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July 15 2014

Commentary by David Fuller

Deepak Lalwani: Positive and Pragmatic Budget [for India] Despite No Big Bang Reforms.

My thanks to the author of the India Report for his insights on this interesting market.  Here is a sample:

India Inc is largely happy as this budget is seen as the start of a new economic journey.

1. Bearing in mind this maiden budget was presented in 45 days of the Finance Minister being sworn in it is realistic not to have "big bang" structural reforms unveiled so quickly.

2. Positives include: (a) No populist move; (b) FDI limits increased in both defence and insurance from 26% to 49%. There is relief that finally, after several false dawns, the FDI limit in insurance is finally being raised; (c) Intent to reduce the fiscal deficit and keeping an eye on fiscal prudence and to spur economic growth; (d) GST to be introduced finally by end of year; (e) Infrastructure spending to continue to support economic growth; (f) Tax adventurism to end from here on; (g) REITs good news for stock market.

3. Negatives include: (a) Rather rosy assumptions made of growth - calculations could go awry especially since no details are given on what will drive growth to such levels; (b) Very ambitious target for privatisations; (c)No details on how the $ 43 bn subsidy regime (2.3% of GDP) will be reduced. This is worrisome as the ratings agencies could still downgrade India's sovereign rating to below investment grade or "junk" status; (d) The increase in FDI limit for defence to 49% will not be sufficient for foreign contractors to be willing to transfer Technology if they do not have voting control.

Overall, a positive and pragmatic budget that has tried to address the needs of many sectors. The key will lie in implementation and speed of delivery. Very positive for capital markets - although from here they will focus on earnings catch-up, global markets and the effect of "El Nino" on the Indian monsoons.

David Fuller's view -

Rating agencies know this is a pro-business government embarking on a modernisation programme for India, which the country’s citizens voted for.  Therefore, I doubt they will downgrade India’s sovereign rating over the $43 bn subsidy regime, especially as they know that Narendra Modi intends to phase it out, although this cannot be done overnight.

This item continues in the Subscriber’s Area and contains two related articles and a video.  

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July 15 2014

Commentary by Eoin Treacy

Taiwan May Relax Rules to Expand Securities Firms Business

This article by Justina Leefor Bloomberg may be of interest to subscribers. Here it is in full:

Taiwan’s Financial Supervisory Commission plans to allow securities firms to sell overseas yuan bonds to local institutional investors, Economic Daily News reports, citing officials it didn’t identify.

FSC may also relax rules to let securities firms trade derivatives for non-hedging purposes: report

FSC is lobbying central bank to allow overseas securities units to introduce derivatives linked to Taiwan’s stocks andexchange rate: report

Eoin Treacy's view -

While Western media have focused on improving manufacturing data from the USA and UK, Taiwan’s manufacturing data has been equally impressive. The outperformance of its large cap Technology sector has recently been supplemented by the return to form of the financial sector on speculation that regulatory overall will open up fresh growth avenues. 


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July 07 2014

Commentary by Eoin Treacy

Foxconn recruitment spree shows automation plan setback

This article for Want China Times may be of interest to subscribers. Here is a section: 

Foxconn chairman Terry Gou announced in 2011 that the company planned to manufacture 300,000 robots at a rate of 1,000 units a day and hoped to have 1 million robotic arms in 2014 for the benefit of the first batch of fully automated factories in five to ten years.

A vendor supplying equipment for automated production said that technically it is not a major problem for Foxconn to replace human workers with robots. However, using robots on the production line is only cost-effective for making homogeneous products and cuts cannot realistically be made in making mobile phones and tablet devices which have a more complicated manufacturing process, the vendor stated.

"The labor-intensive industry, such as OEM, can no longer sustain the company's growth," Gou said at a shareholder meeting on June 25. He further said that the company has been seeking a transformation of its business model in the past few years, which is expected to be crucial for Foxconn's continued growth in the next decade.

Eoin Treacy's view -

Factory automation represents an inexorable trend as companies attempt to contain costs and labour uncertainties. As the evolution of robotics proceeds, companies are becoming increasingly knowledgeable about what can and cannot be outsourced to automation. However robots have an important advantage relative to a human labour force. As pieces of Technology, they are subject to Moore’s law and humanity is not. Therefore we can anticipate that as robotics continues to develop and innovation accelerates, robots will both displace humans and also develop products human hands are incapable of. 

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July 03 2014

Commentary by Eoin Treacy

Vascular network bio-printing brings 3D-printed organs one step closer

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

According to the University of Sydney study, the technique demonstrated better cell survival, differentiation and proliferation compared to cells that received no nutrient supply. In addition, Bertassoni says that it provides the ability to create large, life-supporting three-dimensional, micro-vascular channels quickly and with the precision required for application to different individuals.

"While recreating little parts of tissues in the lab is something that we have already been able to do, the possibility of printing three-dimensional tissues with functional blood capillaries in the blink of an eye is a game changer," he says.

Bertassoni explains that the ultimate aim of the research is for patients to be able to walk into a hospital and have a full organ printed with all the cells, proteins and blood vessels in the right place.

"We are still far away from that, but our research is addressing exactly that," he says. "Our finding is an important new step towards achieving these goals. At the moment, we are pretty much printing 'prototypes' that, as we improve, will eventually be used to change the way we treat patients worldwide."

Eoin Treacy's view -

3-D printing of living tissue that is fit to be transplanted into a human host would represent a game changer for the healthcare sector not least because it represents a Technology that would become progressively cheaper overtime. It would also represent a bridge before genetics has developed to such a stage that our internal chemistry can be manipulated without the need for surgery except in emergency cases.

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July 01 2014

Commentary by David Fuller

Manufacturing Sustains Gains as U.S. Growth Rebounds

Here is the opening of this informative article from Bloomberg:

American factories, propelled by the strongest orders of the year, sustained gains in June and are poised to be part of the rebound in economic growth.

The Institute for Supply Management’s manufacturing index was 55.3 last month, little changed from a five-month high of 55.4 in May, the Tempe, Arizona-based group’s report showed today. Readings greater than 50 indicate expansion.

Producers of wood products, furniture, metals and machinery were among those seeing a pickup in demand as gains in auto and home sales rippled through the world’s largest economy. Growing consumer spending, lean inventories and improving overseas markets will probably keep assembly lines busy in the second half of the year.

“Manufacturing is back on track,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, the top U.S.-based ISM forecaster over the past two years, according to data compiled by Bloomberg. “It’s growing at a solid pace.”

Factories globally were also mostly on an upswing, figures today showed. In China, the world’s second-largest economy, manufacturing grew in June at the fastest pace of the year, according to a gauge from the National Bureau of Statistics and China Federation of Logistics and Purchasing.

In the U.K., manufacturing expanded in June at the strongest pace in seven months, according to Markit Economics. Factories in the 18-nation euro area cooled last month, as a deepening downturn in France offset a pickup in Spain, other Markit data showed.

The Standard & Poor’s 500 Index rose to a record, after posting the longest streak of quarterly gains since 1998, as Technology and consumer shares rallied. TheS&P 500 climbed 0.8 percent to 1,975.21 at 1 p.m. in New York.

David Fuller's view -

The US economy is now at least five and a quarter years into its economic recovery following the worst credit crisis slump since the 1930s.  Inevitably, it has been a slow, somewhat staggered recovery in response to all the deleveraging that occurred, and obviously not just in the USA.  Arguably, that deleveraging process has been an economically healthy corrective phase for the long-term outlook, although it has seldom felt that way as we have lived through the process. 

Nevertheless, quantitative easing has made the journey a lot less uncomfortable than it might have been, not least for investors, who now worry about the sustainability of global stock market rallies.  How serious a concern might this be, and how do we keep our analytical feet on the ground when stock market valuations increase more rapidly than corporate earning and GDP growth?

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July 01 2014

Commentary by Eoin Treacy

Technology Catch-Up plays

Eoin Treacy's view -

The Nasdaq-100 is within striking distance of a new all-time high following a market leading performance from the 2009 lows. As the psychological 4000 level is approached I thought it might be instructive to look at some of the more established Technology companies with reasonably robust dividend policies that may play catch-up. 

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June 25 2014

Commentary by Eoin Treacy

Capex about to turn up: The missing link in the US recovery

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

Spending on non-residential structures fell to unusually depressed levels following the financial crisis and has remained weak during this recovery. Similar to residential investment, much of this weakness can be attributed to a need to work through the overbuilding that occurred during the run up to the financial crisis, as structures share of GDP rose rapidly from 2004 through 2008. There are some indications that this excess supply has diminished materially and that pent up demand for non-residential structures should lead to stronger spending going forward. For example, the vacancy rate for office space nationally has declined steadily over the past four years toward historically more normal levels (Chart 18). In addition, in response to the shale energy boom in the US, investment in energy-related structures has been notably strong. This supports the outlook for a pickup in investment in commercial structures.

IPP: Uptrend should continue
Spending on IPP – composed of spending on software, R&D, and entertainment, literary and artistic originals – has displayed a steady uptrend as a share of GDP over the past several decades, which has been relatively impervious to cyclical factors. Recent strength in IPP spending has been driven primarily by the R&D component. IPP spending may also benefit from a shift away from investment in information processing (IP) equipment.

Equipment: IP equipment has been notably weak
Equipment spending as a share of GDP remains well below historical averages for this point of the recovery. In this section we take a more granular look at equipment’s components to analyze the underlying causes of this weakness. We have already determined that transportation equipment is near longer-term averages. We also find that recent contributions to BFI from industrial equipment and the “other” equipment category appear to be in line with longer-term averages. Conversely, IP equipment appears to be the component driving much of the softness in total equipment spending. Spending on IP equipment has been consistently below its longer-term average contribution to overall fixed investment during this recovery (Chart 19). 

Eoin Treacy's view -

The majority of established Technology companies rely on corporate spending to boost earnings. The outperformance of the Nasdaq-100 highlights the fact the corporations have been spending on software and other services. The return to outperformance of the industrial sector in 2012 reflects increased spending on machinery and embedded processors. Generally speaking there is a perception that the US recovery is weaker than one might expect but the fact that companies are embarking on increased spending is a sign of confidence. 

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June 11 2014

Commentary by David Fuller

The Machine - HP May Have Invented a New Kind of Computer

Here is the opening for this interesting article from Bloomberg:

HP’s bet is the memristor, a nanoscale chip that Labs researchers must build and handle in full anticontamination clean-room suits. At the simplest level, the memristor consists of a grid of wires with a stack of thin layers of materials such as tantalum oxide at each intersection. When a current is applied to the wires, the materials’ resistance is altered, and this state can hold after the current is removed. At that point, the device is essentially remembering 1s or 0s depending on which state it is in, multiplying its storage capacity. HP can build these chips with traditional semiconductor equipment and expects to be able to pack unprecedented amounts of memory—enough to store huge databases of pictures, files, and data—into a computer.

In theory, that would remove the need for a conventional slow disk/fast memory system. With the Machine’s main chips sitting on motherboards right next to the memristors, they can access any needed information almost instantly. “It’s the Platonic form of computing and is the natural way to do things,” says Papadopoulos, a former computer architect for HP and Sun. “You want lots of, lots of memory, and you want it to always be there and to use it as storage.”

New memory and networking Technology requires a new operating system. Most applications written in the past 50 years have been taught to wait for data, assuming that the memory systems feeding the main computers chips are slow. Fink has assigned one team to develop the open-source Machine OS, which will assume the availability of a high-speed, constant memory store. Another team is working on a stripped-down version of Linux with similar aims; another team is working on an Android version, looking to a point at which the Technology could trickle down to PCs and smartphones.

David Fuller's view -

I obviously have no idea whether or not Hewlett-Packard will be able to deliver ‘The Machine’ as a competitive, commercial, evolutionary new computer within the next 3 to 6 years.  However, I maintain that there is no known reason for why the pace of new technological innovation should not continue to accelerate well into the exciting future. 

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June 11 2014

Commentary by Eoin Treacy

Musings from the Oil Patch June 10th 2014

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

The translated Nikkei article described the transmutation experiment in the following manner: “The researchers put the source material that they want to convert on top of the multi-layer film, which consists of alternately laminated thin films of calcium oxide and palladium. The thin metal layers have a thickness of several tens of nanometers. Elements are changed in atomic number in increments of 2, 4 and 6 over a hundred hours while deuterium gas is allowed to pass through the film.

“The transmutations of cesium into praseodymium, strontium into molybdenum, calcium into titanium, tungsten into platinum have been confirmed.”

Mitsubishi’s patent was originally issued in Japan but it was extended in 2013 into a European patent, and protects the company’s proprietary thin-film transmutation Technology. The Japanese newspaper also reported that a research and development company of the Toyota Group (TM-NYSE), Toyota Central Research and Development Labs, has also replicated the elemental conversion research with results similar to Mitsubishi’s experiment.

While the Mitsubishi and Toyota research efforts have focused on material transformation rather than the generation of energy, the process is similar. High profile work on LENR as an energy source has been conducted by Andrea Rossi, an Italian engineer, inventor and entrepreneur. He has invented the Energy Catalyzer (E-Cat) and completed two tests, one of which produced 900o C (1,650o F) of heat that could be used to generate steam to power a generator to produce electricity. In early 2013, a group of independent scientists ran tests on two versions of the “Hot Cat,” a one megawatt LENR unit. Their coefficient of performance (COP) was measured, determining the ratio of energy out versus energy in. The COPs in the two tests were 5.6 and 2.2, respectively. Another group that is not affiliated with nor has it worked with Mr. Rossi, has been using an E-Cat and conducting longer term tests, the results of which may be released soon. This could be a monumental development, although it will not end skepticism of the Technology.

Eoin Treacy's view -

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

In the aftermath of the Fukushima disaster Japan has a vested interest in figuring out how to deal with the problems associated with nuclear power. In the near term that has meant building tsunami walls around nuclear plants and reinforcing structures to protect them from earthquakes. The challenges represented by nuclear waste have been intractable for a long time but the transmutation methods detailed above hold out hope that these will eventually be solved. 

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June 11 2014

Commentary by Eoin Treacy

The coming digital anarchy

Thanks to a subscriber for this interesting article by Matthew Sparkes for The Daily Telegraph. Here is a section: 

The clever part is how the network reaches a consensus on what should be written in it. Otherwise there could be thousands of different blockchains, all disagreeing over who owns what.

The idea is that each and every transaction is broadcast by the person initiating it. Rather than telling the bank we want to spend £3, we tell the world. That transaction is bundled up with thousands of others and cryptographically bound into a “block” by “miners”.

Technically, anyone with a computer can be a miner – they just need to install a small piece of software. But it’s not easy to do: far from it.

Bitcoin “miners” are so called because gold miners traditionally have to put in a lot of work before they see any reward in the shape of precious metal. In the world of Bitcoin, miners have to crack an extremely difficult cryptographic problem before they are rewarded with some newly minted Bitcoins. That “block” is then added to the end of the blockchain and shared around the world.

To quote the wiki dictionary maintained by “the Bitcoin community” – perhaps the nearest you can get to an official explanation – “mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady … The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus.”

In other words, the blockchain remains both public and infallible. It’s a totally reliable and trustworthy record of who owns what, but also who owned what back through time, all the way to the creation of Bitcoin.

Eoin Treacy's view -

To describe bitcoin as a currency is to miss the point somewhat with regard to what the development of cryptocurrencies means. The blockchain is a facilitator of transactions whether financial, services oriented or communications. In essence it is a ledger anyone can access where anything can be recorded and archived.

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June 09 2014

Commentary by David Fuller

Barry Ritholtz: The Bears Have Not Surrendered Yet

Here is a section from this interesting column published by Bloomberg:

According to a study published in the Financial Analysts Journal, equity ownership has fallen to the lowest level in more than a half-century. In 2012, investors held a mere 37.7 percent of their portfolios in equities. That was out of a grand total of $90.6 trillion in investable assets around the world.

Over the past three decades, U.S. investors’ portfolio equity exposure has run at a historical average of about 60 percent. Think of this as the classic 60/40 stock-bond allocation.

In the early 1980s, investors reduced their equity exposure to just 45 percent. In the late 1990s, it rose to 75 percent and higher. A 15 percentage-point swing in either direction is an indication of extreme sentiment. Savvy contrarians can make a bet in the opposite direction with a high degree of confidence.

Today, the equity allocation is a modestly elevated 65.3 percent among the 150,000 members of the American Association of Individual Investor, which tracks individual investor behavior. Given last year's 30 percent gain in the Standard & Poor's 500 Index, it is reasonable to guess that much of this increase was from price appreciation in existing equity holdings, and not due to a newfound love of stocks. Meaning, we are not seeing the sorts of sentiment moves that indicate a bubble.

David Fuller's view -

Barry Ritholtz makes some good points in this article, which may interest subscribers. 

Regarding the last paragraph above, I think he understates the extent to which US equity investors were piling in last year.  Also, we certainly saw some bubble activity in new tech and bioTechnology shares.  I regard those excesses are a lead indicator but clearly they have not yet dragged down the broader market.

This item continues in the Subscriber’s Area along with a link to Barry Ritholtz's article. 

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June 05 2014

Commentary by Eoin Treacy

China Nuclear coming online

Thanks to a subscriber for this report focusing on China’s utilities as newly constructed nuclear power stations come on line. Here is a section: 

According to China Electric Power Promotion Council (CEPPC) report, Fuqing Nuclear unit 1 completed its last round of security checks in mid-April before loading fuel and is currently on schedule to be commissioned from August 2014. However, after Datang’s Ningde nuclear recorded c.Rmb100m loss in 1Q14 due to a 90-day overhaul, investors become a bit concerned whether Fuqing’s profit contribution is likely to be compromised by the undertaking of regular maintenance. While we understand that a new nuclear unit would need to perform a major overhaul for fuel re-load in its second year of operation, the time period is normally shorter. Hence, we do not think the longer-than expected maintenance period for Ningde is a common situation to be assumed for other nuclear projects.

Average utilization still over 7,300 hours despite maintenance In Figure 1, we summarize the utilization hour record of China’s operating nuclear units with GII or GII+ Technology. Result shows that, excluding Tianwan unit 1, which incurred some technical issues during the first three years, average utilization in the second year is still above 7,300 hours, quickly climbing to above 7,700 hours in the third year.


Eoin Treacy's view -

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

Over the last decade China has aggressively invested in procuring the energy resources required to fuel economic expansion. Building nuclear power capacity has been a major component of that strategy and these new reactors are now being commissioned. Considering how extensive the pipeline is for additional reactors, this represents a growth story from the perspective of utilities. 

