuller's view - The US stock market has had to contend with some valuation expansion following the very good rally from early-June through mid-September, at a time when 3Q corporate earnings are struggling to meet their reduced estimates against the background of a sluggish global economy.

I have discussed this ongoing reaction and ranging consolidation phase on a daily basis in my Audios and wrote one of my longer pieces on the subject: The air is thinner up here, on Tuesday 9th October (subscription logon required for the full item). Meanwhile, Wall Street has the additional uncertainty of a close US Presidential Election, plus the fiscal cliff. While most political commentators expect a temporary bridging agreement to prevent an economic crisis, nerves may be tested by brinkmanship within a deeply divided Congress.


So far, Wall Street's action resembles a normal consolidation within a cyclical bull market driven by QE, record low interest rates, some effective corporate governance in recent years and for the most part, sufficient earnings to support share indices during the 12th year of a secular valuation contraction cycle.

Nevertheless, those earnings are starting to disappoint, as I mentioned in my opening paragraph above. Consequently, fashionable shares which become very overextended relative to their 200-day moving averages are being punished.

One of the more dramatic examples of this was Chipotle Mexican Grill, the fast expanding US-listed restaurant chain, which rose for 17 consecutive weeks in a Type-1 ending (as taught at The Chart Seminar), attracted the short sellers and is still weak although becoming somewhat overextended relative to its now declining MA. I know CMG has many fans so watch for a short-covering rally when it next shows some loss of downside momentum.

Google's performance yesterday was a more important example as it is certainly one of the most admired tech companies. Google rose for 12 consecutive weeks before losing momentum last week and falling back sharply yesterday on earnings which disappointed. The share will look more attractive as it moves closer to the MA and that large underlying platform, although from an investment perspective I would like to see some evidence of renewed support given that there is now some concern over earnings.

Tech talisman Apple (weekly & daily) has been spectacular but students of behavioural analysis may recall all those forecasts, not long ago, that it would reach $1000. Currently, it shows more two-way activity, indicating an increase in supply relative to demand. In the long history of mean reversion within very powerful trends, I cannot think of many instances where the MA has not been at least tested and overshoots are not uncommon. Currently, a sustained move back above $650 is the minimum required to suggest that demand is regaining the upper hand.

Two other tech giants, Intel and Microsoft, are underperforming. INTC is becoming overextended to the downside relative to its MA but damage has been done to the overall pattern. A loss of momentum and / or an upward dynamic is needed to signal a temporary short-covering rally. Microsoft is eroding support and needs an upward dynamic to check this drift.

This deterioration in tech leaders could be important because the Nasdaq 100 (weekly & daily) Index has been a relative strength standout over the last three and a half years. Although still within its overall upward trend and above its MA, it failed to maintain the break above the March-April high, indicating that supply has increased relative to demand. The daily graph shows a resumption of the short-term downtrend today and a close above 2800 is currently needed to check this slide beyond a brief pause. Where leaders go, many others follow.

This year's star performing Nasdaq BioTechnology Index has seen a normal, equal sized reaction so far but remains overextended. A new closing high is required to postpone scope for further mean reversion.

The S&P 500 Index (weekly & daily) has fallen back from the higher side of its narrow range today, increasing prospects for a further test of underlying trading. A sustained break beneath 1400 would indicate more of a correction, such as we saw following the March high, rather than just a shallow reaction and somewhat longer ranging phase.

I think Asia is likely to lead the next upward leg in stock markets, having lagged for most of this year. The catalysts would be superior valuations relative to the USA, better growth prospects, some monetary stimulus from China and perhaps a revival in India if Prime Minister Singh's bold moves gather momentum.

Please note - the charts above were drawn before Wall Street's close, S&P 500 excepted.

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October 18 2012

Commentary by David Fuller

Cause of inflation and the Federal Reserve's likely eventual response

My thanks to a subscriber for this interesting item by Michael Ashton of E-piphany. Here is the conclusion:
In a non-CPI related note, New York Fed President Bill Dudley said today that the Fed won't be "hasty" to pull back easy money: "If we were to see some good news on growth I would not expect us to respond in a hasty manner." This confirms what we already knew - the Fed is willing to risk letting the inflation genie out of the bottle. Now, faster growth is not actually causal of inflation, as I frequently point out, so not responding to growth is ironically the right strategy, but it's important to consider the reasons he gives for this policy. He is not saying that the Fed will not respond to growth because growth is not something they can affect; what he's actually saying is that (since the Fed believes they can affect growth meaningfully) there is a very high hurdle to tightening even if prices accelerate somewhat further as long as growth remains slow.

So in what I think is the most likely case, continued slow growth with rising inflation, the Fed wouldn't likely start to tighten the screws until core inflation was near 3% (and more importantly, until the economists who are modeling inflation as a function of growth decide they're wrong, and stop forecasting a decline from whatever level we are at today). Since there is a significant delay of at least 6 months from Fed action to any effect on prices, this means that core inflation could easily get comfortably above 3% before any Fed action took effect - and, with the amount of money they'd need to withdraw, and the likelihood that they would start timidly, I have no idea how long it would take for them to stop an inflationary process which, at that point, would have considerable momentum.

So, in summary, this will not be the last uptick we see in core inflation.
David Fuller's view - Mr Bernanke was appointed to run the Fed because he had spent most of his career studying and writing about how to avoid a destructive deflation of falling production, profits and prices. Veteran subscribers may recall his November 2002 speech: Deflation: Making Sure "It" Doesn't Happen Here, which I have referred to on a number of occasions.


I take Mr Bernanke at his word, believing that he will go on throwing QE infinity at the US economy to ensure that a deflationary spiral is avoided. In this effort his related and stated objectives are a stronger US economy and lower unemployment. Meanwhile, inflationary pressures are slowly building, as you can see from Michael Ashton's graph in the article above.

This is unlikely to recreate the 1970s inflationary cycle, at least not for a long time, because globalisation and Technology, robotics included, will remain a moderating influence on wage pressures. However, we are likely to see inflation in the cost of most household expenses, a trend that is already with us. We should also see it in the prices of many assets, not least monetary metals.

Assuming that financial repression in the form of QE eventually ends, we will also see a normalisation of long-dated government bond yields. Fullermoney has often described so-called 'safe haven' bonds as the last remaining bubble. Moreover, the process of normalisation appears to have commenced, albeit very gradually, given slow GDP growth, recession in Europe, lingering pockets of deflation, and of course QE which is not just limited to the US Federal Reserve.

For evidence that long-dated (10-year) government bond yields have commenced a gradual bottoming out and base building phase, have a look at these charts: US 10-Yr Bond Yield (historic, weekly & daily), UK 10-Yr (historic, weekly & daily), EU (German) 10-Yr (historic, weekly & daily). Note the higher reaction lows on daily graphs; these sequences would have to be broken to indicate a somewhat lower phase of base extension, although retests of the lows appear unlikely. Note also the weekly upside key reversals from the lows on the US and EU weekly graphs.

Japan's 10-Yr graphs (historic, weekly & daily) show a different picture and the July low needs to hold, followed by an eventual break above 0.9% to provide clear evidence of base development. Meanwhile, the BoJ is talking about its own version of QE, although I doubt that governor Masaaki Shirakawa is fully on board regarding this policy. However, his term expires next April and he will not be reappointed.




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