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November 28 2014

Commentary by Eoin Treacy

Copper Falls to 8-Month Low on Concern Oil Slump Will Cut Costs

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

Mining is an energy-intensive industry and lower oil costs have a deflationary impact on producers, according to Macquarie Group Ltd. Copper also declined as a strike was set to end at Peru’s Antamina mine, the world’s sixth-largest copper mine.

“Whatever positive connotations lower energy might have for global growth, the extent and pace of the decline in oil seems the more worrying factor for the moment,” RBC Capital Markets Ltd. said in a note.

 

Eoin Treacy's view -

Shale gas and oil are gamechangers for the energy sector has been a refrain here at FullerTreacyMoney since 2007. Just how much of a gamechanger is quickly coming into focus. Oil is by far the most globally significant commodity because of its utility, portability and energy intensity. Increasing global supply prompted by the high price environment represent a problem for traditional producers. Additionally, rising energy prices were a substantial component in the rising cost of producing just about all commodities. 

Falling energy prices improve the economics of mining operations, allowing greater production. However, in a falling price environment this is not a positive factor. The medium-term result of falling energy prices will be to encourage economic growth and therefore demand but prices could easily fall further before a rebalancing is achieved. 

 



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November 24 2014

Commentary by Eoin Treacy

Heineken Takes Beer Out of Man Cave With $300 Dispenser

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

The Sub’s upscale design plays into the growing trend of more refined at-home drinking -- fancy cocktails, fine wine, craft beer -- which “communicates a certain status” among consumers, said Ben Voyer, a social psychologist at the ESCP Europe Business School. While mainstream beer volumes are falling, sales of premium-priced beers such as Heineken’s Affligem and the tequila-flavored Desperados are on the rise. In Italy, half of all Torps sold are Affligem, an ale started at a Belgian abbey founded in 1074.

Heineken fell 0.6 percent to 61.12 euros at 1:23 p.m. in Amsterdam. Even for the man who has everything, though, the Sub is “ridiculously” expensive, said Euromonitor analyst Spiros Malandrakis, who predicts it will fail unless Heineken licenses its technology to other brewers to widen the selection of brands. That strategy helped make Keurig Green Mountain Inc.’s coffee machines ubiquitous in American kitchens.

That won’t happen with the Sub, however, according to Nasard. “We’re not a service provider.” Instead, Heineken -- which has introduced a cheaper $235 plastic version of its machine -- plans to keep this Christmas gift in the family.

 

Eoin Treacy's view -

Most people who own a capsule coffee machine will testify that consumption and expenditure rise while tolerance for lower quality products such as instant decreases. That’s music to the ears of companies such as Nestle and it is inevitable that others seek to adopt a similar high profile business plan for their products. It remains open to question whether Heineken will succeed with its Torps but the innovation is admirable. 



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November 21 2014

Commentary by Eoin Treacy

Email of the day on the outlook for 2015

Hi David & Eoin, I wanted to get FTM thoughts and opinion on where the best investment returns could be had over the next 12 months and what would be the key things to watch for? Thanks for an excellent service 

Eoin Treacy's view -

Thank you for your kind words and your question. This is a topic we cover almost daily in the written commentary and the audio but it is a good time to summarise our views. 

Let’s ruminate for a moment though on the timing of your question. Generally speaking, the last six weeks of the year is given over to thinking about the possibility of a Santa Claus rally and people don’t generally look at the outlook for the next year until the last week of December or the first week of January. It made headlines during the week that Goldman Sachs had released its prognostication for the coming year, which may have prompted your email. However I believe it is worth considering that the stock market is a discounting mechanism and as a bull market progresses we tend to want to discount cash-flows from increasingly further into the future. It is a measure of how strong the market has been over the last month that investors are already planning for next year. Five consecutive weeks to the upside suggest some consolidation is increasingly likely.

 



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November 18 2014

Commentary by Eoin Treacy

Being Tesco Stinks, but Shopping at Tesco Is Great

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

The two discounters are chipping away at the market share of their bigger competitors. Aldi's market share is now 4.9 percent, up from 3.9 percent a year ago; Lidl is up to 3.5 percent from 3 percent. Tesco, meantime, is down to 28.7 percent from almost 30 percent 12 months ago. Asda, which is owned by Wal-Mart Stores, is unchanged at 17.2 percent, while J Sainsbury has slipped to 16.4 percent from 16.8 percent.

Overall grocery sales are down 0.2 percent in the past year, which Kantar says is the first contraction since it began surveying the market in 1994. Kantar also tracks a basket of 75,000 products; it says shoppers are paying 0.4 percent less for their groceries than they did a year ago.

U.K. food prices have declined for four consecutive months, according to the Office for National Statistics, dropping at an annual pace of 1.4 percent in both September and October:
Lewis, who's been at Tesco since Sept. 1, is unlikely to be looking forward to Christmas. The race to the bottom in prices will make it hard to generate yule-time profit, and his company is still under investigation by the U.K. Serious Fraud Office for fiddling its accounts in recent years. Only five of the 26 analysts who cover the company recommend that investors buy Tesco shares, with 14 holds and seven saying sell.  

In a report published this week, Goldman Sachs analysts said the only way for U.K. supermarkets to make money is to close stores and cut capacity. They're correct; Internet shopping and delivery-to-home services are making edge-of-town superstores increasingly anachronistic, while town centers are flooded with smaller stores that are indistinguishable from the supermarket chains. As well as ending some of its overseas adventures, Tesco needs to shrink more than its prices.

 

Eoin Treacy's view -

A share doesn’t more than halve in value without there being some reason. The issues with Tesco business model at home, accounting irregularities and difficulties with its overseas operations have garnered a great deal of media attention as the price accelerated to the September low. The commonality evident with shares such as Sainsbury and Morrison highlight that Tesco is not the only company feeling the pinch from the entry of discounters to the market. 



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November 05 2014

Commentary by Eoin Treacy

Consumer shares

Eoin Treacy's view -

On October 10th I reviewed the constituents of the Autonomies section of the Chart Library. At the time approximately half were trading above or in the region of their 200-day MAs, while the remainder were in varying stages of trend deterioration. Since then the wider market has rebounded impressively, the Japanese market has been given a new injection of liquidity and the US Dollar has been quite firm. I clicked through the constituents once more this morning to identify those exhibiting relative strength. 



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November 05 2014

Commentary by Eoin Treacy

Australia Needs Stimulus to Avoid Recession, Morgan Stanley Says

This article by Mark Mulligan, Jens Meyer for The Sydney Morning Herald may be of interest to subscribers. Here is a section: 

Morgan Stanley said in its note on Wednesday that a series of external and internal shocks had forced it to downgrade a more upbeat macro-economic forecast at the beginning of this year.

Foremost of these was oversupply in bulk commodities such as iron ore, which has driven down the price of Australia's biggest export to near five-year lows, along with "further signs" that China would have to accelerate its own economic rebalancing act away from property and exports.

The bank also singled out the federal government's "alarmist" narrative about a budget emergency, which had dissuaded discretionary consumer spending and private sector capital expenditure. It also accused the government of lacking focus in its infrastructure agenda.

On the property boom, it noted that "the housing recovery has come through even more quickly than we forecast, pulling some growth into 2014 at the expense of 2015". It urged a "delicate mix of jawboning and macro-prudential policies" to cool prices and speculative investment.

Morgan Stanley said all this "puts an already weak labour market at greater risk". Job-shedding from the resources sector and a spluttering "East Coast recovery" would drive the jobless rate from 6.2 per cent now to 6.8 per cent, it said.

 

Eoin Treacy's view -

As commodity demand growth forecasts undershoot and prices decline, Australia needs a weak currency in order to spur non-resources sections of the economy. Record low interest rates are certainly a help. The recent weakness of the Australian Dollar is an additional benefit for exporters that have seen their competitiveness eroded by the currency’s world beating strength over the last decade. 

The Australian Dollar had been ranging above 86¢ for much of last month but broke downwards today to hit a new three-year low.   A clear upward dynamic will be required to check momentum, while a sustained move above the 200-day MA would be needed to begin to question medium-term scope for continued weakness. 

 



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November 03 2014

Commentary by Eoin Treacy

Making sense of Samsung Group reshuffling

Thanks to a subscriber for this informative report from Deutsche Bank. Here is a section: 

Since Samsung Group's Chairman Lee began experiencing health issues in May of this year (based on press reports from Chosun Ilbo, etc.), the group has announced a series of internal business transactions including IPOs and reorganizations of its subsidiaries. Although Samsung Group has not formally indicated that transition in management control is in process, we believe the market regards this as the primary motivation for the recent developments. Based on our extended analysis of these events and the evolving regulatory backdrop, we see Samsung Life (Buy) and Samsung C&T (Buy) as key beneficiaries that also offer upside to target prices. 

Recap of key events since May 2014 
Over the last five months, Samsung Group has announced a number of transactions to recalibrate its businesses, which many investors appear to believe are likely also designed to strengthen management control for the next generation. Key announcements include IPOs of Samsung SDS and Cheil Industries (aka Samsung Everland), a merger between Samsung Heavy and Samsung Engineering, and removal of cross-holdings. 

Samsung Life a likely beneficiary of further restructuring 
Given potential revisions to the Insurance Act, we believe that a likely additional transaction is for Samsung Life to spin off a separate non-financial entity that holds shares in Samsung Electronics. We would view this as a positive for Samsung Life’s shares, as it should lead to improvement in ROE on the back of a lighter capital base. We estimate that the Samsung Life operating entity’s ROE ratio should double to 10% from 5% as a result of a spin-off. Although the Samsung Life operating company’s RBC (risk-based capital) ratio could decline to about 250% from the previous 379%, this would still be one of the highest RBC ratios in the Korean insurance sector. 

SEMCO and Samsung C&T to recognize gains from IPOs 
Samsung Group has announced its intent to IPO Samsung SDS and Cheil Industries, which may consist mainly of shares owned by affiliate companies. The Lee family has a majority stake in both companies and, while it is apparently not planning to sell its shares during the IPO, the family could utilize the shares at a later point to help fund potential inheritance or strengthen control in key affiliates. Our analysis shows that SEMCO and Samsung C&T should recognize valuation gains worth 21% and 14% of market capitalization, respectively, upon IPO. According to regulatory filings, SEMCO will be the only major shareholder to sell its SDS shares through the IPO, and we expect SEMCO to use the proceeds to strengthen its balance sheet.

 

Eoin Treacy's view -

Some of Asia’s largest companies have been built up on a patriarchal structure so the aging of these important figures represents a challenge for boards as successors are chosen and corporate structures are massaged. Samsung is one example, 86 year old Li Ka-Shing’s eventual retirement will be another major event while 84 year old Warren Buffet has been planning for his eventual demise for quite some time. 