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May 21 2014

Commentary by David Fuller

Russia, China Sign $400 Billion Gas Deal After Decade of Talks

Here is the opening of this latest report from Bloomberg:

Russia reached a $400 billion deal to supply natural gas to China through a new pipeline over 30 years, a milestone in relations between the world’s largest energy producer and the biggest consumer.

President Vladimir Putin is turning to China to bolster Russia’s economy as relations sour with the U.S. and European Union because of the crisis in Ukraine. Today’s accord, signed after more than a decade of talks, will allow state-run gas producer OAO Gazprom (GAZP) to invest $55 billion developing giant gas fields in eastern Siberia and building the pipeline, Putin said.

It’s an “epochal event,” Putin said in Shanghai after the contract was signed. Both countries are satisfied with the price, he said.

Gazprom Chief Executive Officer Alexey Miller signed the deal with Zhou Jiping, chairman of China National Petroleum Corp. The agreement is for 38 billion cubic meters of gas annually over 30 years, Miller said. While he declined to give a price, he said the total value would be about $400 billion.

“This is the largest ever contract for Gazprom,” Miller said, adding the deal was clinched at 4 a.m. Supplies will start in four to six years, he said.

Gazprom shares rose as much as 2.2 percent, to 148.55 rubles in Moscow today and traded at 147.04 rubles at 4:04 p.m. local time.

David Fuller's view -

I do not think that Putin would have gone to China, with some fanfare, if he did not know that a deal was imminent.  Nevertheless, the last minute agreement, particularly after financial news services were initially saying this morning that discussions had failed, suggests to me that Putin had to give ground to the Chinese. 

Russia has gas, oil and weaponry but that is a narrow economic base for a country aspiring to be a global leader.  More importantly, the energy cartels are gradually losing power, not least because many countries now have the capacity, if not quite the will and know how, to produce their own natural gas by fracking.  Additionally, solar power and most other forms of renewable energy can only grow in importance as the advance of Technology improves their output and efficiency. 

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May 20 2014

Commentary by David Fuller

Mandate for Modi: A Business Agenda

My thanks to a subscriber for this detailed article from [email protected]  The first half has been more than covered on Fuller Treacy Money but the second half is revealing in terms of what the outgoing Congress party messed up and what India and Indians actually require.  Here is a sample from the conclusion:

Along with the big picture, it is necessary to look at the small picture. The real wealth of a nation comes from entrepreneurship, not mega-investments by government or big business, observers say. According to Bharti Jacob, managing partner at SeedFund, there is urgent need to encourage and enable entrepreneurship in India. “The government should stay out of it,” she says. “But it should create an environment that encourages innovation and new company formation.”

“India is a hostile habitat for entrepreneurship in terms of regulations that make it complicated and painful to start and run a business,” adds Sabharwal. “The biggest manifestation of this is the substantially stunted firm size. (Companies with less than 49 workers account for 84% of manufacturing employment). India has more dwarfs — companies that are small and will stay small — rather than babies — companies that are small but will grow. The reason obviously includes the labor laws, but the inspector raj, the compliance raj and the permission raj, which have remained unchanged since 1991, are also responsible.”

Laurent Demortier, CEO & managing director of Avantha Group-owned company Crompton Greaves, says the country also needs to bolster research and development capabilities. “With the increased global footprint of the Indian manufacturing industry, India should incentivize R&D and aim to make the country a global R&D hub in select sectors. This will encourage product innovation to make a home in India.”

According to Vinayak Prasad, co-founder ofFrog8, a company in the payments space, the new government needs to force regulators to stop taking baby steps toward enabling adoption of electronic payments. “Cash is still king and extremely costly,” he notes. “The requirements of [identity verification] make it very expensive to get customers. Digital [identity verification] is key, and the government or regulator needs to be more aggressive.” Prasad is talking about one end of the problem. The other end — inclusive banking — is probably more important; 41% of the population in India is unbanked. The only way to get them into the fold is to marry Technology to banking. Banking spread has been hindered by over-regulation. “The RBI is in anxiety management mode,” says Prasad.

Sabharwal talks about another issue. “India only has 50 cities with more than a million people while China has 400,” he notes. “We have 600,000 villages; 200,000 of them have less than 200 people. Politicians dream of taking jobs to people, but what we need is to take people to jobs. Unlike Chinese New Year, where 300 million people get on a train and go home, we don’t have a mass migration at Diwali, Chaath, Eid or Christmas. We should.”

India “[does] not need a business-friendly regime,” Aron notes. “What we need is an administration that pursues a rational regime of laws that will grow the economic pie as well as redistribute it equitably. In early 2000, the share of manufacturing in FDI inflows was more than 60%; it fell to about 40% in 2005 and to 20% in 2008. The drought of investment in manufacturing and in increasing the productive capacity of business in India is a self-inflicted misery…. It is time that we went from ‘made in spite of India’ to ‘well-made in India.’”

David Fuller's view -

A lot of these problems of bureaucracy and overregulation are due to corruption.  The rest is unhelpful socialism. 

Fortunately, Narendra Modi has already shown that he knows more about what is wrong with India’s economy, and importantly, how to address it, than anyone else.  Crucially, he has been given an overwhelming majority by India’s electorate.  People all over India understandably want jobs, economic growth, and rising standards of living. 

This item continues in the Subscriber’s Area and contains three more articles, on Modi from the NYT, on Modi from a distinguished US Congressman, and on another promising stock market.  

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May 20 2014

Commentary by Eoin Treacy

Can crowdfunding give us safe fusion power by 2020?

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

According to LPP Fusion chief scientist Eric Lerner, the vast majority of the financial resources have been allocated to ITER's approach to fusion power, while other avenues, such as the one being pursued by his team, have been largely neglected, despite being much cheaper. Using an approach he calls "focus fusion," Lerner says his team can obtain a crucial electrode for $200,000, demonstrate net power gain with $1 million, and solve the final engineering problems, leading to a functioning fusion reactor with just $50 million in funding.

Eoin Treacy's view -

Fusion has been described as the holy grail of the energy sector for decades and always seems to be about thirty years away. Part of the reason for this is because the government sector which originally funded nuclear research was more interested in weapons development than cheap, clean energy. The ITER project has been plagued by lack of funding, political struggles and a need to make one bet on a developing Technology which has not yet been proven.

This project has clear parallels with Craig Venter’s success in sequencing the human genome. His company achieved the feat faster and more cost effectively than the government funded Human Genome Project. It remains to be seen whether the above privately funded initiative will be fruitful, but it seldom pays to bet against humanity’s capacity for innovation.

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May 07 2014

Commentary by David Fuller

U.S. Stocks Fluctuate as Tech Stocks Tumble Amid Yellen Comments

Here is the opening to this informative report on tech stocks from Bloomberg:

The Nasdaq Composite Index (CCMP)fell as Yahoo! Inc. and Groupon Inc. led a selloff in Internet stocks for a second day. The Standard & Poor’s 500 Index rose amid optimism the Federal Reserve will continue to support the U.S. economy.

The Dow Jones Internet Composite Index dropped 2 percent and touched the lowest level since October. Groupon fell 19 percent as sales and profit projections trailed some estimates. Yahoo slumped 5.8 percent as Alibaba Group Holding Ltd. filed for a U.S. initial public offering. Whole Foods Market Inc. declined 20 percent after cutting its 2014 profit forecast for a third time because of increasing competition. Electronic Arts jumped 18 percent after reporting better-than-forecast results.

The Nasdaq Composite slipped 0.7 percent as of 12:30 p.m. in New York, paring an earlier drop of 1.5 percent. The S&P 500 gained 0.3 percent to 1,873.98, rebounding after dropping below its average trading level for the past 50 days. The Dow Jones Industrial Average gained 107.43 points, or 0.7 percent, to 16,508.45. Trading in S&P 500 stocks was 10 percent above the 30-day average during this time of day.

“You’re seeing a brutal shift from growth and momentum investing to more value-based investing,” Chad Morganlander, a fund manager at Stifel Nicolaus & Co., which oversees more than $150 billion, said in a phone interview from Florham ParkNew Jersey. “The momentum stocks are ridiculously overvalued, but nonetheless, the overall broader market is fairly valued. Any kind of shift in momentum does spook investors.”

Technology stocks led this year’s selloff among companies whose growth are more tied to economic swings after a rally drove valuations to about double that of the S&P 500. The Nasdaq Composite is trading at 35 times reported earnings, compared with a multiple of 17.2 for the broad market measure.

David Fuller's view -

Janet Yellen’s comments were favourable for Wall Street today but I think Putin’s U-turn, if you believe him, was at least equally responsible for the firm close. 

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May 02 2014

Commentary by Eoin Treacy

Email of the day on Energy, Bank Capital & Cars

Have you noticed US oil producers are having trouble capitalising on these higher global Oil prices.  We both agree the world needs a cheap energy.  I think it is unlikely that cheap energy source will be conventional or unconventional Oil and Gas.  My concern is that cheap energy solution may take another 10 years to materialise.

I still think European banking looks like Zombie banking.  We know European banks have capital deficiencies.  I think these banks are holding back a broad recovery in the European economy.  My sources continue to tell me European banks are still trying to shrink balance sheets.  I believe the ECB needs to be more proactive in solving this problem.  I see ECB is talking of QE - I am not sure this idea is the solution more likely the problem.   However the bank capital dilemma needs to be addressed quickly otherwise Europe faces a possible Japanese situation of low growth for decades.

Like you I am a strong believer in the big European global business brands and product solutions.  However the availability of credit is stifling growth in Europe's smaller companies and businesses.   From what I observe VW increasingly looks like it is going to dominate the global car industry.  Unless Toyota can catch up in this Technology race they will lose their cherished Crown of the dominate global car producer.  As for old world car companies Ford , GM etc. sadly they look like a great short to me.  Every time I hire rental car in the US I come away with the thought how do US car companies do it so badly and remain in business.  I don't expect US cars to handle like my Porsche but US cars are just plain scary to drive.

Please keep up the good service.

Eoin Treacy's view -

Thank you for sharing your perspective on a range of topics. The revolution in unconventional supply of oil and gas can be viewed in terms of a supply response to high prices. At the beginning of the last decade $40 was considered the highest price possible for oil with the result that a great deal of additional supply was simply uneconomic.

Canadian bitumen becomes economic in the region of $40. Generally speaking more established offshore oil fields, such as the North Sea, have a breakeven in the region of $20-$25 while newer offshore such as Brazil’s pre salt ultra-deep water fields comes in closer to $45. A number of the unconventional plays have breakevens closer to the $50-60 area. As a result, we can conclude that price is the determining factor in which sources of potential supply are ultimately moved into production. 

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April 29 2014

Commentary by David Fuller

Email of the day

On the relationship between mining Technology and the supply of gold:

“Thank you for your comments on Gold. In the past few months your service mentioned a Technology that would make mining gold simpler and easier. I presume you still hold the view that this does not pose a threat for the supply of Gold in the medium to longer term. As always thanks for the wonderful service.” 

David Fuller's view -

Thanks for an email of general interest.

Yes, there is now a new reef-boring Technology, developed by AngloGold Ashanti, which is a lot more efficient and economical than ‘drill and blast’.   Iain Little also mentioned it and you can see the two emails just below my response on 5th March.

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April 29 2014

Commentary by Eoin Treacy

Africa: A ripe opportunity

Understanding the pharmaceutical market opportunity and developing sustainable business models in Africa This report by IMS Health is highly educative and I regard it as a must read for anyone interested in Africa. Here is a section:

By 2016, pharmaceutical spending in Africa is expected to reach US$30 billion.  This value is driven by a 10.6% compound annual growth rate (CAGR) through 2016, second only to Asia Pacific (12.5%) and in line with Latin America (10.5%) during this period. Spurred by a convergence of demographic changes, increased wealth and healthcare investment, and rising demand for drugs to treat chronic diseases, this market potentially represents a US$45 billion opportunity by 2020. 

The pharmaceutical growth is a reflection of economic strength accompanied by increasing healthcare spending. Sub-Saharan Africa (SSA), excluding South Africa, is notable in this regard: according to the Economist Intelligence Unit, its economies are growing faster than anywhere else in the world and this trend is expected to continue.

The appeal of Africa lies not in its size – the continent accounts for just 3% of the global economy – but in the dynamics that drive sustainable growth at a time when the major established pharmaceutical markets face a more uncertain future. Underpinning these prospects are a series of positive economic trends: greater political and fiscal stability and improvements in pro-business legislation have led the United Nations (UN) to forecast that Foreign Direct Investment (FDI) in Africa could more than double by 2014, despite speculative money leaving the continent following the collapse of Lehman Brothers, and the Arab Spring restricting investment in North Africa.

This FDI is fuelling macroeconomic growth and vastly improving access to new Technology. The recent boom in mobile subscribers reflects this trend: as of mid-2012, there were more than 600 million mobile subscribers on the continent, surpassing American and European figures. At the same time, major demographic shifts show an increasing number of working-age Africans, a rising middle class which accounts for 34% of the continent’s inhabitants, and an urban population expected to exceed that of China’s and India’s by 2050.


Eoin Treacy's view -

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

IMS Health recently IPOed in New York. The company which specialises in crunching complicated prescription data in order to sell it to pharmaceutical companies represents one of a new breed of information companies that are likely to become more common in the coming decades as big data moves into the mainstream. While they do not generate revenues in Africa, one can understand why the continent represents an interesting opportunity for them. 

According to this report GlaxoSmithKline is the dominant provider of pharmaceuticals in Africa. However, with annual revenues of £30 billion the 3.8% represented by the Middle East and Africa barely moves the needle in terms of the share’s performance. Nevertheless, as a global Autonomy GSK represents one of the companies most likely to benefit from the continued evolution of the global consumer. The share (Est P/E 15.38, DY 5.2%) has been largely rangebound for much of the last year but a sustained move below 1500p would be required to question medium-term scope for additional upside. 

South African listed Aspen Pharmacare generates 35.5% of its revenue in South Africa and 10.2% in the rest of Africa. The share (Est P/E 25.48, DY0.56%) has lost momentum following an accelerated advance in September and it will need to continue to hold above or in the region of the 200-day MA if medium-term upside potential is to continue to be given the benefit of the doubt. 

Africa has been one of the more fashionable destinations for investors over the last few years with the result that prominent regional shares now have rather expensive valuations. For example the UK listed Africa Opportunities Fund which invests directly in Sub Saharan Africa’s less liquid markets traded on a discount to NAV of 18% in early 2012. Following an impressive advance it now trades at a 2% premium and appears to be unwinding an overbought condition relative to the 200-day MA. 

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April 23 2014

Commentary by David Fuller

April 17 2014

Commentary by David Fuller

Tom Stevenson: There is a lot more air to come out of the tech bubble

Here is the opening from this interesting article published by The Telegraph:

In the long run the market is a weighing machine but in the short run it counts votes. Eventually, fundamentals will determine the right price but eventually can be a long time coming. In the meantime, being right at the wrong time is frustrating, career-threatening and expensive.

This is what Keynes was getting at when he described investment as a beauty contest with a difference. You are not there to judge the most beautiful contestant but to guess who the other judges will rate. The sensible thing might be to temporarily do what you think makes no sense.

The vote-counting always comes to an end at some point but if the authorities are really determined, they can disable the weighing machine for longer than you expect. And while that’s happening markets can do strange things. Fundamentals can simply go out the window.

Last week we saw the fallout from a landslide vote in favour of tech and bio-tech stocks. The weighing machine has been re-activated, perhaps only for a short while, perhaps for longer. If we’re really back to weighing not counting, however, then I suspect this process has further to go. The scales are a long way off balance yet.

There were some pretty punchy corrections in individual Technology stocks last week, with the likes of Amazon, Facebook and Google off more than 4pc on Thursday alone. And it’s been a global correction, with internet stocks under the cosh from Shanghai to Silicon Valley and all points in between. With Nasdaq still trading at around twice the average multiple of earnings in the broader S&P 500, however, I think there’s still plenty of air to come out of this bubble.

David Fuller's view -

A degree of caution is still warranted over at least the next few months. What does this mean more specifically?

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April 17 2014

Commentary by David Fuller

BMO Mining Equity Outlook Q2/14

My thanks to a subscriber for this comprehensive report; here is a brief sample from the Preferred Stocks section:

Diversified Miners

BHP Billiton: Remains the preferred big cap name, balance sheet strong with debt reduction in 2014 on track, lowered costs and capex, net cash flow increasing, 4% dividend yield with moderate growth rates.

Rio Tinto: A well articulated and coherent strategy on lowering costs and capex, net cash flow increasing with cash return possible late 2014 into 2015, 4% dividend yield but some worries on iron ore price H2/14.

David Fuller's view -

Mining shares are generally contra cyclical and often underperform until the latter stages of bull markets.  Often regarded as ‘dull old economy stocks’, especially when the cycle’s highly fashionable shares are outperforming, miners are often ignored for much of the bull market’s duration and consequently range sideways in large developing base formations.  However, when overvalued and overextended momentum plays finally lose form, as we have seen in recent months, re-ratings are usually underway.

The Nasdaq Biotech Index (weekly & daily) is a good example. 

This item continues in the Subscriber's Area where the BMO report is also posted.

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April 16 2014

Commentary by Eoin Treacy

How resource scarcity is driving the third Industrial Revolution

If you believe as we do that we are in the early stages of a third industrial revolution then this video from McKinsey is well worth spending 11 minutes to watch. Here is a section from the transcript:

What’s important to realize is that the technologies we’re talking about changing in this way are really basic infrastructure technologies. And because of that, they have this spillover benefit for the productivity of the economy as a whole.

When we change the cost of a structure—in housing or an office—that has a knock-on effect on all these industries that use or take advantage of buildings. When we change the economics of the resources required for transportation and for movement of goods, every industry that ships anything anywhere in the world benefits from that.

When we virtualize a process to, instead of physically moving a good, turn it into a service delivered over your phone or over the Internet remotely, that, again, spreads to many, many industries, from elevators to automobiles to mining companies. They’re all now taking advantage of the fact that I can do things remotely. That’s why it’s very exciting. We’re just at the beginning, the inception point, of these new materials and new IT technologies beginning to affect many, many other industrial domains.


Eoin Treacy's view -

The above video helps bring together a number of themes that are likely to help drive productivity growth over the coming decades. This is worth keeping in mind following the sharp pullbacks experienced by a number of Technology companies over the last six weeks. 



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April 15 2014

Commentary by Eoin Treacy

Email of the day on technological innovation

“Thank you for another productive session at the strategy seminar last week. I came across this interesting overview of emerging technologies which touches upon one of the main themes we discussed.

Eoin Treacy's view -

Thank you for these infographics which offer a wonderful representation of how Technology might develop over the next twenty years. While it would be unreasonable to expect all of these possibilities to reach fruition, the potential for success in at least some of them suggests that productivity growth is more likely than not over the next couple of decades. 

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April 07 2014

Commentary by David Fuller

Iain Little: Fund Manager Diary: Leaders and Sex

My thanks to the author for his latest and ever-entertaining Diary.  Here is a brief sample:

There are many ways to think about global investing. Many talk about countries (“is China’s relative decline over?”). Others think of sectors (“is Technology entering a bear market?”). We see the world as themes (“is the emerging middle class increasing the demand for shampoo?”). Few think in terms of sex (though some psychologists say men think about it every 7 seconds). Our Developing China theme adviser, Arisaig Partners, points out that women are changing global economics. The growth in women’s income (USD 5 trillion) in the next 5 years will exceed the GDP growth of China and India combined. Half of the world’s farmers are women, yet they own less than 2% of the land and take home only 10% of global income. Mao Zedong, the “Great Helmsman“, said that women “hold up half the sky”. How poetic therefore that thinking about women’s purchases –cosmetics, soap, chocolate, apparel- conjures up those stocks –Unilever, P&G, Nestlé etc- that are rightly called “Global Autonomies”. Indeed, The Hand That Rocks The Cradle Rules The World.

David Fuller's view -

They also have decent dividends, which make them purchase candidates following every significant correction. 

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

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April 07 2014

Commentary by David Fuller

U.S. Wind Power Blows New Records. Again. And Again

I am no fan of wind power but was impressed by this report from Bloomberg.  Here is the conclusion:

Even without the subsidy, wind prices are getting cheaper as the Technology improves. The cost of wind energy has declined by 43 percent over the last four years. There’s a backlog of projects that already qualified for the tax credit that will ensure a steady pace of turbine growth for the next few years, according to BNEF wind analyst Amy Grace.

The future of the wind tax credit is contentious and uncertain, but so is America’s cheap gas prices. As expensive coal plants are retired, utilities are switching to cheaper natural gas, driving up the price, says Grace. Also, the U.S. Energy Department is opening up domestic gas for exports for the first time. By 2020, U.S. shale gas may account for 20 percent of the global market, according to a Citigroup estimate.

If Americans have to buy gas anywhere near international market prices, wind wins. Gas may be booming, but you can expect many more wind records to come.

David Fuller's view -

I suspect that at least part of that 43% drop in the cost of wind energy is due to temporary overproduction of windmills.  Nevertheless, improving Technology is also a major factor.  Even so, these HG Wells monsters are appalling, noisy eyesores which blot landscapes and kill millions of birds. 

At least the USA has more undeveloped, remote land where windmills can be placed.  However, this considerably increases the costs and challenges of delivering their electricity to population centres where it is required.  In contrast, solar power need not have any of these drawbacks, while also being far more efficient and adaptable in terms of size or location.  

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April 04 2014

Commentary by David Fuller

U.S. Stocks Fall as Technology Selloff Drops Nasdaq Index

Here is the opening for this report on the US market’s significant developments today, reported by Bloomberg:

U.S. stocks fell, with the Nasdaq Composite Index sliding the most in two months, after large Technology stocks from Google Inc. to Yahoo Inc. plunged as investors sold the bull market’s biggest winners.

Google Class A shares sank 4.6 percent in the biggest drop since October 2012. Facebook Inc. lost 4.6 percent, bringing its two-day slide to 9.5 percent. Yahoo Inc. declined 4.2 percent to the lowest since November. An index of bioTechnology stocks plunged 4.1 percent. GrubHub Inc. surged 31 percent in its trading debut.

The Nasdaq index lost 2.6 percent to 4,127.73 at 4 p.m. in New York, for its worst day since Feb. 3. The Standard & Poor’s 500 Index sank 1.3 percent to 1,865.09 after earlier rising to an all-time high. The Dow Jones Industrial Average dropped 159.84 points, or 1 percent, to 16,412.71.

“This has been in the making for a few weeks,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said a phone interview. “Managers were positioned very heavily last year with the winners. They killed in 2013 and money started to pour in them. Today is kind of like the panic day that they couldn’t stand it any more and now they’re just puking these names.”

David Fuller's view -

These market developments are discussed below, albeit less colourfully.  

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April 03 2014

Commentary by David Fuller

Drones Portend High-Tech Future for Dangerous Mines

Here is the opening from this fascinating article from Bloomberg Businessweek.

Mines without miners?  Not quite. Still, a Technology boom in robots, drones, driverless trucks and pilotless trains is beginning to reshape one of the world’s most labor-intensive industries, portending automation of logistics, supply chains and mapping and allowing development of mines in regions once thought too dangerous or remote to exploit.Already about 200 driverless haul trucks are working iron ore mines, mainly in Australia. Meanwhile, mining giant Rio Tinto Ltd. (RIO), which funds one of the world’s largest non-military robotics programs, will soon use unmanned trains to deliver cargo to the coast and set drones aloft at its remote mines.

Drones can monitor stockpiles, map exploration targets and track equipment and will eventually deliver parcels to workshops according to Accenture Plc. -- and on a schedule far ahead of that envisioned by Inc.’s Jeff Bezos, who one day wants Amazon’s books and DVDs delivered instantly to customers via miniature helicopters.

“Come and see me in about October,” said John McGagh, head of innovation at Rio Tinto in Brisbane, Australia, where staff use the world’s largest multi-content touchscreen to monitor mining operations from Utah to Queensland. “You will see drones flying around. That’s not so long away.”

David Fuller's view -

It may take a while, but Technology is beginning to transform one of the dirtiest and most dangerous extraction businesses, giving it a metallic sheen of glamour to match the appeal of some mining share valuations.  

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March 31 2014

Commentary by David Fuller

Hi-Frequency Traders Ripping Off Investors, Michael Lewis Says

Here is today’s initial article by Nick Baker and Sam Mamudi for Bloomberg, prior to the public release of Michael Lewis’ new book: Flash Boys: A Wall Street Revolt.  The original article is no longer available online but having sent it to my PC this morning, I make the PDF above.  The article was subsequently watered down and also diluted with rebuttals from the very powerful HFT industry, which has so far had the blessings of most exchanges, because their profits have increase dramatically as a consequence of all the additional volume created by high speed electronic orders.  Here is the opening from the original article:

March 31 (Bloomberg) -- The U.S. stock market is rigged when high-frequency traders with advanced computers make tens of billions of dollars by jumping in front of investors, according to author Michael Lewis, who spent the past year researching the topic for his new book “Flash Boys.”

While speed traders’ strategies, developed over the past decade with help from exchanges, are legal, “it’s just nuts” that they’re allowed, Lewis said during an interview televised yesterday on CBS Corp.’s “60 Minutes.” The tactics are too complicated for individual investors to understand, he said.

“The United States stock market, the most iconic market in global capitalism, is rigged,” Lewis, whose books “Liar’s Poker” and “The Big Short” highlighted Wall Street excesses, said during the interview. The new book comes out today. “It’s crazy that it’s legal for some people to get advance news on prices and what investors are doing,” he said.

Everyone who owns equities is victimized by the practices, in which the fastest traders figure out which stocks investors plan to buy, purchase them first and then sell them back at a higher price, said Lewis, a columnist for Bloomberg View. To show how lucrative the tactics are, Lewis said a Technology firm spent $300 million to build a line that would shave three milliseconds off the time it takes to communicate between New Jersey and Chicago, then leased it out to securities companies for $10 million each.

David Fuller's view -

Veteran subscribers are very familiar with the debate concerning high-frequency trading (HFT) because this service has been posting articles on the subject and writing about it throughout the last five years, as the historic Archive will confirm. 

Michael Lewis and others who have expressed criticisms of HFT today are rightly focussing on the fact that it is mainly a front-running system.  Therefore the ‘T’ in HFT is actually a misnomer because the normal definition of trading does not include front-running, which is supposed to be illegal. 

Moreover, normal trading has always carried a level of risk because the future is generally unknown.  Today’s HFT would be more accurately described as HFFR, for high-frequency front running.  HFFR virtually eliminates risk because it gets a clear look at the immediate future by seeing everyone else’s buy and sell orders, microseconds before they are excuted.

This item continues in the Subscriber’s Area where another informative article on the subject is also posted.

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March 28 2014

Commentary by Eoin Treacy

Insights in 140 words

Thanks to a subscriber for this interesting note from Deutsche Bank by a former editor of the Financial Times’ Lex column. Here is a section on biotech:

BioTechnology - The Nasdaq biotech index has quadrupled in five years but is down 14 per cent in less than five weeks. Is a bubble popping? There are reasons to worry but beware the chatter about excessive valuations. Who cares if the 800 biotech deals this millennium were priced, for example, at 30 times net income on average? Such ratios are meaningless given early development-stage companies accounted for 350 of these acquisitions. Biotech is mostly a probability game before a commercial one. Investors are better off pondering, therefore, whether the decline in FDA approvals of new molecular entities from 39 in 2012 to 27 last year is significant. Or whether even if approvals accelerate will the crowding into, say, oncology research result in a deluge of similar new drugs that dulls returns? Biotech’s fate cannot be analysed in spreadsheets just yet.

Eoin Treacy's view -

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

There is a never a better time to seek funding for a capital intensive project than when interest rates are low and liquidity abundant. Biotech shares broke out of long-term bases late in 2010 and have since soared as an increasing number of projects reach commercial viability. 

This has fostered the acceptance of optimistic growth forecasts and improved perceptions of future potential. Considering just how quickly the pace of technological innovation is occurring, it is reasonable to be enthusiastic about the potential for future medical enhancements. However the price charts act as a reality check.



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March 12 2014

Commentary by Eoin Treacy

Next Opportunity: Position for Theme-based Investment

Thanks to a subscriber for a link to this report from Citi focusing on China. Here is a section: 

In the annual session of the National People’s Congress (NPC), Chinese leaders appear to have opted for Chinese medicine, not western ones or a drastic surgery, to cure past problems. They called for stabilizing growth in 2014 while the economy is climbing hills and crossing ridges. This does not rule out the possibility of sub-7.5% growth this year, but the resource-rich government will try to avoid a systemic risk.

Defaults in the financial markets are possible but significant ones would be avoided. In other words, our concern is not the defaults in the near-term but in the long-term.

The economy may moderate further but a hard landing is unlikely in the near term. The bottom line is to cap any sharp rise in the unemployment rate.

This reconfirms our base case: growth first, reform second. Reforms are likely to take place only when the CPI is below 3.5% but GDP growth above 7.0-7.5% (or, below 4.6% urban registered unemployment).

However, the market is likely to remain cautious in the near-term regardless of the government policy and growth target. Some investors worry about no reform as a high growth target limits any room for reform, and others are more concerned over the near-term defaults and thus further economic downturn. Neither scenario is positive to the equity market.

Our more constructive view is that the next investment opportunity will likely be a mixture of growth stabilization and reform. The government may first buy time by avoiding significant defaults and then roll out reform to boost domestic demand and engage in a gradual pace of de-leveraging. An even better but difficult result is when near-term defaults are avoided and the economy stabilizes; reforms are able to ease default risks in the long-term.

Eoin Treacy's view -

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

The above report represents a measured medium-term outlook for China’s economy and is probably in line with how the administration sees the situation. However, the short-term outlook is more focused on the fact that an increasing number of troubled trust products are missing coupon payments and investor hopes of receiving their principal are deteriorating. Here is a section from a Bloomberg article with some additional detail: 

Jilin Province Trust Co., which missed five interest payments on a trust product it issued to finance mining projects, declined to comment on a sixth payment due yesterday. China had its first onshore bond default last week when Shanghai Chaori Solar Energy Science & Technology Co. failed to make an interest payment and Baoding Tianwei Baobian Electric Co.’s notes were suspended from trading yesterday after it lost money for a second year.

“China’s economic outlook has deteriorated and more bond defaults could be coming, so it’s weighing on the yuan,” said Bruce Yam, a currency strategist at Sun Hung Kai Forex in Hong Kong. “A weaker yuan could help some exporters, especially the small- to medium-sized ones. It will also facilitate meeting China’s growth target this year.”

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March 11 2014

Commentary by David Fuller

ETF Outflows Biggest in World on Economy: China Overnight

Here is the opening of this informative article from Bloomberg:

Exchange-traded funds focused on China are posting the world’s biggest outflows amid concern economic growth is slowing.

Withdrawals from U.S.-based Chinese ETFs totaled $87.5 million March 10, the most among 46 nations, bringing this year’s redemption to $380.7 million, according to data compiled by Bloomberg. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., fell 1.6 percent to $33.90. The Bloomberg China-US Equity Index of the most-traded stocks in the U.S. dropped 2 percent to 99.60, led by Vipshop Holdings Ltd. (VIPS)

Official data over the weekend showed the steepest slide in exports since 2009 and the slowest inflation in 13 months, highlighting the challenges for Premier Li Keqiang in achieving this year’s economic-growth target of 7.5 percent. China had its first onshore bond default after Shanghai Chaori Solar Energy Science & Technology Co., a solar-panel maker, said last week it would fail to pay interest on notes due March 2017.

“Investors are pulling out of financial markets where there’s an economic slowdown and a lot of uncertainties,” Dave Lutz, the head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said yesterday. “The outflow of capital from China will not end until investors stop seeing all the headlines about China indicating the country’s growth is faltering.”

David Fuller's view -

This is certainly understandable because the world’s second biggest economy is obviously going through a difficult transformation stage.  Moreover, China looks like a conundrum to many observers because the timing of its next recovery or even the next policy decision of importance remains difficult to predict.  As China’s Shanghai A-Shares Index (weekly & daily) has sagged, no one really thinks the 7.5% GDP growth target is achievable. 

Against this background, are the ETF outflows from China’s stock market a smart move or a contrary indicator?

This item continues in the Subscriber’s Area. 

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March 11 2014

Commentary by David Fuller

Email of the day 1

On Reef Boring Technology:

“I was very interested in reading about Reef Boring Technology mentioned in your comment of the day on March 5th. It reminded me of how early you were commenting about shale gas. How important do you see this development. Can it have similar effects on Gold as fracking did on gas? I would be grateful for your or the collectives’ views on this. Thanks very much in advance.”

David Fuller's view -

The short answer is our maxim: Technology Is Everything!  It will not have quite the same impact as fracking for gas in shale deposits, because that resource could not previously be released by conventional drilling. 

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March 05 2014

Commentary by David Fuller

Iain Little: Fund Managers Diary: Boring Laser Surgery for Exciting Miners

Here is a sample from the opening, plus his comment on The Markets Now:

Many's the time I've sat glued to the dentist's chair praying for merciful escape, or a laser fast treatment. Any fate but "drill and blast". Gold mining companies in South Africa now have new know-how. AngloGold Ashanti, the world's number 3 gold miner, is abandoning drill and blast techniques and now expects to double the life of its S African mines -that means 30 more years of revenues- by using reef-boring Technology (RBT). RBT taps new ore from old areas. It drills directly into the gold veins, like a laser drill, and extracts the most valuable content without blasting the entire rock. RBT could be, at least for gold, the new "fracking", a concept we introduced to readers several years ago when most people thought we were just talking dirty. "South Africa is going to long outlive me and probably the next five CEOs of the company," says Anglo's main man. The boring machines, which AngloGold developed with its suppliers, can single out gold-bearing ore from the reef, replace it with cement and chemicals that stabilize the mining structure, and thus take in ore that used to be lost amongst the pillars that supported the structure. Using Technology rather than manual labor means AngloGold can operate 24 hours a day. And it should please unions by giving workers less dangerous tasks to do instead. "Effectively, gold that is written off comes back into the books", he says. OK, so how will the books of gold miners change? Start with increased grades (read "margins"). We're talking about raising grades by as much as 15 times, from 6/10 grams per ton to 90 grams per ton. Then add in increased volumes, lower labour costs, reduced environmental impact, and greater extraction speed, and you've got, well, a gold mine. Like so much new Technology, RBT comes about because of man's need to meet a challenge: how to excavate deeper and deeper mines. 

Roll up, roll up for this Friday's "Markets Now" seminar in the East India Club (at 1700h prompt, the bell rings for Round One). About 20 are coming to hear Global Strategist David Fuller, supported by yours truly, tackle the major investment issues of the day in a Town Hall free-for-all. There's room for a few more. Here's the email address of the organizers: [email protected] 

David Fuller's view -

Iain Little’s Diary is posted in the Subscriber’s Area but if you would like to meet him and are anywhere near London this Friday, do come along to The Markets Now event.  Further details are provided below.

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February 25 2014

Commentary by David Fuller

Email of the day 1

On an article about bubbles in the UK and USA stock markets:

“Dear David, What is your opinion on this article [from The Guardian] that claims that there is a "bubble" in the USA and UK stock markets?”

 Ed: Here is the opening:

 According to the stock market, the UK economy is in a boom. Not just any old boom, but a historic one. On 28 October 2013, the FTSE 100 index hit 6,734, breaching the level achieved at the height of the economic boom before the 2008 global financial crisis (that was 6,730, recorded in October 2007).

Since then, it has had ups and downs, but on 21 February 2014 the FTSE 100 climbed to a new height of 6,838. At this rate, it may soon surpass the highest ever level reached since the index began in 1984 – that was 6,930, recorded in December 1999, during the heady days of the dotcom bubble.

The current levels of share prices are extraordinary considering the UK economy has not yet recovered the ground lost since the 2008 crash; per capita income in the UK today is still lower than it was in 2007. And let us not forget that share prices back in 2007 were themselves definitely in bubble territory of the first order.

The situation is even more worrying in the US. In March 2013, the Standard & Poor 500 stock market index reached the highest ever level, surpassing the 2007 peak (which was higher than the peak during the dotcom boom), despite the fact that the country's per capita income had not yet recovered to its 2007 level. Since then, the index has risen about 20%, although the US per capita income has not increased even by 2% during the same period. This is definitely the biggest stock market bubble in modern history.

David Fuller's view -

This is a generally good article although the author seems to think that the stock market should reflect the economy.  It will reflect monetary conditions but most UK and USA companies are considerably better off than their respective home economies, as I have mentioned before. 