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October 31 2014

Commentary by Eoin Treacy

Insights in 140 Words October 31st 2014

Thanks to a subscriber for this edition of Deutsche Bank’s weekly missive. Here is a section on Facebook:

Facebook - Leave aside Mark Zuckerberg's dystopian goal of "connecting the whole world". Before then investors must think about the eight per cent drop in Facebook's share price since Wednesday. To understand why jitters surround a company that is growing sales and earnings 60 and 90 per cent respectively, look through a DuPont analysis lens. Multiply the current ebit margin of about 40 per cent by an asset-turn of 0.6 times and a leverage ratio of 1.2. That spits out a return on equity of 17 per cent, adjusted for tax. Given that asset-turn and leverage are unlikely to change much, shareholder returns become a margin game. Hence the reaction when Facebook said spending would increase 50 to 70 per cent in 2015. The rise equates to almost half of current ebit or the entire projected increase in gross profits next year.

Eoin Treacy's view -

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

Facebook will reinvest next year’s expected profits in expanding its business which for a company with a lower P/E would be welcomed by investors. However with the leverage Facebook has in its business, reinvesting everything means it has no choice but to meet or exceed sales targets if investors are to be placated. 

 



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October 28 2014

Commentary by Eoin Treacy

Ackman $5.3 Billion Allergan Bet Examined Before Ouster Vote

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

Bill Ackman’s accumulation of $5.3 billion in Allergan Inc. stock will be scrutinized by a judge who will decide whether the hedge fund manager can vote his 10 percent stake to help seal a hostile takeover bid by Valeant Pharmaceuticals International Inc.

Allergan, the maker of the anti-wrinkle treatment botox, seeks a court order barring Ackman from voting the shares held by his PS Fund 1 at a Dec. 18 meeting, where shareholders will be asked to remove six directors who oppose Valeant’s $54 billion unsolicited bid.

Ackman calls Allergan’s request “drastic and unprecedented,” while the company alleges the activist investor acquired his shares through insider trading. The decision by U.S. District Judge David Carter, who will hear arguments today in Santa Ana, California, may determine the outcome of the vote.

“An injunction would substantially tilt the playing field because a majority of outstanding, as opposed to voting, shares must vote in favor of removing directors for this proposal to pass,” Ackman said in a court filing. “If PS Fund 1 cannot vote its shares, they will effectively become ‘no’ votes.”

Valeant, based in Laval, Quebec, wants to buy Allergan to expand its portfolio and become one of the world’s largest drugmakers. Allergan Chief Executive Officer David Pyott has fought to keep the company independent, announcing a restructuring that includes cutting 1,500 jobs.

Eoin Treacy's view -

Whenever I think of Botox I think of my grandmother’s response to a childhood question “did you have a midlife crisis?” She said she would have loved to but couldn’t afford one. I included Allergan in the original list of Autonomies because its product line epitomises the narcissism so often associated with the middle classes. Valeant and Bill Ackman obviously agree and their efforts to acquire the company represent a media spectacle which has boosted the price of both securities.


The biotechnology sector accelerated to a medium-term peak in the first quarter and most constituents pulled back sharply to close overextensions relative to the 200-day MA. The majority of large caps stabilised and the sector has been an absolute and relative outperformer over the last month despite heightened volatility for the wider market. 



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October 23 2014

Commentary by Eoin Treacy

From mobility to connectivity

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on the Internet of Everything theme which is likely to continue to gain attention over the coming decade. Here is a section: 

IoT-driven demand for servers to all benefit the Asian technology supply chain in 2015-20. In this report we focus on devices which have yet to become connected and will be new growth drivers in 2015-20. We expect the upstream semiconductor sector to see incremental sales contribution from IoT and wearable ICs in 2015-20. We anticipate server demand to benefit the downstream hardware sector more than the upstream semiconductor sector.

Internet of Things – the connectivity theme After the mobility theme drove the proliferation of smartphones and tablet PCs since 2005, we expect the connectivity theme to trigger IoT demand in 2015-20. We expect 1) low-power application processors and microcontrollers with connectivity and embedded memory, and 2) MEMS (micro-electro-mechanical systems) sensors to be the major growth drivers for the upstream semiconductor sector. The key IoT applications for the downstream hardware sector include smart cities, home automation, eHealth, retail, smart cars, logistics, industrial control, smart metering, and smart agriculture and farming. In our view, IoT will provide benefits such as life quality improvement, productivity improvement, energy saving, and security enhancement.

Wearable devices to be key products in an IoT world
Wearable devices can be connected to mobile devices and belong to the concept of IoT. Major applications for wearable devices will be entertainment, healthcare monitoring, mobile communication (connection with mobile devices), and mobile payment, in our view. We expect wearable device units to grow at a 25% CAGR in 2015-20.

IoT infrastructure should drive continuous server demand growth
We believe IoT infrastructure will be based on the current cloud architecture. Once IoT connects more objects, machines, and networks for global cloudbased services, data will be routed through servers for applications and data analysis. The uptake of IoT should therefore result in growing demand for data analysis and storage in servers and continue to drive demand for servers in 2014-18 with 4.3% unit CAGR 

 

Eoin Treacy's view -

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

Connectivity is an increasingly utility-like commodity which is essential to modern living. As 4G networks continue to evolve and speed up, the practicality of having access to the internet wherever you go, at an acceptable cost and for an increasingly wide array of uses is swiftly becoming a reality. Set aside for one moment the angst of what we are to do to ensure full employment and think of the productivity that can be gained from supplying an educated, astute worker with tools that make their jobs easier. The roll out of technology to the global workforce and the development of entirely new industries that benefit from big data, tech distribution and connectivity represents the type of development on which secular bull markets are based. 



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October 21 2014

Commentary by Eoin Treacy

Euro STOXX Index

Eoin Treacy's view -

The ECB is slow to call its monetary intervention quantitative easing but the LTRO program and its successor amount to the same thing.  The key difference between the Eurozone and the USA is that the Fed has the ability to expand its balance sheet and leave the additional money in the system while the ECB has so far been forced to completely unwind its programs once they conclude. Despite the fact that the ECB is more constrained in what it can do than the Fed, it is worth remembering that it has only one key mandate i.e. an inflation target of close to 2%. The Eurozone is a long way from that and lower oil prices make inflation even more difficult to achieve. The case for stimulus, simply to achieve its primary mandate, is well made. 

From the Fed’s experience we can conclude that quantitative easing is best suited to boosting the price of fixed and financial assets rather than achieving outsized growth numbers. The ECB does not have a growth mandate but it does have a price mandate so QE is well suited to its objectives. The purchasing of Spanish and French bonds yesterday and Italian bonds today suggest the ECB’s stimulus is now underway. This is particularly noteworthy considering how abrupt the sell-off has been in Eurozone equities over the last month.  

 



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October 20 2014

Commentary by Eoin Treacy

Email of the day on yields and P/Es for Autonomies and Dividend Aristocrats

“Fantastic commentary and impeccable timing as always. Thank you both so much.

“I have been looking through the Autonomies and Aristocrats following your various commentaries. I wonder if it is possible (and easy) to provide us with an updated list and table on their current EY and DY, possibly including ranking and comparison over say 3 years, i.e. price and EY and DY for each period. Obviously price action is paramount but it would be good to be able to assess possible opportunities for topping up in the market and possible best fade fundamental returns. Thanks once again for a superb service.”

 

Eoin Treacy's view -

Thank you for your kind words and I agree that this represents an interesting time to monitor the Autonomies and Dividend Aristocrats. When I reviewed the Autonomies last week approximately half were in various stages of mean reversion while the uptrend consistency of the other half had deteriorated, some markedly so. 

I’ve created sections in the International Equity Library for the US, Canadian, European and Asian Dividend Aristocrats as well as US Dividend Champions and Contenders. Links to all of these lists can be found at the top of the left column here. 

A table with Earnings Yield, 12-month Gross Dividend Yield, Historic P/E and Estimated P/E for next year for the Autonomies and the various S&P Dividend Aristocrats indices which is posted in the Subscriber's Area.

 



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October 10 2014

Commentary by Eoin Treacy

Autonomies

Eoin Treacy's view -

We created the Autonomies designation because it was evident from late 2009 that some very important secular themes were coalescing around a group of companies that benefit from lower energy prices, the expansion of the global middle class and the accelerating pace of technological innovation. These types of companies have global reach, the freedom to take maximum benefit from the global economy, dominate their respective niches, have established businesses that foster brand loyalty and often pay solid yields.  

Such qualities represent important reasons why they should be considered for entry in investment portfolios with a relatively long time horizon. More than a few subscribers have told me that they use the universe of Autonomies as a pool from which they pick emerging trends to participate in for as long as they remain consistent and we anticipate they the group will continue to provide investment opportunities for the foreseeable future.  

As the Fed’s third QE program draws to a close, the liquidity fuelled rally which has had such an effect on both markets and investor psychology is coming into question. I thought it would be an opportune time to review the Autonomies considering the spike in volatility posted this week. 

I suspect a big question for many investors will be whether the current pullback will represent something akin to that posted in 2011. It might, but in a good many cases this reaction is already larger and occurring from a higher point. 

 



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September 09 2014

Commentary by Eoin Treacy

Apple Unveils Watch, Bigger-Screen IPhones in Product Blitz

This article by Adam Satariano and Tim Higgins for Bloomberg may be of interest to subscribers. Here is a section: 

“Apple Watch is the most personal device we have ever created,” Cook said at the event. “We set out to create the best watch in the world.”

Cook unveiled the watch after earlier introducing Apple Pay, the mobile payments system. Apple is partnering with credit-card companies including American Express Co., MasterCard Inc. and Visa Inc. for the service, which will be offered in the U.S. starting next month.

In introducing a mobile-payments service, Apple squarely took aim at existing payments services. “Our vision is to replace this and we’re going to start by focusing on payments,” Cook said as a picture of an old wallet was flashed on screen.

The company also posted an image of a leather billfold on its website with a message saying, “Wallet, your days are numbered.”

Apple Pay will work with services including mobile car- booking application Uber Technologies Inc., restaurant reservation system OpenTable and daily deals company Groupon Inc., the company said.

 

Eoin Treacy's view -

I watched the Apple presentation this morning and I want an Apple Watch for the fitness tracking apps but I’m not sure I need one when I already have a FitBit Flex and an iPhone. The share had rallied to a new high over the last month on expectations of big news in the product line up. The watch is a new product but it is open to question whether it is meaningfully better than the Samsung products already in the market. That would suggest that it will be up to Apple to demonstrate that the apps are better and the ecosystem more attractive than other product stables. 



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August 26 2014

Commentary by Eoin Treacy

Email of the day on agriculture and Amazon

Hello, could you take a look at the agricultural sector (Deere, CNH, Monsanto, Potash) and also could you comment Amazon? I find it too expensive, but I fear that they are building a monopoly in the retail sector, so it is expensive now, but nobody can really compete , especially book stores or electronic retailers

Eoin Treacy's view -

Thank you for this question which raises a number of items that may be of interest to subscribers.