For instance, they do not face the same debts or employment problems.  They can also earn revenue beyond their home shores, and some companies listed in the UK are not domiciled here.  However, all these shares have definitely benefited from Technology enhancements, low interest rates and quantitative easing (QE).  

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February 25 2014

Commentary by David Fuller

Email of the day 2

On developments in solar power:

“Hello David, it's me again. The article below on solar power appeared in today's City A.M. paper (London). The author draws a graphic analogy of panels installed to date with the Ford Model-T which was produced from 1908-1927. Look at the sophistication, reliability and affordability of modern cars by comparison and we get some idea of how amazing solar power is likely to become in coming decades. It will transform the world, in my humble opinion.”

Ed: Here is a section:

First, grid parity – when electricity generation is competitive with grid-electricity rates without subsidies – is edging closer. In 2012, Bloomberg reported that Germany, Denmark, Italy, Spain, Portugal, Australia, and Brazil could already expect to achieve at least a 6 per cent return on PV investments. Many of these countries still offer indirect subsidies, so the market isn’t competitive quite yet. But the direction is clear. The average US PV market will likely reach proper grid parity around 2020, and states like California should reach that point sooner. Within a few years, arguments about feed-in tariffs will become irrelevant in many countries, because the solar industry won’t need subsidies.

Second, large companies are flocking to solar. Thanks in part to cheap PV modules, non-energy businesses are becoming mini power generators. The retail giant Walmart already has a solar-energy capacity of almost 90 megawatts (MW) in the US. If the retailer installed panels on every US store, it could generate 1.5 to 2 gigawatts – or about twice the output of my local nuclear power station. If other big-box retailers follow – and many are already doing so – we could see collective generation capacity skyrocket, making solar increasingly viable as part of the energy mix.

Its potential goes beyond retail. Solar is well-suited to industrial and processing applications: in Saudi Arabia, the Al-Khafji solar-powered seawater desalination plant is set to produce 30,000 cubic metres of salt-free water per day. And entrepreneurs are honing new applications. The US startup WaterFX, for example, is developing solar “troughs” that remove salt from water by distillation to deal with drought.

But these innovations are only possible because solar Technology is developing rapidly. Today’s domestic PV modules are the Ford Model-Ts of solar: cheap, mass-produced, commercial pioneers. But they are poor at converting sunlight into electricity (efficiencies of around 10 to 15 per cent are common). These figures, however, could easily double.

Scientists from the California Institute of Technology and partners are developing a new multi-junction cell with a target efficiency of over 50 per cent. Building-integrated PV – glazing that generates power – could further popularise solar power. And PV is not the only form of solar energy. Improvements in other approaches, such as concentrated solar power (CSP), are possible. CSP uses mirrors to concentrate a large amount of sunlight onto a small area, driving a turbine. Just look at Spain’s 50MW Solnova Solar power station.

David Fuller's view -

Many thanks for the article, as informative emails are most welcome, not least in the field of Technology.  Solar farms can be understandably contentious if they are anywhere near recreational areas and sights of natural beauty, although they are considerably less menacing than noisy windmills. 

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February 25 2014

Commentary by Eoin Treacy

NSA-Avoiding Devices Pitched as Way to Leave No Trail for Spies

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

“Most of the large companies are taking significant steps to broaden and audit their use of encryption,” Henninger said in a phone interview. He questioned whether the Technology is practical for widespread use, given that some services can be difficult to use.

Providing secure communications is “a huge growth area” for Verizon, Eddie Schwartz, the New York-based company’s vice president of global security solutions, said in a phone interview.

Verizon provides managed security services to companies, which include monitoring networks and data for hacking threats.

The company views its ability to monitor global Internet traffic as an advantage to offer customers the latest threat intelligence, Schwartz said.

“We sit on a fairly significant portion of the world’s Internet traffic,” he said. “The Internet is a living body of activity that we are constantly examining.”

Verizon also offers companies cloud services, which refers to online file storage and sharing.



Eoin Treacy's view -

In an era where an increasing number of people seem totally at ease with sharing the entire details of their personal lives with the whole world, those who seek privacy are often looked on with suspicion. However, a countermanding argument is that in an age where every piece of information is now also a piece of digital data,  the need for security has never been more important. 

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February 24 2014

Commentary by David Fuller

Tim Price: Forty centuries of learning nothing

My thanks to the Author for his interesting report, focussing this week on the history of inflation, plus wage and price controls.

It is posted in the Subscriber’s Area but here is the opening:

“The co-authors began working on this book in 1974, just after the termination of President Nixon’s controls in the United States. Since that time, we have examined over one hundred cases of wage and price controls in thirty different nations from 2000 BC to AD 1978..

“We have concluded that, while there have been some cases in which controls have at least apparently curtailed the effects of inflation for a short time, they have always failed in the long run. The basic reason for this is that they have not addressed the real cause of inflation which is an increase in the money supply over and above the increase in productivity. Rulers from the earliest times sought to solve their financial problems by debasing the coinage or issuing almost worthless coins at high face values; through modern Technology the governments of recent centuries have had printing presses at their disposal. When these measures resulted in inflation, the same rulers then turned to wage and price controls.”

- Robert L Schuettinger and Eamonn F Butler, ‘Forty centuries of wage and price controls: how not to fight inflation’ (The Heritage Foundation, 1979). 

David Fuller's view -

This history will certainly interest many subscribers, as will the conclusion.

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February 21 2014

Commentary by David Fuller

Is the Facebook takeover of WhatsApp a sign of a tech bubble?

Here is the opening of this topical article from The Telegraph:

Facebook's shock purchase of the smartphone messaging service WhatsApp has pushed Technology deal-making to the highest levels since the dotcom bubble burst at the start of the century.

The $19bn (£11.4bn) takeover is the fourth biggest Technology acquisition in history, and means that $42.4bn-worth of mergers and acquisitions have been agreed in the first month-and-a-half of 2014 – a 14-year high – according to data from Thomson Reuters.

The extravagant valuations of Technology companies have seen dozens of founders turned into millionaires overnight, but have also fuelled fears that the crash of 2000 will be repeated, with WhatsApp just the latest example that the sector is overheating.

On Wednesday night, Facebook chief executive Mark Zuckerberg announced the takeover, a radical move to protect his company’s status as the world’s dominant social service.

This figure is expected to reach 1bn within a few years, making WhatsApp one of the world’s biggest companies in terms of user numbers. However, its low fees – it charges users just 99 cents a year – and a promise not to add adverts have led to questions about whether WhatsApp can ever achieve the revenues to justify its valuation.

A host of companies are looking to cash in on the growing demand for Technology investments.

Twitter floated on the New York Stock Exchange in November, with the social network now valued at $30bn despite losses widening last year; King, the British games maker behind the phenomenally-successful Candy Crush Saga, has filed for a New York listing; and Snapchat, a photo-sharing app without any revenue, is believed to have rejected a $3bn bid from Facebook.

David Fuller's view -

“It’s like déjà-vu all over again”, as Yogi Berra said in another context. We saw it in the late 1990s with tech.  Alan Greenspan described it as “irrational exuberance”, before he was hounded into silence. 

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February 20 2014

Commentary by David Fuller

How to Save Water on Fracking

Here is a brief sample from this informative editorial by Bloomberg:

One way to minimize fracking's drain on fresh water is to substitute, as much as possible, water that's already been used to frack other wells. After fracking, 10 percent to 50 percent of the water flows back up through the oil or gas well and is typically disposed of through injection into deep wells, a practice that has been linked with minor but troubling earthquakes. If it is instead cleaned of chemical additives as well as metals and minerals from deep underground, it can be reused. Frackers can also use brackish water from aquifers or municipal and industrial wastewater. Some are even beginning to frack not with great quantities of water but with a foam that contains nitrogen, carbon dioxide and relatively small quantities of water. Some of these options even make fracking cheaper.

 Regulators need to ensure these alternative practices are consistently adopted. Pennsylvania has the right approach. Before withdrawing water in that state, drillers must win approval for a water-use plan that discloses how much water a well will use, from where and what effect that will have on local sources. To be approved, these plans must include wastewater recycling.

David Fuller's view -

The unconventional production of oil and particularly natural gas from fracking is another area where US Technology - in this one instance largely shared by Canada - is streaking away from the rest of the world.  Bloomberg’s editorial confirms that fracking Technology continues to develop at a rapid pace.  This is extremely beneficial for the US economy which has much lower energy costs than any other large developed country.  Consequently, manufacturing industries are moving to the US, reversing the trend of earlier decades since the 1980s.

The US is also producing fewer CO2 emissions thanks to the surging consumption of its own natural gas.  Additionally, it also kept a number of its nuclear power stations open and is also becoming a leader in new nuclear Technology.  It is also benefiting from the technological advances which are boosting the efficiency of solar energy. 

Other developed countries are also utilising solar power, but mostly after weakening their economies by prematurely closing nuclear power stations and investing heavily in inefficient wind farms which are proving to be deeply unpopular.  These countries continue to resist fracking, either because they lack the Technology or are on record for their opposition to fossil fuels.  Ironically, they have to burn more coal – the biggest pollutant of all – because their green technologies are far from being consistent sources of energy.  

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February 12 2014

Commentary by David Fuller

Email of the day 1

On household inflation

“Thank you for posting Tim Price's latest letter.

“This passage quoted from James Grant was a bit of a jaw dropper:

"I submit that in a world of technological wonder, prices ought to be weakening: it costs less to buy things because it costs less to make them."

“While the prices of some goods and services may be dropping, on the whole the upwards march in the cost of living in the real world continues without any signs of slowing down. Our household's bills for taxes, school fees, medical insurance, food, home contents insurance, cinema tickets, utilities, transport, air travel and many other things all increased over the last 12 months. Even the cost of the cat's annual check up at the vet jumped last year. Very few things went down in price.

“It is very hard to believe in the possibility of deflationary risk when the rising cost of living is busy educating my household's finances about the realities of inflation. Certainly it could happen, but I am not holding my breath.”

David Fuller's view -

Very well said and I agree.  It is the dichotomy that we have lived with for years.  The cost of most things that we need to pay for on a regular basis continues to rise.  It is only the cost of some things that we may replace every several years, such as computers or TVs that have been coming down in price, and/or are providing better value. 

 However, to make matters worse, there is deflation in average salaries paid by many competitive industries.  If a company needs to lower wage costs to remain competitive, it can either move at least part of its operation to a cheaper location, or increasingly, replace many employees with smart machines.  This is the deflation that many financial analysts and economists are referring to.  Moreover, every middleclass worker who is replaced by Technology is inadvertently removing a monthly salary tax payment from the state. 

 As investors, we need to look for companies that are profiting from the virtuous deflation.  For instance, by manufacturing goods more cheaply, which they can also sell at low prices in greater volume, earning bigger profits in the process.   

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February 10 2014

Commentary by David Fuller

Bernard Tan: Indonesian Energy Deficit

My thanks to the author for his latest interesting, extensively illustrated report.  Here is the opening:

The full report is posted in the Subscriber's Area.

Indonesia joined OPEC in 1962 and left the cartel in 2008 when it realised it was going to become a structural net importer of energy. Funny thing is most people I polled while writing this essay were under the impression that Indonesia is still part of OPEC!

Oil production has been since 2000, from over 1.4 million barrels per day to less than 800,000 by late 2013. There was actually a period from 2007-2010 when production stabilised at just below 1 million bpd but has seen fallen steeply again. See chart below.

The latest data shows that Indonesia crude oil production will continue to plunge. According to Indonesia’s BPPT (Agency for the Assessment and Application of Technology), crude oil production could drop to as low as 124 million barrels by 2030 or about 340,000 barrels per day.

The natural consequence is net imports go up as shown in the next chart.

Actually, Indonesia only became a structural net importer of crude oil in late 2012 but since then, the deficit has accelerated. It is now in the region of 4 million barrels per month or more than US$400 million at current oil prices.

According to BPPT, net imports could reach 408 million barrels by 2030 or 34 million barrels per month. That’s nearly $4 billion per month at current oil prices.

The deficit in oil isn’t coming from the demands of electricity generation. As can be seen from the next graph, oil based electricity generation capacity has been roughly stagnant since 2004. Most of the increase in Indonesia’s electricity generation since 2005 has been from coal and to a lesser extent, natural gas.

The culprit is motor vehicles as shown by the next chart of monthly motor vehicle sales in Indonesia. From 2004-2009, Indonesia’s monthly motor vehicle sales oscillated around the 40,000 level. Prior to this, it was around 25,000. But from 2010 onwards, it grew rapidly and in Sep 2013, was approaching the 120,000 level, almost 3x the level of 2004-2009 average levels.

As we all know, once people own motor vehicles, they drive them around, thus needing ever growing amounts of petrol and diesel. Even if motor vehicle sales fall off from now on, the installed base cannot help but grow ever larger. If current sales levels are maintained, more than 100,000 new vehicles will pour onto Indonesia’s roads every month, adding to the demand for imported oil.

David Fuller's view -

Indonesia is a resource-rich developing economy with a rapidly increasing oil shortage problem as Bernard Tan points out.  Indonesia appears to have plenty of coal for electricity generation but its soaring rate of consumption must have negative consequences in terms of pollution. 

Indonesia’s BPPT (Agency for the Assessment and Application of Technology), quoted above, offers a grim projection for oil imports by 2030, including 34 million barrels per month costing nearly $4 billion per month at current prices!  

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January 23 2014

Commentary by Eoin Treacy

Why Alibaba IPO will make it the next global tech powerhouse

Thanks to a subscriber for this interesting article by  Arshy Mann and Joe Castaldo for Canadian Here is a section: 

Alibaba’s best bet for international expansion is probably not North America but everywhere else. Last year it made all of its products available in Hong Kong, Macau and Taiwan. Countries like Singapore and Malaysia, with large numbers of Chinese speakers, now look ripe for the picking. Emerging economies in Africa and Latin America are also promising, where underdeveloped financial systems could allow Alipay to become the dominant online payment system.

Alibaba’s experience in overcoming Chinese consumers’ distrust of online commerce should also help as it expands into other emerging economies. Among its innovations have been a third-party verification process to vet sellers’ claims and a chat function so buyers can talk to sellers in real time. Alipay is also an escrow service, so payment isn’t released to vendors until buyers indicate they’re satisfied with the quality of the goods. The company doesn’t have to grow organically, either. “It is an extremely cash-rich company that could easily gain a large position in other markets through investments or acquisitions,” says James Roy, an associate principal at China Market Research Group in Shanghai.

As Alibaba considers tentative steps abroad, it’s also becoming a crucial link for western retailers coming to China. Because of Tmall’s popularity, it’s far easier and cheaper for foreign brands to buy exposure on the site rather than start from scratch. Chinese consumers don’t even look for products through a search engine; they go straight to Tmall. Adidas, Pampers and Canada’s own Roots now have dedicated pages on Tmall. A spokesperson for Roots declined to comment, other than to say its Tmall presence is a “preliminary test to help determine whether we decide to develop this further.” Tmall alone is set to surpass Amazon in 2015 to become the world’s biggest online retailer, according to Euromonitor, so any company would be foolish not to consider partnering up.

Eoin Treacy's view -

Alibaba is one of a small number of Chinese companies that has emerged to compete on the global stage and as its founder Jack Ma is certainly deserving of acclaim. However, the fact that he has stepped down as CEO in advance of the IPO raises the possibility that he wishes to cash out of the business rather than lead it to the fresh heights many who will buy the stock aspire to.

In the current environment where internet related IPOs are surging, the potential for Alibaba to do the same is nontrivial. However, I have to ask myself if Apple would have been the company it is today if Steve Jobs has resigned as CEO six months ahead of its IPO? Probably not.


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January 22 2014

Commentary by David Fuller

Email of the day

On Apple:

“I wonder what will come out of left field to upset the Apple Cart?”

David Fuller's view -

Well, we certainly know that mobile phone Technology remains a rapidly developing field so Apple needs to keep delivering, including an awareness of fashion which can be fickle and change quickly. I have wondered if nice Tim Cook was saddled with the equivalent of a dark comedy father-in-law from hell in crusty Carl Icahn, whose holding in Apple is now worth about $3bn. 

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January 22 2014

Commentary by Eoin Treacy

Bitcoin Targets Giants Visa to JPMorgan With Low Costs

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

¡°At some point, I had an ¡®aha!¡¯ moment and realized that Bitcoin was best understood as a new software protocol through which you could rebuild the payments industry in ways that are better and cheaper,¡± Chris Dixon, a partner at Menlo Park, California-based venture capital firm Andreessen Horowitz, wrote in a blog post.

Bitcoin enthusiasts say they are building a system to move money across the Internet securely and at a lower cost than existing wire transfers, bank debits or remittances. If they can eliminate the friction created by middlemen and create easy-to-use consumer tools, Bitcoin businesses may claim a piece of the revenue and still deliver lower costs.

Already, some retailers are paying 1 percent to process transactions in Bitcoin, improving profit margins. Taking debit or credit cards, they may pay more than 3 percent to issuing banks. Bitcoin transactions log immediately, and are confirmed in as little as five minutes. 


Eoin Treacy's view -

Despite a considerable amount of competition between banks, the reality is that fees for money transfers are unusually high and the speed with which they are completed leaves a great deal to be desired. Bitcoin and other potential crypto- currency exchange mechanisms represent a developing Technology base from which consumers and corporations are likely to benefit over the long term. 


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January 21 2014

Commentary by Eoin Treacy

Email of the day on the 3rd Industrial Revolution

The email of the day yesterday on global macro outlook (plus Eoin’s reply) prompted me to write my thoughts on whether high tech is played out. Actually I think just the opposite. In agreement with David and Eoin, I believe we are in the early stage of massive new growth generated by breakthroughs in Technology.

A year ago I attended and presented at a conference in New York City entitled “Are You Ready for the Third Industrial Revolution?” While preparing my presentation I did a lot of research on factors that drive an industrial revolution. I’ll summarize here for the sake of brevity, but I think one can identify three main themes: a new more efficient energy source, improved communication/transport systems, and improved financial structures.

In the first industrial revolution, innovations in England from approximately 1790 led to the replacement of wood power by coal power; new transport systems based on steam-power initially for boats on canals followed by the first railways; steam-power drove the first mass printing presses which led to mass education for the first time in human history; and a new financial model based on the first stock exchange initially out of Lyons coffee house on the Stand in London.

The second industrial revolution, a century later, was jointly driven by US and European inventors. It followed a similar pattern, with oil replacing the less-efficient coal; development of new transport based on the internal combustion engine out of Europe with Messers Daimler and Benz being the most notable contributors; the building of mass transport highways for the first time, electrification of cities driven by the incredible inventiveness of Thomas Edison; and a new financial breakthrough in the form of the limited liability company.