With bumper crops and comparatively low prices it is an open question as to what extent farmers will be able to invest in new plant,  machinery, nutrients and/or seeds. I wonder to what extent crop switching will be a factor in the next season since prices for just about all grains and beans have fallen. With cattle contracts still close to all-time highs, demand for more feed in the coming year is a certainty as herds are rebuilt. That suggests beef farmers are likely to be better positioned than tillage farmers



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August 18 2014

Commentary by Eoin Treacy

Email of the day on retirement planning

I was wondering if I can tap in on your common sense approach to retirement planning for global citizen (read UK/US). I know this may be outside areas you wish to comment on - but thought I would try. Given the amount of noise and exaggerated return assumptions (which is only possible for active portfolio traders/managers), I felt some common sense feedback will be helpful to help me (and some of my colleagues) think through this. 

Question - Given the Potential for a Japan like situation in Western world (low I admit): e.g i) a) low rate of returns in Fixed income, b) potential sideways equity market c) propensity for looser money policies by Central banks (leading to inflation in asset classes that squeeze traditional middle class assets, public services etc.) & d) Jobless growth I ) What would be a) a sensible portfolio return to expect for retirees planning retirement for next ten years (if one is not an active stock picker and trader) b) What asset allocation would you suggest. c) what inflation should one plan for ? II) Any sensible websites or material you could direct me to research this ? Many Thanks

 

Eoin Treacy's view -

Thank you for this question which I’m sure will be of interest to the Collective of subscribers who may also have additional input. 

Generally speaking the last 10-years of one’s working life are devoted to building assets for retirement once mortgages and college education for one’s offspring have been paid off. This goal is achieved in the main by investing more of one’s income in what is hopefully a low risk / reasonable reward spread of asset classes. More often than not the low risk portion has been made up of bonds and the higher return by equities. Unfortunately, this model is less likely to be successful in future for some of the reasons you highlight above. 

 



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August 01 2014

Commentary by Eoin Treacy

Twin Corn Ears Push U.S. Yields to Bin-Busting Crop

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

Crop conditions are the best in a decade for this time of year, government data show, with 75 percent rated good or excellent as of July 27. The USDA probably will boost its production estimate in its monthly crop report on Aug. 12, said The Linn Group, a broker and adviser. The U.S. is the world’s largest grower and exporter.

“There will not be enough storage space for all the extra bushels this fall,” said Roy Huckabay, an executive vice president at The Linn Group in Chicago. He predicted on July 1 that the crop would increase 2.8 percent to 14.314 billion bushels with yields around 170 bushels an acre.

 

Eoin Treacy's view -

Corn prices continue to extend their decline but the pace of the fall has moderated somewhat since early July. A break in the short-term progression of lower rally highs, currently near 380¢, would signal more than a short-term low has been reached. 



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July 31 2014

Commentary by Eoin Treacy

Adidas Drops Most in 17 Yrs, Berenberg Sees Credibility On Line

This note by Heather Burke for Bloomberg may be of interest to subscribers. Here it is in full:

Management communication, credibility “appear on the line” after profit warning, Berenberg says in note.

In golf, mkt “over-bloated” with inventory, U.S. chains such as Dicks have to right size existing goods, cut future orders

TaylorMade-adidas Golf restructuring may cost ~EU25m-EU30m ex loss of sales, profit anticipated in 2H14

In Russia has done an about-face, will now accelerate store closings, big effect is associated loss of 2H sales, profit, as E. Europe ~14% sales, 20% Ebit, Russia is >90% of that region

Scope of downgrade hard to quantify

Baader Bank says share price reaction “adequate,” sees potential downside revision for mkt consensus of 20%-25%

Profit warning expected, but sharper than seen.

Eoin Treacy's view -

Adidas’ expansion into Eastern Europe has not been as successful as planned and the closing of stores in Russia reflects this. Tighter sanctions imposed on Russia by Europe may have been the final catalyst for this decision. By contrast the reorganisation of TaylorMade is a significant but much smaller issue.  

Adidas’ share price has been deteriorating since late last year and it began to encounter resistance in the region of the 200-day MA from March. Today’s action represents an acceleration of the downtrend but there is no evidence yet that it is over. Some scope for a reversionary rally exists but a potentially lengthy period of support building will be required before investors are likely to support significantly higher levels. 



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July 30 2014

Commentary by Eoin Treacy

Tapping into growth

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

Beer takes share from a readily addressable market in the form of cheaper,  often illicit and non-commercial alcohol. The level of local alcohol in a market  is strongly correlated to national income as per Figure 9.

This readily available market accounts for over 50% to 90% of alcohol consumption in Africa, with growing markets like Nigeria, Democratic Republic of Congo and Ethiopia particularly attractive. Other emerging markets have lower, but nevertheless interesting figures which range from 15% to 40%. Markets like Latin American Ecuador and Peru and Asian markets such as Myanmar and Cambodia looking interesting to the brewers. 

Beer is a luxury 
The barrier to conversion from illicit alcohol to beer is the affordability of beer.  Per capita consumption in a market is relation to the amount of time a consumer has to work to afford a beer. As seen in Figure 11, the first inflection point for growth acceleration is around 120 minutes of work to afford a beer.

A second inflection can be found at 30 minutes worked for a beer. Not only does beer consumption accelerate to the levels seen in developed markets, consumers also move up in the portfolio towards more premium brands. 

There are market dependent limits to per capita growth 
There is a limit to how much alcohol and beer one can drink. For beer, the per capita average of 10 liters of pure alcohol translates to 200 liters which approximates consumption in core beer markets such as Germany and Czech. 

As markets mature, our analysis indicates a range of 70-90 liters per capita being the developed market norm over time. For most emerging markets with favorable population and illicit alcohol profiles, this is a growth destination; for developed markets this may translate into more declines.

 

Eoin Treacy's view -

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

The last few paragraphs above highlight just how important international expansion is for larger brewers. The profile of consumption in emerging middleclass economies represents where they have the best potential to grow their businesses. The pace of M&A activity within the sector highlights the fact that international expansion and establishing  brand loyalty remains a priority. 



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July 28 2014

Commentary by Eoin Treacy

What Do Chinese Dumplings Have to Do With Global Warming?

This article by Nicola Twilley for the New York Times may be of interest to subscribers. Here is a section:

An artificial winter has begun to stretch across the country, through its fields and its ports, its logistics hubs and freeways. China had 250 million cubic feet of refrigerated storage capacity in 2007; by 2017, the country is on track to have 20 times that. At five billion cubic feet, China will surpass even the United States, which has led the world in cold storage ever since artificial refrigeration was invented. And even that translates to only 3.7 cubic feet of cold storage per capita, or roughly a third of what Americans currently have — meaning that the Chinese refrigeration boom is only just beginning.

And

Despite the expansion in frozen foods and refrigerators, the critical growth area is what’s known in the logistics business as the “cold chain” — the seamless network of temperature-controlled space through which perishable food is supposed to travel on its way from farm to refrigerator. In the United States, at least 70 percent of all the food we eat each year passes through a cold chain. By contrast, in China, less than a quarter of the country’s meat supply is slaughtered, transported, stored or sold under refrigeration. The equivalent number for fruit and vegetables is just 5 percent.

Eoin Treacy's view -

The evolution of cold storage capacity tends to move hand in hand with the instant gratification often associated with a developing consumer economy. Having a large refrigerator in one’s home means a large selection of food is available whenever we wish. As the article points out the roll out of a refrigerated food chain doesn’t necessarily reduce food waste over the long term. However it changes food waste from being an inevitable fact to being dependent on people’s purchasing and consumption choices.  While China is on its way to surpassing the USA in terms of refrigeration capacity, India is only now beginning to introduce refrigerated warehouses suggesting there is substantial growth in this sector. 



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July 21 2014

Commentary by Eoin Treacy

Baidu brings its search engine to Brazil

This article by Jordan Novet for venturebeat.com may be of interest to subscribers. Here is a section: 

Brazil’s flavor of the Baidu search engine went live this morning, giving it a presence in one of the growing BRICS countries and helping it stand out more against competitors like Google, Yahoo, and Microsoft’s Bing. The Baidu search engine has also popped up in Egypt, Japan, and Thailand.

The Brazil rollout comes a couple years after Baidu opened up shop in Brazil. Next up, we can imagine an operational Baidu search engine in the United States, the home of the top search engines in the world.

After all, Baidu co-founder and chief executive Robin Li harbors ambitions of making the company a brand name in half of all countries in the world, according to a 2011 report in PCWorld.

Baidu opened a lab in Silicon Valley two months ago. Artificial intelligence smarts for a U.S. version of the Baidu search engine could certainly be possible, given that Baidu hired Andrew Ng, founder of Google’s deep-learning project and director of Stanford’s artificial intelligence lab (and a co-founder of massively open online course provider Coursera). And the Baidu lab is hiring.

 

Eoin Treacy's view -

One of the arguments levelled against China’s development strategy has been that the command capitalism it has championed stifles entrepreneurship. Compared to the private sector led growth of India, China has relatively few internationally competitive companies. However, that situation is gradually changing. India’s new administration looks likely to espouse a wide ranging infrastructure development strategy while China’s companies are increasingly making their presence felt on the international stage. Baidu is a good example of this. 



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July 18 2014

Commentary by Eoin Treacy

The next industrial revolution: Moving from B-R-I-C-K-S to B-I-T-S

Thanks to a subscriber for this report from Goldman Sachs exploring the industrial applications of the Internet of Things (IoT). Here is a section: 

While IoT spans a variety of industrial sectors, the focus of this report is on Home Automation. Previous reports in this series addressed the applications of IoT to CommTech, Semiconductors and Software. In this report, we address the impact of the IoT on the industrials space, with a deeper dive into Home Automation within the Building Automation opportunity below. We expect a series of follow-up reports touching the following topics.

Building Automation focuses on improving energy efficiency and occupant comfort/utility within the home or commercial building. Key advantages include improved security, remote monitoring of devices, and energy management.

Manufacturing applications of IoT could help facilities to reduce downtime through predictive maintenance, have better visibility into inventory and energy management, and improve operational efficiencies overall.

Resources could benefit from real-time equipment monitoring, energy efficiency (smart meters), and fuel reduction (O&G).

 

Eoin Treacy's view -

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

The frivolity of much of the social media space has led some to believe that future productivity gains will be limited. However, the increasing application of new technologies to the industrial sector almost certainly insures that this assumption will prove false. Rapid prototyping, embedded sensors, processors and transmitters are driving efficiencies that are transforming the industrial sector. This is important because productivity growth is a necessary component in the evolution of a secular bull market. It is for this reason that veteran subscribers will be familiar with our continued emphasis, particularly in the Friday audio, that we are in a technological golden age more commonly referred to as the Third Industrial Revolution. 