So, where are we in the third industrial revolution? One of the three factors that drive an industrial revolution must be clear to us all. We all use it every day. The internet is a massive breakthrough in communications. It is now linking all humanity instantaneously for the first time. The impact on communication efficiency, spread of ideas, synergy of creativity globally, and global education is already very clear. At the time of the conference last year I was less sure about the second factor, a new energy source. Gas is a stopgap in my mind, a last play on the hydrocarbon theme, though likely to be very significant in coming decades in driving down energy costs. But over the past year my reading around solar power has convinced me that it is just about ready to make a major impact. The efficiency of capture of sunlight was until recently in the 10% range and depended on expensive ingredients in the panels. But breakthroughs in graphene Technology suggest that 50-100% capture efficiency is achievable and the materials will be very low cost. The impact could be absolutely incredible. (Think through all the ways it could change energy generation and usage. Thankfully, it will soon bypass windmills and other “green” energy sources currently in vogue).

The third factor, innovation in our financial system, is a clear need and currently unsolved. I am wondering whether crowd-funding is part of the answer at least, and I have personally invested Angel money in helping build one company here in the UK.

Finally, one additional point is worth making. Eoin hinted at this in his response yesterday to the email of the day. He was referring to medical breakthroughs (my own field of work) but his comment is applicable to all fields I believe. New technologies take a long time to develop to a level of real usefulness and payback. I did a lot of research on this over a decade ago and I gave public presentations and published research papers on this matter. All the evidence is that it takes 15-25 years for any new Technology to get to the "payback” phase. This seems to apply to all technologies in all fields. Moreover, the eventual real value of a new Technology may not be obvious at first, and it may differ from the intentions of the original innovators.

Personally, I have been building a second investment portfolio alongside my usual “trend-following” portfolio. I have been buying ”Third Industrial Revolution” companies, those that are driving the revolution, mostly in the USA and UK. By applying trend-following principles in selecting when to buy I have achieved gains of 10%-70% for over 20 companies over the past year. It is really interesting to build such a portfolio as it makes one very aware of the incredible breakthroughs and moreover keeps one very positive about the future! If other members of the collective are building such portfolios it would be interesting to share ideas and experience.

Eoin Treacy's view -

Thank you for this enlightening email contributed in the spirit of Empowerment Through Knowledge which as you point out is very much in line with our view.

In addition to technological innovation, the 3rd industrial revolution will differ from the others in an important respect. While the first and second were largely relevant to a small proportion of the global population, the third industrial revolution will be global and should help unleash humanity’s creative potential as never before.

In the realm of innovations in the financial sector, classic economic terms such as GDP and GNP are not particularly appropriate for a global system where capital can move relatively freely in search of the most attractive opportunities. The iPhone is a great example of how inefficient our view of value creation is. The majority of the benefit from the intellectual property resides in the USA, but many of the parts are assembled elsewhere and the phone registers as an import on trade figures.

In monitoring markets, we see that accommodative monetary policy in one jurisdiction has the capacity of fuel investment booms in other countries. However, the role of money flows in fostering global growth dynamics is more difficult to demonstrate in concrete terms. I suspect that when we think about financial innovation, what we need is a new way of conversing about global capital. Local considerations will always be important and protectionism is an ever present threat but the global macro environment is likely to become increasingly important.

As a medium of exchange and partnership, I wonder if Bitcoin and other crypto- currencies represent the thin end of the wedge in unleashing excess savings for investment and overcoming capital controls. It will probably be at least a decade before we have any semblance of an answer to that question.

I’ve posted this fascinating chart from the USA’s National Renewable Energy Laboratory on a number of occasions over the last year. I find it useful because it highlights the improving trajectory of solar cell efficiency but also the fact that totally new technologies are appearing at an increasing rate and the pace of obsolescence is also increasing. Therefore while graphene is a Technology that is still in its infancy, it is not difficult to imagine the potential for innovation. 

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January 20 2014

Commentary by David Fuller

Tim Price: Power failure

My thanks to the author for his ever-interesting letter, published by PFP Wealth Management. Here is a brief sample:

Make time, if you can, to watch this 2013 investment review from Century Management. For all the problems and financial distortions caused by overconfident central bankers and hopelessly indebted governments, Arnold Van Den Berg manages to convey a wonderfully balanced and even optimistic assessment for the US economy (and by extension for much of the world). A hat-tip to Jonathan Escott for bringing it to our attention. Van Den Berg highlights, for example, the impact of fracking on the domestic energy market; an Egyptian fertilizer company recently established a plant in the US where natural gas prices are now cheaper than in the Middle East. He also alludes to the advances in 3D printing, nanoTechnology, artificial intelligence and robotics. As an example of the latter two trends, he points out that in July last year, the US Navy landed an unmanned fighter jet on the aircraft carrier USS George H W Bush:

“When you consider that the computer had to factor in airspeed, altitude, the angle-of-attack, pitching, a rolling flight deck, not to mention the changing winds and seas, this was a historic landing for the Navy and maybe equally so for robots and artificial intelligence.”

David Fuller's view -

The report quoted above is posted in the Subscriber's Area.

This reminds me of one of my favourite quotes, which I also picked up from Tim Price:

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

Edward O Wilson

Fortunately, most of us do not invest in the Stone Age emotions or medieval institutions.  However, we can and do invest in the companies which benefit from god-like Technology.

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January 20 2014

Commentary by Eoin Treacy

Email of the day on the global macro outlook

Liked your weekly commentary today especially the summary on Gold.  I have made money on gold and I don't wish to chase that market again.  

Now you keep talking regulary about innovation and Technology.   As you are probably aware you are in conflict with the Harvard University Economic academic's view of Technology and innovation.  They hold we are well past the big innovation gains from Technology especially IT Technology.  In fact these bunch of academics seem to beleive these innovation benefits ended at the turn of the last century i.e. 2000.  There message appears to be that the last decade has simply delivered fancy hardware / software toys that have offered business no productivity tools.   Mums and dads may like these toys but for business they are just staff time wasters.

I do beleive medical science has much to offer mankind in the future.  However that picture is a bit cloudy also.   Utilizing any new innovations seems to be determined by price.   My son Keith (has a PhD in genetics worked for Merrill Lynch) now works for a medical services company running the cancer treatment businesses.  He is some what cautious on medical innovation.  He sees government unwilling to embrace new Technology unless their is a demonstrated cost saving to the government.  As he points out this is not always easy to demonstrate.

We all know US medical Insurance companies are also capping not premiums but the medical services they will offer to their insured patients.   We also here in Australia see lots of pressure from government to cap the more expensive medical procedures.  This must ultimately slow innovation in medical science.   The largest shareholder in the company Keith works for is no other than KKR who own a bit over 50% of the business.

Fridays profit warning from Royal Dutch Shell seems to suggest at least some of the dumb money must now be looking closely at getting out of the "Fracking" business.  Let's see if the other big dumb money provider in BHP also throws in the towel on what I see as a very stupid business.  I am not environmentalist this is just about a reasonable return on capital.

I listened to a Economist speaking on oil on Bloomberg the other night. He had a cautious view on Oil prices saying its always priced at the marginal producers cost structure I.e the fractures cost as we all know.  The dumb money frackers must be getting increasingly sick of this profit-less business.  I know Iraq, Iran, Saudi Arabia etc, etc are not going ignore 1,000 years of hating and killing one another.  The Libyan oil fields now producing 200,000 to 300,000 barrels a day are not going to revert overnight to again produce 1.8 million barrels a day.  Try talking to an oil geologists how hard it is to get an oil well flowing again.  This is an extremelly challenging task.  Lastly the US embraces Iran nuclear industry and all is forgiven about the Bush Evil Empire statement.  Somehow I don't think it's that easy.   The oil business is challenging. 

You are right the RBA is on the sell side of the AUD.  As to the future level of the AUD local economists are very worried.  They fear when we shortly become a very large energy exporter the AUD will come under pressure to rise.  This will make most other local export industries uneconomic.  There was a comment on Bloomberg the other night from a US oil company that said the oil business is now too expensive and costly.   That LNG is the go and forget the US, go straight to Australia where it is cheaper and easier.  True I am not making this up.

Perhaps we can talk more about these big picture matters at the Sydney conference.

Eoin Treacy's view -

Thank you for this thought provoking email which touches on a number of the issues I anticipate discussing with delegates at the upcoming Chart Seminar and Global Strategy session in Sydney. With only two weeks left before these events please contact Sarah Barnes [email protected] to secure you place.

From what I have read of the Harvard Economics team’s research, they tend to focus on the significant challenge of increasing processor speed as “gates” approach the width of a silicon atom. An acceptance of this limit helps to explain the urgency with which companies are investigating the potential of carbon nanotubes, graphene and other substances for the production of future generations of microchips.


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January 17 2014

Commentary by Eoin Treacy

Saxo Banks Fat Tail Predictions for 2014

Thanks to a subscriber for this interesting compilation of contrarian opinions which may be of interest to subscribers. Here is a section on a number of high flying Technology companies:

The US information Technology sector is trading about 15 percent below the current S&P 500 valuation, which is in sharp contrast to the historical premium of approximately 160 percent during the dotcom bubble. We like Technology stocks in general as they are the main driver of the necessary productivity growth the economy needs to create long-term increases in wealth per capita.

However, a small group of Technology stocks trade at a huge premium of about 700 percent above market valuation, almost defying the “Newtonian laws” of financial markets. These stocks are what we call the “Fat Five” of the Technology sector” Amazon, Netflix, Twitter, Pandora Media and Yelp. These stocks have very inflated valuations based on a skewed valuation premium on growth that has evolved in the aftermath of the financial crisis. Investors have trouble finding good growth scenarios, so when some suddenly drop by the neighbourhood, they get bid up to levels that present very poor risk/reward ratios. It is like a new bubble within an old bubble.

Facebook’s USD 3 billion cash offer for Snapchat, declined by its 23-year-old founder, is the ultimate display of hubris that shows how exuberance has grown to new levels in this part of the Technology sector. Snapchat has zero revenue and does not have a business model, so the acquisition value is not determined by incremental cash flow to Facebook, but from the potential destruction value to Facebook based on assumptions about wider adoption of Snapchat.

This creative destruction is exactly the “dark matter” that should make investors cautious about the huge valuation premium that is currently being put on this small group within the information Technology sector. To trade this, we would create a synthetic equal-weighted index of the Fat Five, starting at 100 on the last trading day of 2013. Our Outrageous Prediction is that this index will go to 50 during 2014.

Eoin Treacy's view -

The full report quoted above is posted in the Subscriber's Area. 

Earnings matter. Many forgot that during the Nasdaq bubble and some appear to have forgotten that simple fact again when looking for growth opportunities in the social media space. 


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January 14 2014

Commentary by Eoin Treacy

Twitter Stock Swings Driven by Biggest Split in Ratings

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

Sena, an analyst at Evercore Partners Inc., calculates Twitter's stock can reach $70 in the next 12 months, while Ernst, an analyst at Hudson Square Research, thinks it'll drop to $20. The spread between those predictions -- which represent the highest and lowest price targets for Twitter -- is the widest among Technology companies in the Russell 1000 Index with a market capitalization of more than $10 billion, according to data compiled by Bloomberg.

The division is reflected across the analyst community -- even among the firms that managed Twitter's IPO such as Goldman Sachs (GS) Group Inc. and Morgan Stanley -- spurring large swings in trading. After Twitter extended its post-IPO rally to more than 180 percent last month, bearish ratings have now climbed to outnumber positive ones by more than any other Technology company, data compiled by Bloomberg show. Meanwhile, investors are still willing to value Twitter at a price-to-sales multiple more than double that of Facebook Inc. (FB)

Eoin Treacy's view -

2013 was a particularly active year for IPOs with the fourth quarter providing some large cap entries to the market. Record low interest rates, abundant liquidity, investors keen to own the next big thing and an equity Bull that has driven stock market indices from depressed levels to all-time new highs have supported demand for new issues. 

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January 10 2014

Commentary by David Fuller

Internet of Things: Utopia? Horror Show? Both?

Here is the opening from this interesting and mildly amusing editorial from Bloomberg:

At the International Consumer Electronics Show in Las Vegas, an annual carnival of corporate hype and techno-hoopla, John Chambers, the head honcho at Cisco Systems Inc., described an emerging phenomenon in terms that were sensationalist even by Vegas standards.

“It will be bigger than anything that’s ever been done in high tech,” he said. “It will change the way people live, work and play.” And, oh yes, it’s a $19 trillion opportunity.

The phenomenon is commonly known as the Internet of Things. As more and more objects -- appliances and automobilestennis rackets and toothbrushes -- are wired with sensors and connected to the Internet and to other devices, they’re pulsing with new information and capabilities. Cisco has estimated that 25 billion devices will be connected to the Internet by next year, and 50 billion by 2020.

The potential benefits of this evolution are compelling. Yet as with every innovation of the digital era, it’s also fraught with perils -- many of which we haven’t even begun to think through.

Enthusiasts argue that connecting more and more objects will help bring the automation and precision of the digital world to bear on the inconveniences of the physical one. Consumers -- who can already buy communicative door lockspet collarsforksfitness monitorslight bulbsinhalersthermostats and so on -- might one day see their domestic routines unfold with Jetsons-like ease.

Retailers could use “smart” sensors to better organize their inventory and track performance data. Manufacturers could improve logistics, reduce waste and boost productivity. And city governments might benefit from smart roads that monitor congestion, trash cans that tell garbagemen when they’re full or parking meters that ping drivers when a spot opens up.

What could possibly go wrong?

David Fuller's view -

The field of consumer electronics is all those things mentioned in the headline so discretion is required, particularly in terms of what is helpful and useful for children. 

The far more important story for investors is the industrialisation of the internet, a frequent topic on this site.

This item continues in the Subscriber’s Area.

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January 08 2014

Commentary by Eoin Treacy

3D Systems targets families with sub-$1,000 3D printer

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

The company is emphasizing the Cube 3's appeal as a 3D printer for the family home, its website stating the device is recommended for children over eight years of age. This is complimented by the companion smartphone app (iOS, Android and Windows compatible), which lets users browse through other people's designs or connect to the Cubify online platform that features dozens of pre-designed objects, such as bottle-openers, dinosaur fossils and NBA figurines, and then print them remotely via the printer's built-in Wi-Fi 802.11b/g.

3D Systems also announced its high-end 3D printing solution, the Cube Pro. Geared toward the more professional end of the market, the device is capable of printing objects a considerable 10.75 x 10.75 x 9.5 in (27.3 x 27.3 x 24.1 cm) in size and three colors simultaneously.

Eoin Treacy's view -

This additional article highlighting Stratasys’ newest models may also be of interest. 

Since a 3-D printer is only as good as the 3-D data that it receives, the advances being made in optics and scanning are no less important than the printing Technology detailed in the above articles. This article focusing on 3-D Systems’ scanner plug-in for the iPad caught my attention.

When I first began looking at 3-D printers a few years ago, they cost in the region of $25000. Since then the products on offer have improved significantly, become considerably more user friendly and the prices have collapsed so that printers are on the cusp of entering the consumer market. The revolution in 3-D scanners has led this advance with the X-Box gaming system giving widespread access to a swathe of new developers which has helped push the boundaries of innovation.

While 3-D printing is an exciting sector on its own, the confluence of advances in materials science, nanoTechnology, bioTechnology and genetics is where the capacity of innovation fuelling innovation takes on a truly exponential growth curve. At present 3-D printing is concerned mostly with additive manufacturing of industrial products and customised consumer goods such as jewellery. However, it is conceivable that as the Technology advances, we are entering a phase where customised genetic sequences will be printed which opens up potential in limb replacement, vaccines and weapons.

While it is easy to be apprehensive at the potential of new Technology to displace jobs, the future appears to be one where the limits on imagination becoming reality are progressively being broken down, so that human creativity can be unleashed as never before. From an investor’s perspective, this represents massive future productivity growth potential, but our focus must remain rooted in the present, the consistency of trends and the influence of monetary policy. These factors are worth remembering as we access the overextended but still intact uptrends of 3-D printing shares.  

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January 03 2014

Commentary by David Fuller

Email of the day 4

More on Alan Kohler: Letter to Robert Gottliebsen, posted in the Technology Spectator section of the The Australian, posted in my first email yesterday: 

“I can't wait to see the developments to come and the discussion on 3D printing reminded me of an old Star Trek episode where Commander Worf needed a spine transplant and his replacement was 3D printed!! I look forward to space travel and only hope I get the chance to experience it before I shuffle off, as they say.

“I wish you and the team a healthy, prosperous and less stressful 2014 and look forward to meeting you at one of the Strategy Sessions in London.”

David Fuller's view -

Yes, the accelerated rate of technical innovation, which is potentially unlimited, now means that science fiction is becoming reality before our very eyes. 

My advice on space travel, which may not be that comfortable and is unhealthy for the body after a few days, is that you send the 3D printed version of yourself.  I may do the same for Eoin’s Strategy Session in London so that this Site is not neglected.  

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December 31 2013

Commentary by Eoin Treacy

Google's Eric Schmidt admits social networking 'mistake'

This article by Sophia Curtis for The Telegraph may be of interest to subscribers. Here is a section:

Google+ currently has 540 million monthly active users, according to Google, making it the second-largest social networking site in the world after Facebook.

Google+ profiles are now used as the background account for many Google Services including YouTube, Gmail, Google Maps, Android, Google Play, Google Music, Google Voice and Google Wallet.

Schmidt predicted that smartphones will become ubiquitous in 2014, resulting in a whole new generation of applications around entertainment, education and social life.

"The trend has been that mobile was winning, it's now won," he said. "There are more tablets and phones being sold than personal computers, people are moving to this new architecture very fast."

Eoin Treacy's view -

Google is a swiftly evolving company with a focus on investing in emerging Technology themes. While high growth companies have tended to be successful in their original fields they sometimes struggle to continue to innovate in fresh directions. What sets Google apart is that it has succeeded spectacularly in a range of additional sectors which has supported its core business. Search engine advertising through its own sites and others remains the company’s core revenue base at 87% in 2012. The development of its Android software has helped open up new avenues for revenue growth for that core business. As one of the dominant forces in an increasing number of developing sectors Google was one of our original cast of Autonomies.

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December 30 2013

Commentary by Eoin Treacy

Email of the day on generation IV nuclear reactors

"Last year I forwarded some information about nuclear molten salt reactors. I thought I would provide a brief update and have attached an article from Reuters on China's push for future nuclear technologies, in particular thorium and the molten salt reactor design. The article, in my opinion, places too much emphasis on thorium, as I believe the reactor design is the crucial factor. The article highlights considerable efforts being made by China, while one wonders what goes around in the heads of US Government that seems to be taking a back seat in the push for our nuclear future! I find that amazing when one thinks about the technological capacity of the US, and one may speculate about the incumbent nuclear industry's lobbying efforts to protect the status quo.¡±

"Best regards for 2014"

Here is a section from the article: 

"Beijing's long-term goal: commercialize the Technology by 2040, after building a series of increasingly bigger reactors. The Shanghai Institute of Applied Physics is recruiting nuclear physicists, engineers, project managers and support staff, according to a regular stream of job advertisements it publishes online. Its team is expected to expand to 750 by 2015 and eventually include 1,000 researchers.

"A director at the Shanghai Institute, Li Qingnuan, and other senior researchers are wooing top young talent across China to join the project. After lecturing on molten-salt reactor Technology at Sichuan University in April, Li invited students from the audience to apply for positions at the institute, according to a report on the university's website.

"China's sprawling network of nuclear-research and industrial companies are gearing up to assist. In early June, the China National Nuclear Corporation, the body overseeing all Chinese civilian and military nuclear programs, announced that state-owned China North Nuclear Fuel Company had signed an agreement with the Shanghai Institute to research and supply thorium and molten salts for the experimental reactors.

"The push into thorium is part of a broader national energy strategy. The government wants to reduce its dependence on coal-fired power plants, which account for about 80 percent of the nation's electricity but have darkened its skies. Nuclear energy is a big part of the plan: China aims to have 58 gigawatts of nuclear power on the grid by 2020, an almost five-fold increase from 12.57 gigawatts today.

"Thorium is a hedge on that nuclear bet. China has 15 conventional nuclear reactors online and 30 under construction. But energy authorities are also investing in a range of different technologies for the future, including advanced pressurized water reactors, fast-breeder reactors and pebble-bed reactors. China has little uranium but massive reserves of thorium. So, the prospect of cheaper nuclear power with secure supplies of fuel is a powerful attraction.

"At last year's Shanghai thorium conference, Jiang described how clean nuclear power would allow China to make a "revolutionary" move towards a greener economy.

"The bet on unconventional nukes, he said, explains "why China is the first one to eat a crab" - citing an old Chinese proverb about the individual who dares to make a discovery important to civilization."




Eoin Treacy's view -

The USA is an energy superpower. China is not. This simple fact helps to explain the emphasis China has put on securing energy assets overseas, purchasing the Technology required to begin exploiting its unconventional oil and gas resources and developing a multi-strand nuclear policy. China aspires to provide a first world standard of living for its citizens and this will require energy production to expand by multiples over the next few decades. It has no choice but to explore every possible avenue if it is to achieve that goal not least if air quality is to improve. 

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December 16 2013

Commentary by David Fuller

Energy and Jobs. The transformation of Americas energy market is starting to have a direct impact on vital British [and European] industries

Here is the opening from this important editorial from The Times, which is relevant not only to Britain but also most countries which have chemicals industries:

“Welcome to Boomtown USA,” says the sign at the entrance to Williston, North Dakota. Its unemployment rate is under 2 per cent. Its gas flares are visible from space, and its pride at helping to reverse America’s long slide towards energy dependency is palpable.

There are no such signs in Britain because there is still no large-scale British fracking industry. Instead the economy remains yoked to high energy costs and low growth that compare well only with its sluggish European neighbours.

Britain’s energy-intensive industries, chief among them chemicals manufacturers, are struggling with gas prices three times higher than in the United States. Electricity costs twice as much as in America and the chemicals sector across Europe is in a “fight to the death”, in the words of one analyst, as investment and jobs go elsewhere. Prompt steps must be taken to begin to bring them back. If the price is that the coalition’s green credentials are further undermined before the next election, it is one that must be paid.

For now, Europe’s largest maker of PVC is the giant chemical works owned by Ineos in Runcorn. It produces 38 varieties of polyvinyl chloride, used in hundreds of products from clingfilm and swimming pool liners to pharmaceuticals and drainpipes. It uses as much electricity, much of it from gas-fired power stations, as Liverpool. Historically it has exported much of its output to North America, but its future is now much less certain.

The Government’s Committee on Climate Change warned yesterday that low American shale gas costs as a result of fracking “could present a direct competitiveness risk to UK gas-intensive firms trading with the US”. The committee said that “in the longer term there is a risk that investment and jobs could relocate to the US”.

Viewed globally, this relocation is already under way. Taiwanese and Saudi chemicals firms are among those planning investments worth more than $90 billion in new US plants to take advantage of low energy costs. From being a net importer two years ago, America expects to be exporting chemicals worth $30 billion a year by 2018. At the same time it is preparing to boost its gas liquefaction capacity by a third in order to sell its shale gas surpluses abroad.

The impact on British industry will be profound, and the policy imperatives are clear. The Government should, first, avoid the trap of committing itself to high prices for future energy supplies when there is a clear possibility that wholesale prices will fall rather than rise in the medium to long term. That it has already guaranteed extravagant prices for power from new nuclear plants to woo foreign investors only makes it more important not to follow the same path for renewables. The result would be higher domestic energy bills and the risk of steep job losses for the sake of self-imposed carbon targets not observed even elsewhere in Europe.

David Fuller's view -

Wake up politicians, and smell the coffee.  You are weakening your economies and increasing unemployment by driving away energy dependent industries. 

This is not America’s fault.  In fact, the USA’s private sector has shown the way, by using Technology, commonsense and commercial initiative to lower its dependency on often hostile energy cartels.  Thanks to fracking Technology, which the USA’s private sector invented, it has lowered its energy costs and increased the efficiency of its economy.  In the ultimate riposte to militant green lobbyists, who would weaken our economies while darkening our homes and streets, the USA has also lowered its CO2 emissions by using fracking to produce much more natural gas.


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December 11 2013

Commentary by David Fuller

Email of the day on the new service and a very interesting article

“Firstly I'd like to congratulate you both on the launch of the new service, and also to praise David for his grace and wisdom in renaming the service in acknowledgment of Eoin's key role and contribution. I was intending to highlight some issues I see with the redesign, but will wait a little while for things to settle down (and thanks, Eoin, for the timely email today acknowledging some issues). This will be intended as constructive feedback, not moaning from someone resistant to change, so hopefully my comments may prove useful. In brief, the feedback will be on how the move to a more touch/mobile-device oriented "magazine" style interface may have inadvertently somewhat crippled the productivity an experienced subscriber could obtain from the old site design (especially in the Chart Library) when using a desktop interface or other large screen interface. As a mobile touch device, laptop and multi-monitor desktop user, I'm currently feeling that what one hand has giveth, the other has taken away! I shall be back in touch with details. An increasingly key theme of Comment of the Day is automation; as we know, the benefits are vast, but you've also wisely covered some the challenges and drawbacks. This is the subject of the following (lengthy!) article by Nicholas Carr, which I hope you'll find this article as thought-provoking as I did.  

“Carr is the author of the very interesting "The Shallows: How the Internet is Changing the Way We Think, Read and Remember". As a very long standing Internet user, and full time investor who spends a great deal of time reading and researching using Internet technologies, The Shallows resonated strongly with me. I was able to identify with many of the issues he raised, and as a result modified my Internet usage in order to retain its benefits while minimising the potential negative effects arising from its various "interruption technologies". Article Extract: "Most of us want to believe that automation frees us to spend our time on higher pursuits but doesn’t otherwise alter the way we behave or think. That view is a fallacy—an expression of what scholars of automation call the “substitution myth.” A labor-saving device doesn’t just provide a substitute for some isolated component of a job or other activity. It alters the character of the entire task, including the roles, attitudes, and skills of the people taking part. As Parasuraman and a colleague explained in a 2010 journal article, “Automation does not simply supplant human activity but rather changes it, often in ways unintended and unanticipated by the designers of automation.” Psychologists have found that when we work with computers, we often fall victim to two cognitive ailments—complacency and bias—that can undercut our performance and lead to mistakes. Automation complacency occurs when a computer lulls us into a false sense of security. Confident that the machine will work flawlessly and handle any problem that crops up, we allow our attention to drift. We become disengaged from our work, and our awareness of what’s going on around us fades. Automation bias occurs when we place too much faith in the accuracy of the information coming through our monitors. Our trust in the software becomes so strong that we ignore or discount other information sources, including our own eyes and ears. When a computer provides incorrect or insufficient data, we remain oblivious to the error. Examples of complacency and bias have been well documented in high-risk situations—on flight decks and battlefields, in factory control rooms—but recent studies suggest that the problems can bedevil anyone working with a computer. Many radiologists today use analytical software to highlight suspicious areas on mammograms. Usually, the highlights aid in the discovery of disease. But they can also have the opposite effect. Biased by the software’s suggestions, radiologists may give cursory attention to the areas of an image that haven’t been highlighted, sometimes overlooking an early-stage tumor. Most of us have experienced complacency when at a computer. In using e-mail or word-processing software, we become less proficient proofreaders when we know that a spell-checker is at work. The way computers can weaken awareness and attentiveness points to a deeper problem. Automation turns us from actors into observers. Instead of manipulating the yoke, we watch the screen. That shift may make our lives easier, but it can also inhibit the development of expertise. Since the late 1970s, psychologists have been documenting a phenomenon called the “generation effect.” It was first observed in studies of vocabulary, which revealed that people remember words much better when they actively call them to mind—when they generate them—than when they simply read them. The effect, it has since become clear, influences learning in many different circumstances. When you engage actively in a task, you set off intricate mental processes that allow you to retain more knowledge. You learn more and remember more. When you repeat the same task over a long period, your brain constructs specialized neural circuits dedicated to the activity. It assembles a rich store of information and organizes that knowledge in a way that allows you to tap into it instantaneously. Whether it’s Serena Williams on a tennis court or Magnus Carlsen at a chessboard, an expert can spot patterns, evaluate signals, and react to changing circumstances with speed and precision that can seem uncanny. What looks like instinct is hard-won skill, skill that requires exactly the kind of struggle that modern software seeks to alleviate." ” 

David Fuller's view -

Many thanks for your thoughtful and also insightful email. 

 The last thing any of us want, to paraphrase one of your important comments is to inadvertently cripple somewhat the productivity of any subscriber, let alone the cherished veterans and friends who have been sharing a long journey with me.  At the risk of being simplistic, if FT Money’s Technology is any good, once we have received the correct Chart Library data which has not yet been fully and correctly handed over, and once we have debugged and simplified the site, then it should help all subscribers.  Also, it would be a mistake if we just assumed that programmers know what is best, rather than subscribers, which is why we value the Collective’s views on what we are trying to achieve. 

 I read the excerpt from Nicholas Carr very carefully and look forward to the full article.  It is certainly interesting but I did not identify with many of the examples, at least not so far.  If I was playing boredom games or reading horoscopes all day, whatever remaining brain, and also body, would be mostly jelly.  I feel that computers inform and educate me, at least when they are not driving me around the bend because I cannot cope with the software.  Also, I was disappointed in seeing the title of Carr’s earlier article: “Is Google Making Us Stupid?”  I suppose it could, if I looked at banal things, but I know that Google educates me in so many different ways.

 I look forward to your further comments on how to improve our website.  Subscribers’ considered input and suggestions can only help us to make it more useful.      

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December 11 2013

Commentary by David Fuller

Fracking Boom Pushes U.S. Oil Output to 25-Year High

Here is the opening of this informative article from Bloomberg:

U.S. crude production rose to the highest level in a quarter-century as a shale drilling boom in states such as Texas and North Dakota cut the need for foreign oil and pushed the country closer to energy independence.

The U.S. pumped 8.075 million barrels a day in the week ended Dec. 6, a gain of 0.8 percent, or 64,000 barrels a day, the Energy Information Administration said today. It’s the most since October 1988.

“You can’t swing a cat without hitting a barrel of oil in North America,” saidStephen Schork, president of the Schork Group Inc., an energy consulting firm in Villanova, Pennsylvania. “It’s amazing how quickly things can change.”

U.S. oil output grew 18 percent in the past 12 months, the fastest pace on record, boosting fuel exports and reducing reliance on imports, according to the EIA. The boom will make the country the world’s largest producer by 2015, five years sooner than last year’s forecast, the International Energy Agency in Paris said last month.


David Fuller's view -

Remember growing up with all those stories about how we were going to run out of oil, to the point of being impoverished and sitting in the dark?  They persisted right into the 21st Century.  People are still inventing reasons to avoid tapping their natural resources, and paying much higher prices for their energy.  Who benefits from that?

 Technology is everything.  It improves our livelihoods, as most of us know.  We have only begun to see how it can reduce pollution, because that challenge was not sufficiently prioritised previously.     

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December 11 2013

Commentary by David Fuller

December 05 2013

Commentary by David Fuller

Email of the day on the difficult transition:

"Many of your subscribers have moved businesses before and know the pitfalls.  Yours is essentially all Technology and you both clearly expressed the challenges.  I can already tell the new system will be a winner.  As far as I am concerned take all of the time you need."

David Fuller's view -

Thank you for your understanding and reassuring support.  We will take whatever time and effort is needed to make this service better value than ever before.    


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December 02 2013

Commentary by David Fuller

"Green energy could kill Britain's economy"

Here is the opening of another excellent article by Matt Ridley for The Times (subscription required to read the full article but a PDF version is in the Subscriber’s Area.)

The Chancellor is to knock £50 off the average energy bill by replacing some green levies with general taxation and extending the timescale for rolling out others. On the face of it, the possibility that global energy prices may start to fall over the next few years might seem like good political news for him, and some of the chicken entrails do seem to be pointing in that direction. There is, however, a political danger to George Osborne in such trends .

For Government strategists reeling from the twin blows of Ed Miliband’s economically illiterate but politically astute promise of an energy bill freeze and the energy companies’ price hikes, the prospect of lower wholesale energy prices might seem heaven sent. But in many ways it only exacerbates their problems, for the Government is right now fixing the prices we will have to pay for nuclear, wind and biomass power for decades to come. And it is fixing those prices at quite a high level.

The more that oil, gas and coal prices drop, the worse these deals look and the more they threaten our economic competitiveness. The Liberal Democrats have not allowed the Chancellor to cut subsidies for the renewable energy industry, the most regressive redistribution of wealth since the Sheriff of Nottingham was in his pomp.

They argue that what has driven energy bills up threefold in ten years is mainly an increase in the wholesale price of energy, rather than any great lurch towards subsidising renewables. True, but most of the lurch is yet to come and as wind power capacity quadruples by 2020, it will add £400 to average bills — not to mention driving up the price of energy to industry, which will pass it on to consumers.

“There is not a low-cost energy future out there,” said Ed Miliband when Secretary of State for Energy and Climate Change in 2009, at the time an enthusiast for discouraging energy use by price rises. It even became fashionable to argue, when Chris Huhne filled that post, that higher prices would cut bills (yes, you read that right) by encouraging people to use less power.

Anyhow, the forces that have driven energy prices up in recent years appear to be fading. Consider some of the reasons that oil and gas prices rose in 2011, the year energy companies pushed up prices even more than this year. Japan suffered a terrible tsunami, shut down its nuclear industry and began scouring the world for gas imports to keep its lights on. At about the same time Libya was plunged into civil war, cutting off a key supplier of gas. Add in simmering tension over Iran, Germany’s sudden decision to turn its back on nuclear power, the legacy of a couple of cold winters and the lingering depressive effect on oil and gas exploration of low energy prices from much of the previous decade, and it is little surprise that oil and gas producers pushed up prices.

Contrast that with today. Several years of high prices have driven a surge of new exploration. Deep offshore Technology is advancing rapidly and huge gas fields have been found in the Mediterranean and in the Indian and Atlantic oceans. In the United States, the shale revolution has glutted both gas and oil markets, displacing imports. Iran is coming in from the cold, Libya is back on stream and Australia is preparing to export huge volumes of gas. Should the rest of the world start producing shale gas — China, Argentina, Poland and others are on the brink, even Britain might one day deign to join them — that would further add to supply.

David Fuller's view -

This is an excellent summary of what FT Money has been pointing out over the last four years, as the Archive will confirm.

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November 27 2013

Commentary by Eoin Treacy

Email of the day (1)

on "cheap" energy:

"There was a good article on Fracking in the Economist Magazine (still the best business magazine with no close second choices).  It was the 16-22 November issue. Sorry life has been to busy to bring this to your notice earlier.

"I am not taking sides in the argument of social versus business arguments for fracking. I personally not convinced Fracking is a cheap source of oil although in the short term it is providing the US with cheap gas.

"What I observe is fracking has created a collar in the oil market. If oil prices drop the frackers respond quickly and fracking stops. If oil prices rise frackers drill a lot more to meet the demand. T Boon Pickens commented recently that fracking is not in his experience cheap oil. I think we agree Mr Pickens knows the oil business in particular the economics of fracking.

"As the Economists Magazine article points out the economics of fracking is a combination of gas prices, other liquids and oil prices. I will not go into the boring arguments of the relative merits of different sources of gas. Australia has lots of gas. We always knew about coal seam gas (CSG) however the petroleum engineers used to tell us CSG was very poor quality gas with low heat qualities and of no commercial significance. Not a argument you hear today. 

"I guess the economics of fracking will improve. BHP are hoping they do. But unless they do improve even the dumb money (i.e. BHP) will get the hint and stop funding what has been so far a stupid idea.

"Hopefully see you in February at the Chart seminar."

Eoin Treacy's view -

Thank you for this insightful email which brings us to the question of what exactly the term cheap energy means. We have described the peak oil argument, for much of the last decade, in terms of the rising cost of production. As you point out, geologists have known about coal seam methane, shale oil and gas, tight gas, methane hydrates etc for almost as long as the fossil fuel industry has existed. The commercial viability of these resources has always been dependent on the application of Technology and the marginal cost of production.

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November 22 2013

Commentary by Eoin Treacy

Novartis Sets $5 Billion Buyback as It Seeks Faster Growth

This article by Eva von Schaper for Bloomberg may be of interest to subscribers. Here is a section: 

The drugmaker also said a review of its pipeline will lead to more approvals and higher sales by 2017. Novartis's stable of cancer drugs and sales are set to grow annually for the next five years, despite the anticipated loss of exclusivity on its cancer drug Gleevec, the company said.