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July 17 2014

Commentary by Eoin Treacy

US Dividend Contenders

Eoin Treacy's view -

Following on from yesterday’s addition of a section for the US Dividend Champions to the Chart Library, I created a section for the US Dividend Contenders today. Unlike the Dividend Aristocrats which demand 25 years of consecutive increases as well as a market cap and liquidity provision, the Champions and Contenders only look at records of increasing dividends. In the case of the Champions this is at least 25 consecutive years and between 7 and 24 years for the Contenders. 

The US Dividend Contenders represent an interesting universe of companies where banks, utilities, insurance, MLPs and REITS dominate. This list also highlights the increasingly large number of technology companies that have maintained solid records of dividend increases over the last decade. 

 



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July 15 2014

Commentary by Eoin Treacy

Big Plan by Google to Race Amazon to Your Door

This is an informative article by Jason Del Rey for Recode.net and may be of interest to subscribers. Here is a section: 

Big retailers, however, are clearly taking these partnerships seriously. Instead of sending mid-level business development executives to strike deals with Google, some are negotiating at the top. Costco’s CEO, for instance, flew out to Google’s Mountain View, Calif., campus to meet with Google CEO Larry Page before agreeing to participate in the Google Shopping Express program. Costco CFO Richard Galanti also met with execs at Google on a separate trip. Galanti said it’s important for Costco to consider new sales channels as more shoppers make purchases online.

“Why wouldn’t Google just eliminate the merchant from the middle?” Faisal Masud, e-commerce chief at Staples

“We’re pretty good at knowing what we know how to do and what we don’t,” Galanti said.

“We’re not arrogant about it.”

What’s keeping some retail bosses awake at night, however, is the ongoing suspicion that Google could eventually build an Amazon-like marketplace in which the search giant sells products directly to shoppers and cuts out brick-and-mortar retailers altogether. Even some current Google Shopping Express partners see the potential for such an approach.

Fallows, for his part, was adamant that Google will not pursue this strategy.

“Very firmly no,” he said. “Google is a platform and partnership business. We can’t say that strongly enough.”

Another fear among some retailers, according to RetailNet Group’s Anderson, is that as long as the purchases keep running through Google instead of the retailer’s site, Google will start to collect more and more valuable information on who buys what. Google could then use that data to attract more money from brands looking to promote their own product through Shopping Express no matter which retail store it comes from. Some of that marketing money, Anderson believes, could in turn be shifted away from funds these brands typically allocate to retail stores to promote individual products.

“Google may be in a position to go to Procter & Gamble and say, ‘Why would you give [marketing] dollars to Target when you can just give them to us and we’ll promote the brand whether the shopper decided to buy from Target or another retailer?’” Anderson said.

Despite these concerns, Google has assembled a respectable group of partners to the program. Several of them say participating in the Google Shopping Express program gives them a way to evaluate whether it’s more cost effective to offer same-day and next-day delivery themselves, through a partner or whether they should at all.

 

Eoin Treacy's view -

The retail sector is in a constant state of transformative development. This is particularly true in the USA where penetration of online shopping is higher than elsewhere. Since moving to Los Angeles, it is apparent that there is no shortage of retail space in West LA. Whether this is as a result of online eating into high street market share, the slow recovery of consumer appetites, high rents or the dominance of big box stores and malls is debatable. What seems clear is that the survivors on the high street are service oriented or tailor to a very specific niche. 

The entry of Amazon and Google into the grocery market is a fresh interesting development. Since realising that we could do our Costco shopping online so that we could outsource the porting of heavy bulk items such as gallons of washing detergent etc. to someone else we’ve concentrated on pleasure shopping for fruit, veg and meat at Bristol Farms and Whole Foods. Both Amazon and Google’s delivery trucks are regular sights around our neighbourhood. 

 



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July 14 2014

Commentary by Eoin Treacy

What is Quality?

This report by Michael Hunstad for Northern Trust may be of interest to subscribers. Here is a section: 

Higher quality stocks—as identified by the Northern Trust Quality Score (NTQS) definition—tend to outperform lower quality stocks and do so with considerably less risk. This phenomenon is seen across domestic, international developed and emerging markets.

Unlike value or size, there is no single generally accepted definition of an equity quality factor. Although a wide range of attempts have been made to define quality, their ability to capture the quality phenomenon has been extremely varied.

Much of the difficulty in defining quality stems from the lack of a theoretical justification. Classic models such as CAPM suggest the quality phenomenon should not exist so we lack a practical framework with which to form a definition. However, these models make restrictive assumptions such as uniformity of investor risk posture.

On the other hand, our model of heterogeneity in investors’ views toward risk does a better job of explaining the quality phenomenon as well as the asymmetry of returns to quality during crises and recessions.

Heterogeneity of risk postures suggests risk-seeking investors drive up the price of lowquality/ high-risk stocks until their expected values are negative. Risk-averse investors gravitate toward low-risk stocks where positive expected values, i.e., positive risk premia, are an equilibrium condition.

With this guidance we can define quality as those features of a company that appeal to risk-averse investors – a definition that is inherently multidimensional and will vary by market segment.

With metrics encompassing multiple dimensions of quality, the NTQS has performed exceptionally well relative to other alternative definitions. Implementation of Northern Trust’s quality philosophy, while integrated into the consistent framework that underlies our active equity products, varies by strategy and market segment.

Tactically rotating in and out of quality is impractical since “junk rallies” are tied directly to macroeconomic cycles and are, hence, even more difficult to predict. Further, most of the return for holding low-quality names is concentrated into a few, relatively brief periods which are easily missed with factor rotation. 

The quality and low-volatility phenomenon are only partially related. While there is strong overlap between low quality and high-volatility stocks, there is only a weak relationship between high quality and low-volatility stocks. Thus, the two phenomena are fundamentally different.

 

Eoin Treacy's view -

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

Quality is a poorly defined term, but is a characteristic investors tend to prize more than traders. When we created the Autonomies designation, it was with a view to finding companies that have grown into truly international businesses.

Today’s multinationals are in many respects globally mobile, not least in where they choose to pay taxes, but also in terms of where their respective processes are centred. As truly global companies their revenue is sourced internationally and is less focused on the country they originated in. Together with the fact that they generally have sound balance sheets and competent management structures, the Autonomies share a number of characteristics with “quality” companies. 



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July 14 2014

Commentary by Eoin Treacy

India to raise foreign investment limit in $60 bln insurance sector

This article by Sumeet Chatterjee and Devidutta Tripathy for Reuters may be of interest to subscribers. Here is a section:

India's insurance business was full of promise when it was thrown open to competition in 2000, but has been hobbled by losses, regulatory change, uncertainty and a sharp slowdown in the economy.

The federal government's approval for a proposal to raise the limit to 49 percent has been kept pending for a long time due to opposition by nationalist politicians, frustrating many overseas investors lured by low penetration rates in India.

Life insurance penetration in India is about 3.2 percent of gross domestic product in terms of total premiums underwritten in a year, much lower than more than 10 percent in Japan and nearly 6 percent in Australia.

Dutch banking and insurance group ING Groep NV and New York Life have quit their Indian ventures in recent years, while some other foreign investors were said to be weighing their options.

At the end of Sept 2013, India had 24 life insurers, which accounts for 80 percent of the sector's business. Only 17 of the 24 reported profits in the fiscal year ended March 2013, according to latest data available with the regulator.

State-owned Life Insurance Corp of India Ltd controls about 70 percent of the life insurance business.

"This measure should provide impetus for spurring growth of the insurance industry and enable foreign players to bring in capital required for growing distribution (and) product suite," said Shashwat Sharma, partner at consultant KPMG.

 

Eoin Treacy's view -

India represents a potent market for western multinationals but has been a disappointing investment for a number of companies who failed to deal effectively with the bureaucratic quagmire, regulatory roadblocks to growth and depreciation of the Rupee. With a new administration and a greater potential share of the profits, internationally oriented companies may be re-enticed to consider India. 



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June 16 2014

Commentary by Eoin Treacy

Email of the day on an Autonomies fund

“You mention the Autonomies in your comment of the day quite regularly - Is there a fund I can invest in?”

Eoin Treacy's view -

A number of subscribers have asked this question over the last few years but until now the closest proxy has been the Dow Jones Industrials Average. However a few months ago a UK based fund manager, who read Crowd Money, approached me about consulting on an Autonomies fund which he envisaged running a smart beta strategy. In other words it would seek to run trends in the Autonomies but would lighten when an instrument was heavily overextended relative to the 200-day MA and seek to increase positions following reversions to the mean. I believe this fund will be launched in early September



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June 13 2014

Commentary by Eoin Treacy

Review of the Autonomies

Eoin Treacy's view -

This week I have spent each day reviewing a different Dividend Aristocrats index, as defined by S&P, and adding the respective constituents and former constituents to the Dividend Aristocrats section of the International Equity Library. Today I will focus on the Autonomies, a term we coinded a number of years ago, which is a list I compiled to reflect the types of companies that should benefit from the confluence of themes represented by the Greatest Urbanisation in History, the Golden Age of Technological Innovation and the game changing nature of innovation in energy production

Our original aim in creating the list was to recognise the fact that companies have grown so much in terms of influence and dominance of their respective niches that they are now akin to mobile principalities.  The globalisation of economies means that corporations can make the best use of their platforms to optimise sourcing of raw materials, manufacturing, R&D, marketing and sales. They also have the ability to choose where they eventually pay taxes and how to limit their exposure to regulation.

Capitalism trends towards concentration as the strongest eventually consume the weakest. It is therefore no surprise that the Autonomies include a range of sectors dominated by oligarchies whether iron-ore, industrial gases, social media, marketing, convenience foods, snack foods etc.

In an exchange between Iain Little, Pascal Morin and I this week Pascal suggested the following as a definition for autonomies:

An autonomy is a company which displays leadership characteristics in its sector and operates on a global scale; it is relatively “autonomous” from any given country, including where its head office is located, with respect to tax, governmental interference, regulation, labour inputs and end-markets, and can freely choose where to allocate its resources to best fulfil its objectives.   

This encapsulates the most important factors we seek to highlight with the list. In this regard it is a somewhat qualitative definition and differs from the Dividend Aristocrats which is a purely quantitative designation. I devoted the final section of my book, Crowd Money, to the Autonomies because they represent a fertile pool from which uptrends continues to evolve. 