The Alcon unit is now set to grow at a mid- to high-single digit rate. The company said last month group sales would do better than previously expected. Europe's biggest drugmaker by sales has begun a review of units such as its animal-health operation that lack global scale.

Novartis announced this month it would sell its diagnostics unit to Grifols SA for $1.68 billion, part of a strategic review of its market segments. The company now has three units with global scale, Jimenez said: pharmaceuticals, the eye-care business Alcon and the generics arm Sandoz. Novartis has said it wants its businesses to be among the industry leaders or it will consider divesting them.

Eoin Treacy's view -

The healthcare sector represents important cross currents from the perspective of a globally oriented thematic investor. From first principles the energy, Technology and healthcare sectors represent areas of research from which new inventions or discoveries can literally create value by changing forever how we live or lives. 

Healthcare tends to do this through investing in technological development which creates new therapies as well as lowering the cost and increasing the availability of existing products. The net result is that the sector is both large and diverse, with a comparatively small number of companies dominating the global market. 

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November 19 2013

Commentary by David Fuller

The Weekly View: When Yellen Talks, People Listen

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their ever-interesting letter, published by RiverFront. It is posted in the Subscriber's Area but here is the opening

Clarifying her view of quantitative easing (QE) asset purchases during her Senate confirmation hearing last Thursday, Federal Reserve Chairman nominee Janet Yellen said that, at this point, "the benefits exceed the costs." Although some within the Fed want to start reducing purchases and replace them with extended forward guidance on zero interest rates, Yellen seems to currently favor both forward guidance and keeping the purchase program in place for now. That said, she framed her dovish stance as promoting more robust economic growth to "regain the ground lost in the crisis and the recession" with the intent to end extraordinary monetary policies as soon as possible. Regarding the duration of QE, Yellen acknowledged that the Fed cannot expand its balance sheet forever: "The committee is focused on a variety of risks and recognizes that the longer this program continues, the more we will need to worry about those risks. So I do not see the program as continuing indefinitely… at each meeting we're attempting to assess whether or not the outlook is meeting the criterion that we've set out to begin to reduce the pace of purchases.

David Fuller's view -

Despite the USA's considerable economic advantages of very competitive energy prices and a growing lead in Technology, Janet Yellen is unlikely to find the US economy growing at the pace she would like for commencing QE tapering.

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November 11 2013

Commentary by Eoin Treacy

Oil-to-gas switch in transportation

Thanks to a subscriber for this fascinating report from Deutsche Bank highlighting the point that while US natural gas exports will not take place until 2015, the adoption of Technology that promotes the use of the commodity is already occurring. The full report is posted in the Subscriber's Area but here is a section
Economic benefits of gas as an oil substitute stay intact
We believe the impact of the gas tariff hike in July 2013 on vehicle fuel switching to natural gas is limited as the lengthened payback period is still economically attractive for conversion. The planned diesel/petro upgrade as a move to reduce emission will enhance the cost competitiveness of natural gas as a fuel substitute and offset the negative impact from rising natural gas price. There is also downside potential for natural gas price in China in the long term on increasing supply from unconventional gas and US LNG exports.

Environmental benefits and improving infrastructure/supply
Compared with gasoline and diesel, CNG and LNG are much cleaner and can significantly reduce transportation-related emissions. Many local governments have laid out aggressive plans to roll out natural gas applications in public transportation, as an important part of raising gas usage in the total energy consumption mix. Accelerating construction of the gas refuelling station and strong growth in LNG imports will support continued growth in oil-to-gas switch in transportation.

Natural gas application in vessel and other areas; export market potential
LNG conversion in vessels could be another big growth driver with national development guidelines and target just released. Moreover, great potential exists in LNG-fuelled construction, drilling and mining machinery markets. As China is a pioneer in LNG vehicle application, domestic equipment players are well positioned to exploit overseas markets, especially the US market where gas price is most competitive vs. oil.
Eoin Treacy's view - It has been our view at FT Money since at least 2010 that the development of unconventional oil and gas resources represents a game changer for the energy sector and the wider global economy. This is now reasonably well understood by governments less encumbered by climate ideology. China’s policy makers have committed themselves to working out how they can best make this change in global energy dynamic work to their advantage. The obvious answer is to do whatever they can to produce more gas and consume more of it in preference to coal and oil.

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November 07 2013

Commentary by Eoin Treacy

Twitter: What's It Worth?

This article for [email protected] may be of interest to subscribers. Here is a section
Ramesh and Abrol expect Twitter's year-over-year revenue growth to steadily drift down, from 88% in 2013 to 17% in 2018. They see operating profit turning positive in 2015 and free cash flow to be in the black in another three years. “Our fundamental approach was to stay a little conservative,” Ramesh says. It seemed the most prudent approach, he notes, since Twitter did not disclose advertiser metrics such as how many users are on the platform and their churn rate. Advertising is the core driver of revenue, so these disclosures are critical for modeling projections. “It was the most crucial piece of information, and [Twitter] didn't provide it,” Ramesh points out.

The two students have a “buy” rating on Twitter because the IPO price range is below their fair value of $27.35. But Ramesh says he is not going to be buying the stock out of the gate. “I would be cautious until they reveal more of their revenue model,” he notes, adding that he predicts Twitter shares will go up on the first day of trading but then eventually float down over the next few months.
Eoin Treacy's view - The social media sector has made a splash in the stock market over the last few years and has been a bright spot on the IPO route following the credit crisis crash. The growth rates of these companies and the speed with which they have come from nowhere to carve out substantial niches in the Technology sector is a testament to the inventive capacity of their founders and the USA's technological and private equity ecosystem. However as investors we have additional considerations to weigh.

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October 29 2013

Commentary by Eoin Treacy

Correcting the curve

Thanks to a subscriber for this educative report from Deutsche Bank focusing on iron-ore. The full report is posted in the Subscriber's Area but here is a section
The chart below shows the performance of the Australian dollar to US dollar exchange rate and the spot iron ore price. While the general performance of the two track closely, there are periods of time where the performance is disconnected. From 2011 we saw iron ore prices weakening, but the Australian dollar remains strong, which made for tough operating conditions for the mining companies in Australia. These tougher conditions have prevailed in market sentiment over the last 6 months and haven't adjusted in our view for the closing of the pain gap, as the Australian dollar has finally weakened. In our view, we believe that the market has been comfortable pricing in a drop in the iron ore price, but not willing yet to price in the inevitable weakening of the operating currencies.

As an addendum to the A$ discussion, the other gap shown in the chart above occurred from the third quarter of 2007 when the spot iron ore price far exceeded the strength in the Australian dollar – This did not result in as large a boom as expected as the majority of iron ore exported at the time was sold on contract and not spot basis and the contract price was significantly lower than the spot prices achieved at the time.

The chart below shows the performance of the spot iron ore price in a number of operating currencies over the last ten years. The spot price is four and a half times higher than it was in 2003, but is three times larger in Australian dollar and Brazilian real terms (still a hefty increase, but not as large as the spot price suggests). The performance of the iron ore price in South African Rand has been significantly better with the received price in Rand terms now five and a half times more than it was in 2003.
Eoin Treacy's view - The consumer, healthcare and Technology sectors continue to lead and have been joined over the last year by the industrial sector. Resources shares on the other hand have been notable laggards. Oversupply of steel, new capacity coming on line and a generally weak global economy have all contributed to this condition. However, as the US recovers, Europe emerges from recession and Chinese growth rates improve, it may be time to re-evaluate the outlook for miners, not least because they are cheap relative to the wider market.

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October 28 2013

Commentary by David Fuller

Apple Forecasts Lighter Holiday-Quarter Margin on Costs

Here is a section from this after hours report from Bloomberg
"This is a company that has routinely blown the doors off their estimates so meeting or just exceeding is probably a disappointment," said Jack Ablin, chief investment officer at BMO Private Bank, which has $66 billion under management and owns Apple shares.

Apple has been busy updating its product lineup ahead of the holiday season. The company has said its new iPhones will be available in about 100 countries by the end of the year. The higher-end iPhone 5s costs $199 with a two-year wireless contract and includes a more powerful processor, improved camera and fingerprint-reading Technology.

The new iPhone 5c is mainly last year's model with colorful plastic cases. The handset is seen as Apple's bid to win more customers in emerging markets like China and Russia. Without a contract, the handset costs about $800, leading analysts to say it's too expensive for those markets and that demand is light.

A new iPad Air also goes on sale on Nov. 1, followed later in the month by an updated iPad mini with a high-definition screen.
David Fuller's view - Apple gave back today's gains of nearly $4 in after hours trading following its earnings report. Nevertheless, the share (weekly & daily) had been strong recently and these results are certainly not bad given the soft global economy.

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October 26 2013

Commentary by Eoin Treacy

A New Electric Competitor to Tesla, Porsche, Toyota

This video report from Bloomberg TV may be of interest to subscribers.
Eoin Treacy's view - Charging stations for electric cars are becoming increasingly visible and the innovations introduced by Tesla Motors are helping to reduce range anxiety. As an increasing number of auto manufacturers invest in electric car focused R&D, the cost of these cars should also decline. The viability of electric cars and how well they penetrate the wider auto market will in no small part be dependent on improvements in battery Technology, not least in achieving better power to weight ratios.

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October 24 2013

Commentary by David Fuller

Are Those White Elephants In The Water?

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

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

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

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

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

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

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October 22 2013

Commentary by David Fuller

High-Frequency Trades Face EU Curbs in Draft Deal, Lawmaker Says

Here is the opening from Bloomberg's report
European Parliament lawmakers have reached a draft deal with national governments on high-frequency trading curbs as part of a push to toughen the bloc's financial market rulebook, said the chief legislator working on the plans.

"The negotiation team achieved a significant breakthrough on this issue," Markus Ferber, the lawmaker leading the measures, said in an e-mail. "The area of high-frequency trading is lacking suitable regulation. This is why it was high time to find a decent solution to this pressing problem."

The provisional deal, reached by legislators and officials from Lithuania, which holds the EU's rotating presidency, includes a so-called tick size regime limiting the minimum size of price movements on financial markets, Ferber said. "This will slow down high-frequency trading significantly," he said.

High-frequency trading in stocks came under increased regulatory scrutiny after the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

The practice involves using powerful Technology and complex computer programs to execute orders in milliseconds and profit from fleeting discrepancies in security prices across different trading venues. Companies active in high-frequency trading have warned that interfering with their strategies would raise investor costs and harm financial stability.
David Fuller's view - It will take more that this to curb the dangerous development of high-frequency trading which Eoin and I have campaigned against for several years. Unfortunately, HFT is quietly encouraged by too many brokers and exchanges because they earn fees from it.

This is short-sighted because high-frequency trading is illegal front-running at best. At worst, without firm regulation and a level playing field in the interests of all investors and individual traders, high-frequency trading will result in an eventual market doomsday caused by these machines and their programmers.

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October 21 2013

Commentary by Eoin Treacy

GE: 3D Printers To 'Touch' Half Of Its Manufacturing

This article by Gillian Rich for Investor's Business Daily may be of interest to subscribers. Here is a section
GE already uses 3D printing in a variety of areas from making medical devices and jet engine parts to prototyping components for washing machines.

Three-dimensional printing works by layering material, like plastic or ceramic, into a desired shape. Traditional manufacturing works the other way, by cutting out an object from a larger piece of material.

At GE, 3D printing isn't just a way to make products. It's also a way to try out new tools that could make products better.

"We don't have to invest the time and money into making a permanent tool, but we can 3D print one and be able to see if it really has the type of benefits we dream of," Furstoss said.

GE still plans to use conventional manufacturing techniques, especially for large components. But 3D printing, or additive manufacturing as GE calls it, is still seen playing a role, such as providing tools or repairing parts.
Eoin Treacy's view - Above all else 3D printing, or additive manufacturing as it is also known, represents a breakthrough in how our imagination can take physical shape. While the above article focuses on the conventional use of 3D printing in industry, which remains a sizeable growth opportunity, the Technology is increasingly being used in other fields, not least medicine. For example, this article from Gizmodo highlights how a team at Huazhong University in China have printed a working kidney

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October 16 2013

Commentary by Eoin Treacy

October 15 2013

Commentary by Eoin Treacy

Rio Reports Record Iron Ore, Coal Output as China Demand Surges

This article by Elisabeth Behrmann for Bloomberg may be of interest to subscribers. Here is a section
Iron ore production was 53.4 million metric tons in the three months to Sept. 30, compared with 52.6 million tons a year earlier, the London-based company said today in a statement. That compares with the 53.3 million ton median estimate of five analysts surveyed by Bloomberg.

Economic growth in China, Rio’s biggest customer, is showing signs of rebound after a two-quarter slowdown. Australia, the largest iron ore exporter, this month raised its price estimates on buying from steel mills in China, while the Asian nation’s copper imports rose to an 18-month high.

“The highlights for us are obviously the growth in iron ore shipments and production,” Peter Esho, chief market analyst at Invast Securities Co., said in an e-mail. “Copper is also the big standout.”

Rio, seeking to cut $5 billion in costs by the end of next year, rose 2.5 percent to A$63.20 in Sydney trading. BHP Billiton Ltd., the world’s biggest miner, gained 1 percent.

“In iron ore, we achieved record production and shipments in Western Australia,” Chief Executive Officer Sam Walsh said in the statement. “We are also making further important gains in productivity across our operations and continue to drive costs out of the business.”
Eoin Treacy's view - China’s Communist Party will meet next month for a major policy setting session which is being eagerly awaited by China watchers since it is likely to set the tone of the administration’s ambitions over the next five years. We can expect continued emphasis on improving human capital through supports for the consumer sector, healthcare, Technology and social security. Infrastructure development and affordable housing provision are also likely to feature.

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October 08 2013

Commentary by Eoin Treacy

Email of the day (2&3)

on additions to the Chart Library
"Could you add this fund to the chart library? Thanks!"


"Please could you add:
" Ocean Rig UDW Inc. (ORIG) to the library.
ING Information Technology Fund Inc (ISIN NL0006311821)
ING Europe Small Caps Fund (ISIN NL0006311730)
ING Premium Dividend Fund (ISIN NL0006311748)
BlackRock Global Funds - Latin American A2 EUR (ISIN LU0171289498)"

Eoin Treacy's view - Thank you for these suggestions which have been added to the Chart Library.

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October 08 2013

Commentary by Eoin Treacy

Investing in global megatrends: Stop digging for gold, sell shovels instead

Thanks to a subscriber for this heavyweight 236-page report from Deutsche Bank. The full report is posted in the Subscriber's Area but here is a section
The European companies with the highest share of sales to Asia are mostly from Industrial Goods & Services, Basic Resources, Personal Goods/Luxury Goods and Technology sectors (see Figure 305 for details). The top-ranked company DKSH has 97% sales exposure to Asia and derives only 3% of its sales from Europe. Dialog Semiconductor, CSR, Aixtron and ASML are the Technology companies among the top 10 European companies with the highest exposure to Asia. Also, the two large Mining players Vedanta Resources and BHP Billiton are among the top 10 European companies with exposure to Asia. For investors with a specific sector/country focus, Figure 306 and Figure 307 provide the top five companies by sales exposure to the Asia/Pacific region for each of the 19 Stoxx600 super-sectors and 16 major European countries, respectively.

3.2 Highest sales exposure to the Americas
The European companies with the highest share of sales to the Americas include Industrial Goods & Services, Healthcare, Food & Beverage and Media sectors (see Figure 308 for details). Healthcare companies with high sales share to the Americas include BTG plc. (87% of sales), Elan (74%) and Shire PLC (68%). Industrial Goods & Services companies with a high sales share to the Americas include Ashtead Group (83% of sales), Experian (69%) and MTU (66%). For investors with a specific sector/country focus, Figure 309 and Figure 310 provide the top five companies by sales exposure to the Americas for each of the 19 Stoxx600 super-sectors and 16 major European countries, respectively

3.3 Highest sales exposure outside of Europe
The European companies with significant share of sales from outside Europe in 2012 are given in Figure 311. Again, Industrial Goods & Services, Technology and Healthcare companies dominate. As many as four Technology companies (CSR, ASML, Aixtron and Dialog Semiconductor) feature in the top 10 companies with significant sales exposure outside Europe. For investors with a specific sector/country focus, Figure 312 and Figure 313 list the top five companies with highest sales exposure outside of Europe for each of the 19 Stoxx600 super-sectors and 16 major European countries, respectively.

Highest positive and negative changes in the absolute level year-on-year
Companies that increased their sales exposure outside Europe the most from 2011 to 2012 are given in Figure 314. Industrial Goods & Services companies increased their sales share outside of Europe the most with 8 companies in the top 25 list, followed by Oil & Gas and Healthcare companies. Large caps on this top 10 list include Aggreko and Kering.
Eoin Treacy's view - This report helps to highlight the extent to which companies are outgrowing their respective domestic markets, which is a point we have emphasised at Fullermoney through our Autonomies theme for several years. Subscribers interested in this way of viewing markets are likely to find value in the numerous tables of companies posted.

Mario Draghi is using every opportunity to reiterate that the ECB is willing to do whatever is necessary to ensure the survival of the banking sector, the currency and the smooth operation of the economy. Therefore with the Eurozone economy back on a modest growth trajectory, the direst predictions have been proved wrong. As a result, Europe is likely to pose less of a headwind for its globally oriented companies.

Some of the more interesting chart patterns include:

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September 27 2013

Commentary by Eoin Treacy

Stanford scientists build first carbon nanotube computer

This article by Brian Dodson for GizMag may be of interest to subscribers. Here is a section
This is the main advance accomplished by the Stanford group. They have developed a method to remove metallic and shallow-bandgap semiconducting CNTs by exploding them as if they were tiny electrical fuses. Combined with their recent introduction of a technique for designing circuits that are robust against the sort of uncontrolled wiring errors associated with misaligned CNTs that remain on the surface, they were able to construct a very simple, but general-purpose, von Neumann computer using CNT-based devices. This architecture also allowed them to use off-chip silicon memory with the CNT-based processor, again simplifying the structure of the processor.


The Stanford CNT processor is clearly nowhere near ready for prime time. The clock speed is 1 kHz, and the restriction to one bit operations using a single instruction would be impractical even at clock speeds a million times faster. It primarily serves as a demonstration of potential, and as such is a major step forward in our attempts to escape the predicted end of the Moore's Law era.
Eoin Treacy's view - The evolution of the carbon nanotubes sector can best be described as a baby steps approach which has been gaining pace as the exponential rate of development and need for new technologies encourages investment in new ideas. Nevertheless, we are still years away from mass production of chips based on this development but what looks increasingly likely is that it will happen. We can look forward to technologies such as carbon nanotubes and graphene playing an increasingly vital role in our lives.