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June 13 2014

Commentary by Eoin Treacy

Insights in 140 Words June 13th 2014

Thanks to a subscriber for this edition of Deutsche Bank’s interesting weekly note which may be of interest. Here is a section on the comparison between Nike and Adidas:

Nike versus Adidas - Forget about bragging rights during the World Cup (Nikes enclosed 70 per cent of those Brazilian and Croatian feet last night while a quarter wore Adidas boots) what matters to investors are returns. Here the big question is whether it is time to buy Adidas after years of underperformance versus Nike - although both share prices have more than quadrupled over the past decade. The German company is a third cheaper based on multiples of forward earnings. Partly that is due to forex headwinds and its struggling TaylorMade golf business (rounds played in America fell another 5 per cent in the first quarter). But what really matters is that Adidas’s footwear sales in the US are 30 per cent down on last year with a 9 per cent market share falling fast. Stop that slide and a switch looks more compelling.

Eoin Treacy's view -

Both Nike and Adidas are Autonomies. While one way to look at them is to debate which is more likely to outperform, the other is to accept they are by far the largest sporting goods companies in the world. Under Armour certainly has a cool cache but has yet to venture beyond its domestic US market and is a fraction of their size. The same can be said for other popular local brands globally. However one sees the future, it is likely to incorporate both Adidas and Nike.

 



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June 12 2014

Commentary by Eoin Treacy

S&P/TSX Dividend Aristocrats Review

Eoin Treacy's view -

A company needs to increase dividends for at least 5 years in order to gain access to the Canadian Dividend Aristocrats. For a country with such a wide array of income bearing securities, the time hurdle for entry is lower than other jurisdictions and highlights the fact that while income trust structures pay out high percentages of their profits, those dividends can be highly variable. 

The Canadian list is the only one of the Dividend Aristocrat groups that has a substantial weighting of banks and mining companies. This is a testament both to the country’s sound financial system and the size and maturity of its resources sector. The Total Return Index’s uptrend has picked up pace since October and while it is becoming increasingly overextended relative to the 200-day MA, a break in the progression of higher reaction lows would be required to signal mean reversion is underway.

List of the current and former constituents can be found in the International Equity Library. 

Some of the instruments with interesting chart patterns include:

 



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June 11 2014

Commentary by Eoin Treacy

Pan Asia Dividend Aristocrats Review

Eoin Treacy's view -

In order to gain access to the S&P Pan Asia Dividend Aristocrats a company must increase its dividend for at least 7 consecutive years. S&P made constituents of the Index freely available until 2011 but then decided to make them proprietary. As a result in reviews of the sector over the last few years I have been limited to using out of date information. Happily, S&P have changed their policy and the constituent data is available once more.

The Index still has 57 members but there have been 31 changes. The number of Australian and Indian companies has decreased while the Japanese and Chinese weightings have increased. The Philippines and Indonesia are no longer represented while South Korea only has only one member.

The performance of the Index is quite different from either the US or European equivalents; highlighting the more difficult trading environment evident in Asia over much of the last 18 months; with the exception of Japan last year. 



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June 10 2014

Commentary by Eoin Treacy

S&P Europe 350 Dividend Aristocrats review

Eoin Treacy's view -

The S&P Europe 350 Dividend Aristocrat Index has less stringent requirements for entry than the US Index with only 10 consecutive years of dividend increases needed for entry. This results in much more volatility in the makeup of the Index. Additionally, the other less mentioned requirements for entry, such as requisite free float and liquidity play a greater role for the European index. This means that companies such as Astra Zeneca, Essilor International and Enagas have been dropped only to be added back in later. 

I originally began to keep a record of former constituents of the Dividend Aristocrat indices because I noticed that companies often moved to positions of outperformance following their ejection. Occasionally, a company dropped out because its liquidity was too low or because it failed to raise the dividend for a single year. However these proved temporary aberrations and the shares shook off this hiccup and moved to new highs. Both the constituents of the S&P Europe 350 Dividend Aristocrats Index and the former constituents can now be found in the International Equity Library. 

 



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June 09 2014

Commentary by Eoin Treacy

S&P 500 Dividend Aristocrats Review

Eoin Treacy's view -

As government and corporate bond yields have compressed, the relative attraction of shares where the dividend is increasing above the rate of inflation is obvious. S&P kindly make the constituents of their Dividend Aristocrats indices available through their website and they have represented a useful resource for identifying companies with solid balance sheets and respect for minority shareholder interests over the last five years.

Generally speaking the constituents of the S&P 500 Dividend Aristocrats do not have the highest yields, not least because capital appreciation tends to compress them. In order to achieve 25 consecutive years of dividend increases the companies concerned maintain conservative dividend policies where they increase their pay-out incrementally year in year out. The result is that the constituents are generally well-established companies with reliable franchises and the competitive edge within their respective niche that allows them to prosper. 



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June 09 2014

Commentary by Eoin Treacy

Email of the day on clothing companies and Autonomy membership

I was wondering why Abercrombie doesn't qualify as an autonomy? The graph is basing out it seems, and in Milan while the other stores are empty (except the Ferrari store); you have to practically line up to get in and to pay at Abercrombie. / Hollister. It is the one of the favorite brands among teenagers here along with Bershka. Also, I hope you plan to alternate the audio comments between Mr. Fuller and Mr. Treacy because even though the research and conclusions are the same, the styles are different and I like to listen to both of you regularly

Eoin Treacy's view -

Thank you for this question and I’m glad you enjoy the audio commentaries. I agree that Abercrombie and Hollister are very popular brands among teenagers but Bershka, as an offshoot of Inditex, has greater Autonomy characteristics. 



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May 29 2014

Commentary by Eoin Treacy

Cocoa Shortage Looms as Growers Opt to Farm Rubber

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

Cocoa shortages are poised to extend into the next decade as West African growers struggle with underachieving farms or switch to more lucrative crops, such as rubber.

As worldwide demand increases -- the average Chinese consumer eats only a little more than two candy bars’ worth of chocolate a year -- producers are considering ways to boost grower income and coax higher yields from cocoa farms in Ivory Coast and Ghana. Despite two years of shortages, prices haven’t risen enough to persuade many farmers to stick with cocoa while other crops pay more.

“Cocoa farmers are becoming more aware of the bad deal they’re getting on the cocoa value chain,” said Edward George, head of soft commodities research at Lome, Togo-based lender Ecobank Group. “It takes something quite dramatic to get a farmer who has been cultivating cocoa his entire life to tear up his cocoa plantation and switch to rubber. But you can see a trend is under way.”

Worldwide cocoa demand will outpace production again in the next season that starts Oct. 1, according to a Bloomberg survey of five analysts and traders. The deficit is expected to grow ninefold to 1 million metric tons by 2020, which would equal about one-quarter of global output if growers maintain the current rate of production, said Zurich-based Barry Callebaut AG, citing an industrywide forecast. How to satisfy global demand will be a topic discussed at the World Cocoa Conference, which starts June 9 in Amsterdam.

Sustainable Farming
Part of the problem is unrealized potential, said Damien Thouvenel, a cocoa trader for Sucres et Denrees SA, or Sucden, in Paris. Growers in Ivory Coast, which, combined with neighboring Ghana, is the source of 55 percent of the world’s cocoa, harvest an average of 400 kilograms (882 pounds) of beans per hectare (2.5 acres) while a farm that’s well-managed with fertilizers and pesticides can yield up to 1.5 tons per hectare, Thouvenel said.

To address this, 12 of the world’s largest chocolate and cocoa companies, including Barry Callebaut, Ferrero SPA, Hershey Co., Mondelez International Inc., Mars Inc., Cargill Inc. and Nestle SA, signed an agreement with the Ivorian government in Abidjan on May 20 to “accelerate actions to make cocoa farming in the country sustainable,” according to a statement on the website of the World Cocoa Foundation, which will coordinate strategy.

Eoin Treacy's view -

The life cycle of a cocoa tree means that new supply is difficult to bring on line quickly. Additional measures such as modern farming methods including fertilisers and pesticides are required to boost yields over the next few years. Both London and New York traded Cocoa are in backwardation and both exhibit consistent medium-term uptrends suggesting demand dominance.

In absolute terms prices are still well below the highs reacted in 2010 which means they could rise further before demand destruction becomes a factor. A break in the progression of higher reaction lows currently near £1790 and $2850 respectively would be required to question medium-term uptrend consistency.



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May 29 2014

Commentary by Eoin Treacy

One-Third of People Worldwide Are Obese or Overweight in Study

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

“Since 1980, no country has made significant progress in reducing the rates of people being overweight or obese,” Christopher Murray, the study author, said in an e-mail.

“Obesity is now a major public health epidemic in both the developed and the developing world.”

Obesity can raise the risk of diabetes, osteoarthritis, heart disease and cancer, among other health-threatening conditions, according to the U.S. Centers for Disease Control and Prevention. Being overweight was estimated to have caused 3.4 million deaths worldwide, said Murray, director of the Institute for Health Metrics and Evaluation at the University of Washington in Seattle.

“Countries need to be looking at how they communicate effectively both what people eat and how much they should be eating,” Murray said. “Because what we’ve been doing up until now isn’t working. Strategies to tackle obesity need to address both physical activity, total caloric intake and the different foods we eat.”

Eoin Treacy's view -

At a playdate for our daughters last weekend, one of the other parents recounted a story how her 6-year old daughter had learned a naughty work that sounded like duck. The little girl came back the next day and said she had learned another dirty word that started with ‘f’. She told her mother it wasn’t fart but before uttering the newly learned taboo, she furtively looked around to make sure no one else could hear and whispered the word ‘fat’.

Schools are spending a great deal of time trying to teach children about the virtues of eating well and staying active. The above review of chocolate companies illustrates how powerful an addiction a “sweet tooth” can be and the war against obesity remains an uphill struggle which is gaining importance as the cost of treating obesity related illnesses balloons. 



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May 28 2014

Commentary by Eoin Treacy

Email of the day on Crowd Money and Microsoft

“Hello, I read your book as soon as it was published and I plan on going to one of your courses in London in the fall or in 2015, in the meanwhile I practice. So, I would like an opinion on the Microsoft graph, seems like it is breaking out, so you agree? If it holds 38 / 40 dollars on monthly graph seems it will go up, I am looking at the long term graph from 1999 to today”

Eoin Treacy's view -

Thank you for this question and I look forward to welcoming you to a future venue for The Chart Seminar. Microsoft is one of the original cast of Autonomies because of its global franchise, leadership in its niche, solid balance sheet and impressive record of dividend increases. The market appears to be reacting well to the company’s change of leadership. 



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May 09 2014

Commentary by Eoin Treacy

Sprouts Farmers Market Profit Soars; 2014 Outlook Raised

This article by Tess Stynes for the Wall Street Journal may be of interest to subscribers. Here ii is in full:

Sprouts Farmers Market Inc. (SFM) said its first-quarter profit surged 86% as the specialty grocer's revenue beat expectations.

Shares rose 6.1% to $29.06 in recent after-hours trading as adjusted earnings also beat estimates and it raised its 2014 guidance.

For the year, Sprouts raised its per-share adjusted earnings estimate by a nickel and now expects 63 cents to 65 cents. The grocer also increased its projection for net sales growth by two percentage points and now expects an increase of between 18% and 20%. The company also boosted its same-store-growth estimate by 1.5 percentage point to between 8.5% and 9.5%

The competition in the organic and natural foods space has intensified, as established supermarket chains beef up their higher-end offerings and other niche players embark on expansion plans.

Phoenix-based Sprouts reported a profit of $33.7 million, or 22 cents a share, up from $15.6 million, or 14 cents a share, a year earlier. Excluding secondary offering expenses and other items, adjusted earnings rose to 23 cents from 14 cents. Analysts polled by Thomson Reuters expected per-share profit of 20 cents.

Revenue increased 26% to $722.6 million, topping the company's forecast for $720 million. Same-store sales increased 13%.

Rival Whole Foods Market Inc. (WFM) reported late Tuesday that fiscal second-quarter earnings were flat from a year ago, at $142 million, albeit revenue was up nearly 10% at $3.32 billion. The company also trimmed its annual sales and profit forecasts.

 

Eoin Treacy's view -

A lot of the steam has been squeezed out of recent IPOs regardless of sector. A number of new entries face challenges associated with growing quickly. They often absorb some of their smaller competitors in the race to seek a stock market listing. This means they are left with a number of units that do not fit cohesively with the whole. This is as true of 3D printing shares as it is of internet security and while the challenge is not as great for supermarkets, creating and inseminating a company culture remains a challenge. 



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May 08 2014

Commentary by Eoin Treacy

Nestle Challenge Grows After $5 Billion Mondelez Merger

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

For Nestle SA, life at the top of the $81 billion coffee market just got more difficult. The world’s biggest coffee maker, which derives about a fifth of its $100 billion in sales from java, faces a new number two after Mondelez International Inc. agreed to combine its coffee unit with its D.E Master Blenders 1753 BV. The new company, Jacobs Douwe Egberts, is the latest step by Master Blenders owner JAB Holding Co. to create a caffeine-fueled global powerhouse in one of the few vibrant areas of the $1 trillion food and beverage sector.

That creates headaches for Vevey, Switzerland-based Nestle, whose coffee business has slowed of late after driving revenue and margin expansion for much of the past decade. Sales growth at the unit that includes most of the coffee portfolio has halved, while the single-serve Nespresso division has lost market share to copycats in Europe and failed to make a dent in the U.S.

“Nestle now has proper competition just at a time when they’re struggling,” Jonny Forsyth, an analyst at Mintel, said in a phone interview. “They should be worried.” Nestle declined to comment on the new company.

The combination is the largest in an industry that has rapidly consolidated in the past five years, with more than 100 deals worth almost $23 billion, according to data compiled by Bloomberg. The largest of those deals was Master Blenders takeover by JAB last year.

 

Eoin Treacy's view -

In many respects coffee is a beverage consumed by the middle classes. Consumption has increased over the last decade and is likely to increase further. The consolidation of the sector suggests that related companies are well aware of this fact and they have been competing to gain the critical mass necessary for global expansion. 

Mondelez International’s partnership with D.E Master Blenders can be viewed as a positive for both companies. Quite how much of a threat to Nestle it represents remains open to question. After all, it might be competitive but the sector remains on a strong growth trajectory. 

 

 



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May 06 2014

Commentary by Eoin Treacy

Bayer to Buy Merck Consumer-Health Unit for $14.2 Billion

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

Buying the Merck unit adds the allergy medicine Claritin and Coppertone sunblock to a Bayer portfolio anchored by the iconic pain pill aspirin. Bayer, based in Leverkusen, Germany, had 3.9 billion euros ($5.4 billion) in sales of non- prescription medicines last year, accounting for about 9.7 percent of the drug and chemical conglomerate’s revenue.

“We are strong in the over-the-counter business with Bayer aspirin and other products, so this was a great opportunity for us to strengthen the business and truly become a global leader,” Chief Executive Officer Marijn Dekkers said in an interview with Bloomberg Television.

Bayer ranks second in over-the-counter drugs by sales, behind Johnson & Johnson, according to a ranking compiled by the German company. After the Bayer-Merck transaction closes and Glaxo and Novartis form their venture, that venture will be the largest, followed by Bayer and then J&J, according to Bayer.

Eoin Treacy's view -

The pace of M&A activity in the healthcare sector continues to increase. While an argument continues to run in the bond markets over when interest rates will begin to rise and what effect that will have on borrowing costs, corporations are clearly voting with their wallets. They appear more willing to pay reasonably high prices with cheap credit rather than wait for the possibility of lower prices but perhaps more expensive funding.

The consumer and large cap pharmaceuticals sector had been mostly rangebound over the last year but as the wider market has ranged, these sectors have moved to positions of outperformance.

 



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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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May 02 2014

Commentary by Eoin Treacy

Bitter Taste of Cadbury Guides U.K. Stance on Pfizer-AstraZeneca

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

Even after Pfizer’s 63.1 billion-pound ($106.5 billion) sweetened offer for AstraZeneca was rejected, the government said it was pressing Pfizer for assurances on jobs and the U.K.’s place as a center for the life-sciences industry. The government will carefully weigh Pfizer’s proposals to see “whether they offer sufficient protection of our priorities,” Cameron’s office said today.

Eoin Treacy's view -

The fact that Astra Zeneca shares held their gain following the refusal of Pfizer’s offer suggests investors believe the acquisition will eventually be successful. Europe is proving a fertile hunting ground for well-capitalised US companies in search of acquisitions. GE’s attempt to acquire Alstom’s core power plant unit represents another such example. Considering the relative difference in valuations between the two continents, this trend is likely to continue.  



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April 29 2014

Commentary by Eoin Treacy

Review of European oil majors

Short Term Oil Market Outlook - Thanks to a subscriber for this informative report from DNB which may be of interest to subscribers. Here is a section: 

The geopolitical price premium started to blow out as the market started fearing shut out oil from Russia related to the Ukraine crisis. What if Russian troops really enter the eastern parts of Ukraine and the western powers are forced to impose much stricter sanctions towards Russia. Will oil be part of any sanctions from the western powers? Will Russia be able/willing to use oil as a weapon to retaliate stricter western sanctions?

These mentioned worries have led to financial players adding to their net long oil holdings in the Brent market since the start of April. The buying pressure has come both from adding new long positions but also from squaring short positions as can be seen in the graph below. Money Managers have rarely held fewer short positions in Brent futures and also rarely held more long positions. This close to record net length in Brent futures held by financial players always represent a downside risk for oil prices in the short term. During the last 15 months we have had two major sell-offs of net long positions by these kinds of players. We had one last year from mid-February that lasted into April which chopped 18 $/b off the Brent price and we had one in September-November last year that shaved 10 $/b off the Brent price. As we are again close to record net length held by these players this is a large bearish mark in our score card for the short term (reverse indicator). The longer the net length held by Money Managers the larger the short term downside risk.

 

Eoin Treacy's view -

A great deal of attention is currently centred on political tensions between Russia and Europe/USA. However, despite the leveraging up of long positions Brent Crude Oil prices have been reasonably static; ranging between $105 and $112 since at least November. 

 



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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 25 2014

Commentary by Eoin Treacy

Corporate America From GE to Apple Puts $2 Trillion Cash to Work

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

“Corporations are flush with cash and are beginning to pick up M&A activity as well as share buybacks and dividend increases,” said Eric Teal, who helps oversee $3.5 billion as chief investment officer of First Citizens BancShares Inc. in Raleigh, North Carolina. “These activities will continue.”

The cash pile reached $2.02 trillion in the latest quarterly filings of 2,300 non-financial companies in the Russell 3000 Index, according to the data compiled by Bloomberg as of April 21. The total rose about 13 percent from a year earlier in each of the two latest quarters, the fastest six- month gain since mid-2011. For comparison, Russia’s annual gross domestic product was about $2.01 trillion last year.

 

Eoin Treacy's view -

The USA is the only country where taxation becomes a topic of conversation at The Chart Seminar not least because of the significant implications of realising paper profits on one’s tax liability. Companies have the same concerns, which is part of the reason they are so slow to repatriate profits. 

Against this background Europe is still recovering from a low base, perceptions of further upside potential are improving and valuations are reasonably attractive; particularly on a relative basis. The potential for additional merger and acquisition activity could act as a tailwind for the wider European markets. 

 

 



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April 17 2014

Commentary by Eoin Treacy

Email of the day on the health of the global middle class

“Does the following analysis in the FT raise questions about a central plank our your argument in favour of a long term secular bull market in Autonomies?” 

Eoin Treacy's view -

Thank you for this question which others may also have an interest in. Here is a section:

In an interview, Kaushik Basu, the World Bank’s chief economist, warned that many of those people who had emerged from poverty in recent years remained “very vulnerable” to slipping back. He also said the world economy faced risks, including the possibility that China’s growth could slow even more than it has already, something that would have big repercussions for the developing world.

Even if that risk did not materialise, Mr Basu said, current growth would not be enough to return to the sort of poverty reduction seen in recent decades.

To make up for that, he said, “governments need to do more, much more, in terms of structural reforms in developing countries”.



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April 17 2014

Commentary by Eoin Treacy

Mining Equity Outlook Q2/14 - Seasonality Buy in June Then Sell in September?

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

BMO Research expects 42% of the 136 stocks in its mining coverage universe to generate free cash flow in 2014E. In 2015E, the percentage is expected to increase to 56% of the entire stock coverage.

BMO Research recommendations tend to reflect a preference for strong free cash flow generation at spot commodity prices.

Iron ore and steel, then aluminum and diversified miners have the strongest FCF for 2014-2015E; coal, diamonds and copper have the weakest using spot.

Price to Net Present Value
BMO Research mining stocks demonstrate a wide range of price to net present value multiples when calculated using a 10% discount rate and spot commodity prices. A number of companies trade at high multiples due to high debt or low project value while others trade at lower multiples reflecting political or execution risk.

Steel, iron ore, diamonds and copper stocks miners have the most attractive valuations using spot prices.

Price to Earnings
BMO Research estimates for 2014E price to earnings at spot prices display a wide range of results. In general, most of the diversified, copper, iron ore, and steel producers tend to cluster around 10-15x EPS, while precious metal producers average around 25-35x EPS.

At spot prices, many coal, uranium, and aluminum producers would not be expected to report meaningful earnings

Enterprise Value to EBITDA
Enterprise Value to EBITDA results appear much more consistent than EPS measures with the distribution of company multiples clustered closer to sector averages.

Diversifieds, iron ore, steel, diamond and larger copper companies tend to trade around 5x 2014E EBITDA at spot prices.