NanoTechnology has been touted as a breakthrough for decades but the pace with which products are reaching market is accelerating which suggests the sector's appeal is likely to widen. This is being reflected in the performance of related shares.

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September 27 2013

Commentary by David Fuller

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

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

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

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

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

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

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

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September 24 2013

Commentary by David Fuller

Email of the day

On a 'Technology bubble'
"I was recently in San Francisco and heard from people on the ground that Technology is in a bubble about to pop! This is based on the high level of angel investment from a high number of sources into start-up companies and hence people are drawing parallels with the tech bubble bursting in '01.

"Further today I came across this on the internet seemingly making this type of Angel Investing more accessible:

'"On September 23, 2013 (that's today), the world of start-up financing changes forever. It's a truly historic moment.

'"Previously, I couldn't publicly share deals with you. Now, thanks to an unprecedented legal change, I can offer a portion of my start-up investments to any of you who qualify as "accredited investors."

"Will this further increase the rate of tech innovation or is there a potential bubble here? I would, as always, be interested in your opinion.

"Also, despite the talk of a bubble and high risk etc I would be interested in Angel Investing. If you happen to have information (I'm assuming I need to visit a solicitor?) on how I could qualify for Angel Investing in the US while I am from Ireland it would also be appreciated (specifically I am interested in a group scheme but must be an accredited investor as per the quote above)?

"FYI.. my own opinion (influenced by FM) on the above, as I argued back to these doomsday forecasters, is the trend (NDX 100) is not overextended/ is on a consistent uptrend so I am holding on to my spread bet there. This frenzied hype may be concentrated in the world's no. 1 tech hub and there is plenty of global demand for new technologies."
David Fuller's view - My recollection of the Technology bubble at the end of the last century and which burst in 2000 is that a number of companies floated had no earnings and no prospect of earnings for several years, not least because they had little in the way of products and minimal business plans. Most of them disappeared. There were also tech companies which had promising products and good business plans but they also crashed because they had no earnings and therefore infinity multiples at the time. Many of these recovered a number of years later and did very well.

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September 18 2013

Commentary by David Fuller

African states push back on Chinese oil deals

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

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

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

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

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

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

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September 13 2013

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

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September 12 2013

Commentary by Eoin Treacy

Stanford scientists use DNA to assemble graphene transistors

This article by Dario Borghino for GizMag may be of interest to subscribers. Here is a section
As it turns out, DNA molecules are approximately as big as the graphene nanoribbons that researchers are trying to create, and they also carry carbon atoms, which are the only constituent of graphene. This gave Stanford researcher Zhenan Bao and colleagues the idea to use DNA to help them assemble graphene nanoribbons.

Using a known technique, the researchers first "combed" the DNA strands into relatively straight lines. They then exposed them to a solution of copper salt, which resulted in copper ions being absorbed into the DNA itself.

The DNA was then heated and surrounded in methane gas. The heat freed carbon atoms from both the DNA and the methane, and through a chemical reaction the carbon atoms quickly and orderly assembled to form graphene ribbons that followed the structure of DNA.

After succeeding in the experiment, the team took things a step further and actually used the technique to manufacture working graphene transistors.

While the assembly process still needs to be refined (the carbon atoms sometimes bunch up together instead of forming in a clean one-atom-thick sheet), this work is truly paving the way toward a highly scalable, cheap and precise way to manufacture graphene electronics.
Eoin Treacy's view - Materials science represents a significant growth industry as the promise of nanoTechnology increasingly reaches commercial utility. Graphene and carbon nanotubes might be described as the cutting edge of innovation but to the best of my knowledge there are no pure plays on these sectors just yet.

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September 11 2013

Commentary by Eoin Treacy

How Technology Is Destroying Jobs versus Stop Saying Robots Are Destroying JobsâThey Aren't

Thanks to a subscriber for these competing articles published by MIT. Here is a section from the former
Not everyone agrees with Brynjolfsson and McAfee's conclusions—particularly the contention that the impact of recent technological change could be different from anything seen before. But it's hard to ignore their warning that Technology is widening the income gap between the tech-savvy and everyone else. And even if the economy is only going through a transition similar to those it's endured before, it is an extremely painful one for many workers, and that will have to be addressed somehow. Harvard's Katz has shown that the United States prospered in the early 1900s in part because secondary education became accessible to many people at a time when employment in agriculture was drying up. The result, at least through the 1980s, was an increase in educated workers who found jobs in the industrial sectors, boosting incomes and reducing inequality. Katz's lesson: painful long-term consequences for the labor force do not follow inevitably from technological changes.

Brynjolfsson himself says he's not ready to conclude that economic progress and employment have diverged for good. “I don't know whether we can recover, but I hope we can,” he says. But that, he suggests, will depend on recognizing the problem and taking steps such as investing more in the training and education of workers.

“We were lucky and steadily rising productivity raised all boats for much of the 20th century,” he says. “Many people, especially economists, jumped to the conclusion that was just the way the world worked. I used to say that if we took care of productivity, everything else would take care of itself; it was the single most important economic statistic. But that's no longer true.” He adds, “It's one of the dirty secrets of economics: Technology progress does grow the economy and create wealth, but there is no economic law that says everyone will benefit.” In other words, in the race against the machine, some are likely to win while many others lose.

Here is a section from the latter:

Brynjolfsson and McAfee's mistake comes from considering only first order effects of automation where the machine replaces the worker. But when a machine replaces a worker, there is a second order effect: the organization using the machine saves money and that money it flows back into to the economy either through lower prices, higher wages for the remaining workers, or higher profits. In all three cases that money gets spent which stimulates demand that other companies respond to by hiring more workers.

This common sense view is borne out virtually all economic studies looking at the relationship between productivity and jobs. While some studies have found that productivity growth does have some short-term negative job impacts, all the studies find either no impacts or positive impacts on total jobs in the longer term. As the OECD stated in a definitive review of the studies on productivity and employment:

Historically, the income-generating effects of new technologies have proved more powerful than the labor-displacing effects: technological progress has been accompanied not only by higher output and productivity, but also by higher overall employment.

Sure, but those that argue that robots kill jobs argue that this time it's different. As the article states, “Technologies like the Web, artificial intelligence, big data, and improved analytics—all made possible by the ever increasing availability of cheap computing power and storage capacity—are automating many routine tasks.”

But there are two problems with this argument. First, it assumes that productivity growth rates will increase significantly. But there is little evidence that the United States will see productivity growth in excess of 3 percent a year (the best we have ever done). This is in part because despite IT advances that boost productivity in information-based functions, a growing share of jobs involve interacting with people (e.g., nursing homes, police and fire) or doing physical tasks that are difficult to automate (e.g., construction, janitorial services).
Eoin Treacy's view - Something that has been at the back of mind for some time is that productivity is an economic concept while employment is a social concept. There is no doubt that the exponential rate of technological development, not least in the automation of industrial, logistics and clerical functions is enhancing productivity.

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September 11 2013

Commentary by David Fuller

Eagle slaughter: Wind farms kill 67 eagles in 5 years

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

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

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

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

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

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September 10 2013

Commentary by David Fuller

Dow Jones Industrials to Add Goldman Sachs, Nike Shares

And Visa as you will see in the introduction to this report from Bloomberg
Goldman Sachs Group Inc., Visa (V) Inc. and Nike Inc. (NKE) will be added to the Dow Jones Industrial Average (INDU), replacing Bank of America Corp. (BAC), Hewlett-Packard Co. (HPQ)and Alcoa Inc. (AA) in the biggest reshuffling since April 2004.

The changes will boost the influence of banking and computer companies in the 30-membergauge as the fifth-biggest U.S. bank by assets and the largest payment network join seven other financial and Technology firms, such as JPMorgan Chase & Co. and Cisco Systems Inc. Bank of America exits even after rising 109 percent in 2012, the Dow's largest gain. The changes will take effect after the close on Sept. 20.

Moves announced today by a committee that includes editors of the Wall Street Journal will give extra influence to the average's newest members, due to the way the gauge is designed. Since Dow proportions are determined by stock price rather than market value, shares of Visa and Goldman Sachs, which trade above $160 apiece, will have about seven times the weighting as the constituents they replace.

"The Dow is going to look and act very differently," Dan Greenhaus, a strategist at BTIG LLC, said in a note to clients. "Visa would become the second-most important stock in the index and Goldman Sachs the third-most important."

The Dow's price-weighting system has proven a barrier to inclusion for some of America's most-heavily traded Technology stocks. Apple Inc. (AAPL) and Google Inc. (GOOG), which change hands above $500, have been left out. At the same time, the three companies to be removed had the lowest prices in the average.
David Fuller's view - Higher prices for the incoming shares will certainly make the Dow livelier. Here are the incoming shares: Goldman Sachs, Nike and Visa. Here are the outgoing three: Alcoa, Bank of America and Hewlett-Packard.

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August 30 2013

Commentary by Eoin Treacy

Verizon-Vodafone Seen Yielding Over $240 Million in Fee Bonanza

This article by Aaron Kirchfeld for Bloomberg may be of interest to subscribers. Here is a section
Verizon Communications Inc.'s buyout of the rest of its wireless venture may yield more than $240 million in fees for the bankers lucky enough to win a role on the biggest transaction in more than a decade.

Vodafone Group Plc is in advanced talks to sell its 45 percent stake in Verizon Wireless to its U.S. partner for about $130 billion, said people with knowledge of the matter. At that price, the banks guiding Verizon may earn as much as $125 million in fees, while Vodafone's advisers could make up to $118 million, estimates from Freeman & Co. show. That doesn't include potential underwriting fees for financing.
Eoin Treacy's view - Competition in the market for handheld devices remains fierce as demand for mobile internet connectivity replaces desktops. Some of the greatest beneficiaries of this migration are the providers of wireless access, since they sell subscriptions regardless of the Technology used to avail of their services. Verizon's move to acquire the remaining portion of its wireless business from Vodafone suggests they continue to see this as a major growth story. (Also see Comment of the Day on March 6th 2013).

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August 23 2013

Commentary by Eoin Treacy

Tesla Model S receives top marks in NHTSA safety testing

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

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

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August 23 2013

Commentary by Eoin Treacy

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

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

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

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

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

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

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August 22 2013

Commentary by Eoin Treacy

Email of the day (1)

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

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

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

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August 22 2013

Commentary by David Fuller

Stocks Climb With Metals on Factory Data as Dollar Gains

Stocks and metals gained on data showing improvement in manufacturing and the U.S. labor market as a computer error halted trading on the Nasdaq Stock Market. The dollar rose as signs of an improving global economy increased speculation the Federal Reserve will reduce stimulus.

Germany led growth in manufacturing and services in the euro area, while a gauge for China's factory output unexpectedly showed expansion. The fewest workers in more than five years applied for U.S. jobless benefits over the past month, indicating the labor market continues to improve, and an index of leading indicators rose in July by the most in three months.

"We're seeing better economic data out of Europe and China, with several positive surprises," Thomas Haerter, who helps oversee about $54 billion as chief strategist at Swisscanto Asset Management AG in Zurich, said in a telephone interview today. "Getting better-than-forecast numbers out of Europe is even more positive for stocks than better-than-forecast data out of the U.S., as the growth problem is mainly in Europe."
David Fuller's view - Global economic data in recent months has remained mixed but with overall evidence of gradual improvement in leading economies. This is consistent with the views of Kenneth Rogoff, Carmen Reinhart and other economists who have pointed out that it takes at least five to seven years for countries to recover from a financial crisis. Less than five years have passed since global GDP began go bottom after 4Q 2008.

Obviously most stock markets have been considerably stronger, with companies benefiting from record low interest rates, quantitative easing (QE), Technology enhancements and gradually returning confidence.

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August 16 2013

Commentary by Eoin Treacy

Chinese Stocks Roiled as Shanghai Composite Trading Surges 53%

This article from Bloomberg News may be of interest to subscribers. Here is a section
Everbright Securities, the nation's ninth-largest brokerage by assets, disclosed the trading error in a statement filed to the Shanghai exchange. Board Secretary Mei Jian declined to comment further when contacted by Bloomberg News. The company's shares were suspended in Shanghai trading. China Everbright Ltd., which owns a stake in Everbright Securities, declined 5.5 percent in Hong Kong.

PetroChina Co. and Industrial & Commercial Bank of China Ltd., the nation's two biggest companies by market value, jumped as much as 10 percent in Shanghai before paring gains to trade little changed by the close. Volume in PetroChina was 239 percent above the three-month average and it was 269 percent greater than the average for ICBC, according to data compiled by Bloomberg.
Eoin Treacy's view - In an era of increasingly automated trading, “fat finger” mistakes are becoming uncomfortably frequent. More often than not, these types of events result in sharp declines but on this occasion the intraday rally was unwound steadily following the lunch time break. However, the impact of sentiment in either scenario is to increase uncertainty.

The valuations of the Chinese market are in its favour. However, continued speculation about the scale of the non-performing loans issues and how exposed regional governments are continues to weigh on sentiment. Until we have some visibility on how large this issue is and how it will eventually be dealt with, uncertainty is likely to continue to take a toll on sentiment.

The healthcare sector pulled back sharply this week, suggesting a process of mean reversion is underway. The information Technology sector has paused below 1600 since the beginning of the month in a process of mean reversion. A sustained move below the 200-day MA would be required to question medium-term potential for higher to lateral ranging.

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August 15 2013

Commentary by Eoin Treacy

Email of the day (1)

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

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

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

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

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

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August 15 2013

Commentary by David Fuller

U.S. Stocks Drop as Economic Data Fuel Stimulus Concern

Here is the opening from Bloomberg's report on Wall Street's setback today
U.S. Stocks Drop as Economic Data Fuel Stimulus Concern - Here is the opening from Bloomberg's report on Wall Street's setback today:

U.S. stocks fell the most since June as forecasts from Cisco (CSCO) Systems Inc. and Wal-Mart Stores Inc. disappointed while improving economic data pushed bond yields higher amid concern the Federal Reserve will reduce stimulus.

All 10 major industries in the S&P 500 retreated, with Technology and consumer-discretionary shares dropping more than 1.8 percent. Cisco and Wal-Mart lost at least 2.9 percent after reporting earnings. Gannett Co. tumbled 4.8 percent after Warren Buffett's Berkshire Hathaway Inc. exited its stake in the newspaper publisher. Homebuilders rallied as confidence in the industry rose to the highest level since 2005 despite rising mortgage rates.

The Standard & Poor's 500 Index slipped 1.5 percent, the most since June 24, to 1,660.26 at 3:17 p.m. in New York. The Dow Jones Industrial Average dropped 231.26 points, or 1.5 percent, to 15,106.40, the lowest since July 5. Trading in S&P 500 stocks was 15 percent higher than the 30-day average at this time of day. Treasury yields rose to the highest levels in two years.

"With weaker earnings, higher interest rates and geopolitical concerns, risk assets like stocks don't do well in that type of environment," Jim Russell, the senior equity strategist for U.S. Bank Wealth Management, said in an interview from Cincinnati. His firm oversees $110 billion. "The jobless claims numbers were sufficiently strong that taper fears are probably front and center in terms of display today."

Reports today showed claims for jobless benefits unexpectedly dropped last week to the lowest level in almost six years, signaling the U.S. job market continues to mend. The cost of living rose in July for a third month, supporting the Federal Reserve's forecast that inflation will move closer to its target
David Fuller's view - High valuations, mixed earnings results relative to the 1st quarter, uncertainty over quantitative easing (QE), a somewhat overextended rally relative to the 200-day moving average and today's downward dynamic have combined to check Wall Street's advance (weekly & daily).

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August 13 2013

Commentary by Eoin Treacy

Email of the day (1)

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

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August 13 2013

Commentary by Eoin Treacy

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

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

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

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

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

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

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August 09 2013

Commentary by David Fuller

August 09 2013

Commentary by David Fuller

August 06 2013

Commentary by David Fuller

Battle of Biometric Gear

This is an interesting video from CNBC
David Fuller's view - These products will be an immediate hit with fitness fanatics and hypochondriacs. Let me know how you get on with them.

Seriously, these are self-empowerment devices, which can help people to monitor their state of health and look after themselves, without time consuming and often expensive visits to doctors. Additionally, these smart sensor systems will inevitably become move sophisticated and reliable as the Technology develops.

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August 06 2013

Commentary by David Fuller

American Account: Call it moderate, it's still a recovery

Here is the opening for this latest interesting column by Irwin Stelzer for The Sunday Times, UK (subscription registration required for the full article, PDF in Subscriber's Area)
Spare a bit of sympathy for the Federal Reserve Board's monetary policy gurus. They have said they will begin to taper their purchases of bonds and mortgages when the unemployment rate falls to 6.5%. So July's dip from 7.5% to 7.4%, to the lowest rate since December 2008, should edge the Fed closer to reducing its purchase programme. Alas, life is not so simple for the Fed.

The rate dipped, but only 162,000 jobs were created in July, down from 188,000 in June and below the approximate 200,000 average in the first half of the year. Worse, previously reported job creation figures for May and June were revised down by 26,000. What is a poor monetary policy maker to do?

In one sense, these figures burnish the forecasting credentials of Fed chairman Ben Bernanke and his colleagues. Earlier this week, before the latest jobs figures were announced, they concluded their latest meeting by announcing that the economy is no longer expanding at the "moderate" pace they previously thought. Instead, the pace of recovery is merely "modest". If you think that's a distinction without a difference, think again. The "moderate" pace was fast enough to trigger a market sell-off in the belief the Fed's programme of buying bonds and mortgages (known as QE3) to keep interest rates down would be cut sharply and soon. The "modest" pace is slow enough to give bond prices a bit of support and make market-watchers believe the day QE3 will head for dry dock might not be close after all, despite the fact that the Fed did not retreat from hints it might wind down its purchases next month. After all, Bernanke would like to get the process of tapering started before he turns his chair over to the man or woman President Barack Obama picks to head the Fed for the next four years.
David Fuller's view - Ben Bernanke and the Fed may be 'hoist by his petard' in terms of the 6.5% employment target. Companies are hiring but we are unlikely to see anything like the employment rates of the 1990s, even when the US economy is stronger. Today, unlike 20 years ago, the big productivity gains are coming from Technology, and it is far cheaper than a hiring spree.

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August 05 2013

Commentary by David Fuller