Copper developers, senior gold producers, and silver companies are generally observed at 5-10x EBITDA with relatively few exceptions. Uranium, coal, and PGM stocks appear the most expensive.

Eoin Treacy's view -

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

Free cash flow has been the buzz word in the mining sector over the last couple of years as companies have been forced by declining commodity prices to cut back on aggressive expansion programs. The net result has been a tighter supply environment in the industrial metal complex. Nickel has broken out of a six-month base while both zinc and lead are firming from previous areas of support and look primed for additional upside.



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April 16 2014

Commentary by Eoin Treacy

Email of the day on Campari

Hello, could Campari quoted on the Italian stock exchange be considered a potential autonomy?

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. Campari is globally diversified, has a recognisable brand and has a solid record of paying a modest dividend. However we could not describe Campari as a leader when compared to the titans of the international beverages sector. It is for this reason I did not include Campari in the original list of Autonomies. 

 

 



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April 08 2014

Commentary by Eoin Treacy

Big data: The nex frontier for innovation, competition, and productivity

Thanks to a subscriber for this report from McKinsey which is just as relevant today as when it was first issued in 2011, when we first posted it. Here is a section:

Health care is a large and important segment of the US economy that faces tremendous productivity challenges. It has multiple and varied stakeholders, including the pharmaceutical and medical products industries, providers, payors, and patients. Each of these has different interests and business incentives while still being closely intertwined. Each generates pools of data, but they have typically remained unconnected from each other. A significant portion of clinical data is not yet digitized. There is a substantial opportunity to create value if these pools of data can be digitized, combined, and used effectively. However, the incentives to leverage big data in this sector are often out of alignment, offering an instructive case on the sector-wide interventions that can be necessary to capture value.

The public sector is another large part of the global economy facing tremendous pressure to improve its productivity. Governments have access to large pools of digital data but, in general, have hardly begun to take advantage of the powerful ways in which they could use this information to improve performance and transparency. We chose to study the administrative parts of government. This is a domain where there is a great deal of data, which gives us the opportunity to draw analogies with processes in other knowledge worker industries such as claims processing in insurance.

In contrast to the first two domains, retail is a sector in which some players have been using big data for some time for segmenting customers and managing supply chains. Nevertheless, there is still tremendous upside potential across the industry for individual players to expand and improve their use of big data, particularly given the increasing ease with which they can collect information on their consumers, suppliers, and inventories.

 

Eoin Treacy's view -

At the Global Strategy Session last week a discussion evolved about the disruptive impact the third industrial revolution would have on employment trends. People are understandably worried about the pace of mechanisation and how quickly humans are being replaced by robots. 

One delegate highlighted how 4000 people had previously been employed in Bolton by BAE Systems whereas now the workforce is a fraction of that number and there is little hope of these employees ever finding work in the area again. 

Another delegate highlighted the fact that there are more than 4 million jobs open in the big data sector, between the USA and Europe, but that there is a shortage of people with the requisite skills to fill them. 

Clearly the message is that the technical skills needed to thrive in the modern economy have changed beyond recognition in the life span of many workers. As we live longer, the challenge will be to find jobs we can be happy in and which encourage us toward continuous learning. Anyone who fails to embrace this reality will be more likely to have to depend on a state ill prepared for mass unemployment. 

 



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April 07 2014

Commentary by Eoin Treacy

The Chart Seminar and Global Strategy Session review

Eoin Treacy's view -

It was a pleasure, as always, to spend time discussing the outlook for the markets in a convivial environment where experienced delegates shared their considerable knowledge of various sectors. Perhaps the most important question discussed was whether we are in the latter stages of a cyclical bull or the early stages of a secular bull? 
 

 



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April 07 2014

Commentary by Eoin Treacy

Why Google Is Issuing a New Kind of Toothless Stock

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

A new "C" class of Google shares will begin trading on Thursday under the familiar GOOG ticker. This stock gives its owners zero votes at the annual shareholder meeting. That sounds bad. In practice, however, the nonvoting shares won't be so different from holders of Google's "A" class shares, which get one vote apiece. Both groups are dominated by holders of the only shares that matter: class "B" shares with 10 votes each. Most of those are owned by Google's founders, Sergey Brin and Larry Page.

Page and Brin aren't satisfied with the 55.7 percent majority of votes they already control today. As Google issues less-potent "A" shares to compensate employees or to finance acquisitions, the company's founders have seen their voting power diluted. Now that the company is issuing the neutered "C" shares to ensure Page and Brin retain control far into the future, they're free to create as many shares as they like without giving up an iota of their grip on Google's direction.

 

Eoin Treacy's view -

Google remains a core constituent of the Autonomies not least because of its global reach and dominance of the online marketing sector. However, the creation of an additional non-voting share class suggests a lack of respect for minority shareholder opinions. On the other hand, the performance of Google's shares is likely to continue to reflect the opinions of those shareholders. The share continues to extend its decline back towards the 200-day MA. 

Due to this restructuring of the equity, the new non-voting C Class of shares are listed under the GOOG ticker while the back history from the 2004 IPO is now contained in the new GOOGL ticker. 

 



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March 24 2014

Commentary by Eoin Treacy

China Fines Nu Skin $540,000 for Illegal Sales and Claims

This article by Ricardo Lopez for The Los Angeles Times may be of interest to subscribers. Here is a section:  

The regulatory action ends a probe that began in January, when China's State Administration for Industry & Commerce began investigating the company following media reports.

"We continue to believe in the potential of China's large and growing market," said Dan Chard, Nu Skin's president of global sales and operations, in a statement. "We remain committed to working cooperatively with the Chinese government to ensure the healthy, long-term growth of our business."

Nu Skin was fined $524,00 for illegally conducting direct sales. The company was fined an additional $16,000 for product claims that Chinese regulators said did not have enough evidence. Six Nu Skin sales employees were fined a combined $241,000 for "unauthorized promotional activities."

Eoin Treacy's view -

Over the last few years, companies employing a direct selling strategy have come under scrutiny from both short sellers and regulatory authorities. Peer group and door-to-door selling strategies are employed because they succeed in tapping into retail markets without having to spend fortunes on leases and shop fittings. Unfortunately, this leaves companies open to the accusation that they are engaged in pyramid selling which has had outsized effects on their shares.

 



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March 10 2014

Commentary by Eoin Treacy

Ten countries scour sea for Malaysia jet lost in 'unprecedented mystery'

This article by Eveline Danubrata and Nyugen Phoung Linh for Reuters may be of interest to subscribers. Here is a section: 

The disappearance of a Malaysian airliner about an hour into a flight to Beijing is an "unprecedented mystery", the civil aviation chief said on Monday, as a massive air and sea search now in its third day failed to find any trace of the plane or 239 people on board.

Dozens of ships and aircraft from 10 countries scoured the seas around Malaysia and south of Vietnam as questions mounted over possible security lapses and whether a bomb or hijacking attempt could have brought down the Boeing 777-200ER which took off from the Malaysian capital, Kuala Lumpur.

The area of the search would be widened from Tuesday, Azharuddin Abdul Rahman, the head of Malaysia's Civil Aviation Authority, told reporters.

 

Eoin Treacy's view -

2014 has been an active year so far in terms of news flow that has the capacity to move markets. While the disappearance of flight MH370 is undoubtedly a tragedy its impact has had little effect on airline shares with the obvious exception of Malaysian Airlines. 

From a broad perspective, the US and European sectors went through a process of rationalisation following the credit crisis, where a price war gave way to mergers and increasing margins. Asian carriers have not taken part in this process because the sector remains largely fragmented along national lines. Malaysian Airways has been among a group of serial laggards and has lost more than 90% of its value since 2007. It remains in a consistent five year downtrend but steadied today near MYR0.20  



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March 10 2014

Commentary by Eoin Treacy

hiquita to Acquire Fyffes Creating Biggest Banana Supplier

This article by Paul Jarvis and Donal Griffin for Bloomberg may be of interest to subscribers. Here is a section: 

Chiquita Brands International Inc., owner of the namesake banana label, agreed to buy Ireland’s Fyffes Plc to create the world’s biggest supplier of the fruit for about 407 million euros ($565 million).

The combined company will be called ChiquitaFyffes Plc, Chiquita and Fyffes said today in a joint statement. The all- stock offer represents a bid premium of 35 percent, data compiled by Bloomberg show. Shares of Chiquita and Fyffes rose.

The deal brings together two of the world’s oldest fruit importers, who between them have operations spanning the Americas, Europe and Asia. Chiquita Chief Executive Officer Ed Lonergan, who will become chairman of ChiquitaFyffes, has sought to reshape his Charlotte, North Carolina-based company as a high-volume seller of bananas and salads while winding down and abandoning other product lines.

“The deal is logical and will be a good fit going forward for both parties,” said David Holohan, an analyst at Merrion Capital in Dublin. “This is an excellent result for Fyffes.”

Investors will get 0.1567 of a share in ChiquitaFyffes for each Fyffes share, while Chiquita holders will receive one share in the new company for each one of the existing company.

Fyffes Chairman David McCann will become CEO of the combined company, which will be domiciled in Ireland, trade in New York and have annual sales of about $4.6 billion. The transaction is expected to close this year, pending approval by shareholders and the Irish High Court.

 

Eoin Treacy's view -

I originally ruled Fyffes out of our list of Autonomies because it was not liquid enough to be of interest to most institutional investors. However, other than size both Chiquita and Fyffes are worthy of consideration based on their other attributes which are that they dominate their niche as major fruit importers and the sector has a high barrier to entry. As such it represents an oligarchy. 
 



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March 06 2014

Commentary by Eoin Treacy

Autonomies

Eoin Treacy's view -

A number of subscribers have requested that we add a section to the Chart Library devoted to the companies we regard as Autonomies. Sarah completed this task today and you will now find the list in the International Equities section third down from the top of the left column.

We began to focus on large successful multinational corporations in 2010 as the global economy was led out of the credit crisis by Asia. In order to compile a list of suitable shares we looked for those that are truly global and defined that as having at least 50% of their revenues originating outside their home country. 

We also looked for those that dominated their respective niches. While not intentionally seeking oligarchies, the concentration that occurs as part of a capitalist system means that the Autonomies represent a number of oligarchies where a small number of companies dominate their entire markets. 

We did not make dividend growth a defining characteristic for the list because a number of high growth companies do not pay dividends. However, there is substantial cross pollination between the Autonomies and S&P’s Dividend Aristocrats because globally oriented companies with sound balance sheets generally have solid records of dividend growth. 

In my book, Crowd Money, I used the Autonomies as an example of a developing investment theme and depicted long-term charts so that base formation completion was abundantly clear. This helped to stress the point that ranges are explosions waiting to happen and that long-term bases give rise to impressive uptrends. 

You can now scan through the constituents of the Autonomies, using the View All Charts function, in the Chart Library. What is clearly evident is that commonality which was such a feature of the list for the first two years has broken down. Consumer focused sectors have spent much of the last 18 months ranging while industrially oriented sectors broke out of their bases later and continue to extend their uptrends.

 



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February 28 2014

Commentary by Eoin Treacy

Email of the day on European shares with low valuations

“I was wondering if you agree that Porsche looks interesting isin DE000PAH0038”

Eoin Treacy's view -

Thank you for this question which others may also have an interest in. Porsche is representative of a group of companies within Europe with very low valuations. In fact, following a scan of the Europe STOXX 600, Porsche has the lowest combination of historic P/E of forward P/E in the region at 2.86 and 6.36 respectively and the share yields 2.64%. 



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February 24 2014

Commentary by Eoin Treacy

Small investors can make gains by going against the grain - so is now the time to pick up Rolls-Royce shares?

This article by Ian Lyall for the Daily Mail quotes Crowd Money but also makes some interesting points on Rolls Royce. Here is a section: 

It will be interesting to see whether the Dreman screens pick up Rolls-Royce, which has gone from stock market hero to zero in the space of little over a week. 

The share price has tumbled over 16 per cent since February 13, when it said 2014 would see a ‘pause’ in revenue and profit growth in 2014. The warning wiped £3.5billion off the value of the jet engine maker. 

The movement out of the stock was pronounced and supported by heavy trading volumes up until Wednesday when the buyers returned. The analysts who cover Rolls reckon the sell-off has been overdone. 

The Broker Forecasts site monitors stock recommendations and price targets attached to shares. On the figures it has collated the average valuation for Rolls is 1,287p a share, or around 28 per cent above the current market price.

If that consensus target is correct then the investors who sold have pushed the price too far down, providing a buying opportunity. Most analysts (67 per cent) are positive on Rolls, according to Broker Forecasts. So Rolls looks, on the face of it, to be ‘oversold’. 

But there are several reasons why this may not be a slam dunk ‘buy’. It is worth remembering analysts are sometimes slow to recognise the magnitude of problems at companies they are paid to follow. It should also be noted the profit warning is just one reason sentiment has turned. 

There are also concerns about a Serious Fraud Office investigation into bribery allegations, potential accounting issues and fears Rolls might make an expensive and rash acquisition.

 

Eoin Treacy's view -

Rolls Royce was among the original cast of Autonomies because of its globally diversified revenues, dominance (with GE) of the international market for turbines, strong balance sheet and reasonably reliable record of increasing dividends. However, while those attractive characteristics helped propel the share from a 2008 low near 209p to a January peak of 1294p future prospects will be judged on its ability to further enhance shareholder value. 

 

 



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February 18 2014

Commentary by Eoin Treacy

Email of the day on a potential Autonomy:

“I was wondering if you would consider Luxottica Spa as a possible autonomy? It is a leader in Asia, I believe and it has become a dominant player, could you take a look at this? Thank you in advance”

Eoin Treacy's view -

Thank you for this email which others may also have an interest in. We define Autonomies as companies that are truly global in nature, dominate their respective niches and have generally strong balance sheets.

 



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February 14 2014

Commentary by Eoin Treacy

Eurozone bases

Eoin Treacy's view -

While in Singapore last Sunday I was nursing a sore throat following The Chart Seminar and Global Strategy sessions in Sydney, and decided to spend some time clicking through the constituents of the Euro Stoxx Index using a long-term time horizon in order to identify base formations. The reason
I chose the Euro Stoxx Index is because it has lagged the wider Europe Stoxx Index over the last two years not least because of the effect the Eurozone crisis has had on its respective stock markets. 

The Euro Stoxx Index has 292 constituents and broke out to new 5-year highs in October. It found support in the region of the 2011 peaks in December and late January and a sustained move below 290 would be required to question medium-term potential for additional upside. 

Following the click through, I winnowed the list down to 110 shares with promising characteristics. From past experience that is usually a reasonably good number to identify commonality. 
 

 



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January 31 2014

Commentary by Eoin Treacy

Amazon Traders Trapped in Bullish Option Bets as Stock Sinks

This article by Sofia Horta e Costa and Trista Kelley for Bloomberg may be of interest to subscribers. Here is a section: 

Options traders who piled into bullish bets on Amazon.com Inc. this week stand to lose their money today after profit at the world¡¯s largest Web retailer missed estimates by 26 percent.

The volume of calls rose to 113,681 contracts yesterday, the most since October and almost double the trading in puts, data compiled by Bloomberg show. The eight most-traded options were bullish. Calls giving the right to buy the shares at $430 changed hands the most, more than tripling their price to $6.20.

The contracts, which expire today, had an exercise price 12 percent above the Jan. 29 close. Amazon shares slumped 7.4 percent to $373.08 at 9:55 a.m. in New York today.

“Everybody got it wrong, seriously wrong,¡± said Jiban Nath, an equity-derivatives strategist at Solo Capital Partners LLP in London. “A lot of people were going by what the analysts say. Amazon all these years had been doing amazingly well. The analysts all got the direction wrong and no one saw it coming.”

Eoin Treacy's view -

A topic we cover at length at The Chart Seminar is myopia. The focus of market participants is becoming increasingly short term, and HFT takes this process to the ridiculous. The problem with this type of market view is that it is all too easy to miss what is happening beyond the narrow scope of intraday trading.

Amazon represents a very telling example of myopia at work. In a bull market investors become conditioned to buy pullbacks because that strategy works. As demand becomes increasingly dominant, the size of reactions often gets smaller because those seeking to buy wait less time to initiate positions. That strategy is self reinforcing for as long as it lasts.



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January 31 2014

Commentary by Eoin Treacy

MasterCard Net Income Misses Estimates as Expenses Increase

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

Operating expenses, excluding a one-time charge related to settling merchant litigation, climbed 11 percent to $1.1 billion from $966 million a year earlier, according to the statement. MasterCard spent more on rebates and incentives tied to signing deals with card issuers, the firm said.

“The notorious lumpy rebate line was even higher than expected," said Jason Kupferberg, an analyst at Jefferies Group LLC in a note. "Our initial look shows no reason for significant concern. We view the pullback as an especially good buying opportunity."

Eoin Treacy's view -

Mastercard and other credit card companies are among the primary beneficiaries of the growth in the global middle class where instant gratification plays an important role is fuelling demand for goods and services. The growth of the online retailing sector, also on a global basis, represents an additional revenue stream which is likely to increase for the foreseeable future.

With the company increasing its dividend and buying back $3.5 billion in shares investors could be forgiven for thinking that all is as it should be since efforts are underway to support the price as valuations contract from a pricey P/E of 24.



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January 30 2014

Commentary by Eoin Treacy

Consistency and the Autonomies

January 30 2014

Commentary by Eoin Treacy

Sudden HSBC, Diageo Swings Spur Speculation of Trading Error

This article by Inyoung Hwang, Howard Mustoe and Sarah Jones for Bloomberg may be of interest to subscribers. Here is a section:

The moves in HSBC and Diageo were large enough to trigger trading halts designed to prevent excessive volatility. U.S. exchanges introduced circuit breakers in June 2010 on individual securities that temporarily pause stocks across markets when shares move 10 percent in five minutes. The rule, since modified, was implemented in response to the May 2010 crash that erased $862 billion in equity values in 20 minutes.

An LSE spokesperson declined to comment on the moves in HSBC and Diageo shares. Donal McCarthy, a spokesman for HSBC in London, and Diageo’s Camille Dor declined to comment.

“Both cases bear the traditional hallmarks of a ‘fat finger’, as the stock prices quickly corrected themselves,” Saul Taylor, vice president and equity trader at ConvergEx Ltd. In London, said in an interview today. “It is highly likely that a trader, with direct-market access to the LSE, released large orders at market, in error.”

Eoin Treacy's view -

Automated trading systems tend to rely on volatility metrics to size positions and to ensure they do not open themselves up to unacceptable risk. However when volatility spikes, particularly after a reasonably quiet period, the risk of one or more of these types of operation causing erratic trading increases. Diageo and HSBC represent just such examples today.

Following such events the question always arises as to whether the intraday data should be considered relevant or ignored. Generally speaking while investors have become somewhat conditioned by occasional wild intraday swings, the net effect is that these events are not positive for sentiment.



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January 29 2014

Commentary by Eoin Treacy

GE CEO Immelt Urges More Private Investment in Africa Health Care

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

Health-care expenditure in Kenya grew faster than the overall economy in the first decade of this century, driven mainly by private sources, according to Open Capital Advisors, a Nairobi-based financial-services company. Government spending on health care accounts for only one-third of total health expenditure, down from 45 percent in 2000, according to its website. Private spending on health care is expected to total as much as $3.1 billion by 2025, Open Capital said in 2012.

Kenya's government last week approved a plan to lease equipment for public hospitals and improve infrastructure under a public-private partnership model. The project will provide critical care services in a country that has only 64 public intensive-care unit beds, compared with a requirement of 670 beds, the cabinet said in a statement on Jan. 23.

 

Eoin Treacy's view -

Africa represents where the majority of the world¡¯s population growth is due to emanate from in the coming decades. In tandem with the fact that governance is improving across the continent, the development of the healthcare industry represents a significant growth opportunity. As one of the world¡¯s largest healthcare equipment manufacturers, GE is eager to build a footprint in the one of the world¡¯s few remaining regions where access to even basic services is limited. 

 



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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. http://www.nrel.gov/ncpv/images/efficiency_chart.jpg 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 21 2014

Commentary by Eoin Treacy

AB InBev to Pay $5.8 Billion for Korean Oriental Brewery

This article by Frank Longid and Clementine Fletcher for Bloomberg may be of interest to subscribers. Here is a section: 

“On the surface, the deal seems odd as they’re paying more than three times for Oriental than what they sold the business for five years ago," said Pablo Zuanic, an analyst at Liberum Capital. “However, this signals to us they see growth in South Korea -- not so much in terms of market growth, but to improve share and drive the penetration of Budweiser and Corona.”

Korea’s beer market has grown about 2 percent a year from 2009 through 2012, the companies said. AB InBev plans to further develop Cass as well as throw its marketing support behind brands including Budweiser, Corona and Hoegaarden in the market.

Eoin Treacy's view -

It must be pretty galling for AB InBev to pay such a hefty price for an asset they sold less than a decade ago for a fraction of the price. What this story and last week’s announcement that Santory is attempting to purchase Beam Inc highlight how reliant the global alcoholic drinks market is on brand recognition. As a result companies tend to pay for growth.

This trend suggests the consolidation of brands within the drinks sector remains a significant theme. Brown Forman, an S&P500 Dividend Aristocrat yielding 1.75%, surged on news of the bid for Beam probably on the assumption that it is next in line for an offer.

 



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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 sarah@ftmoney.com 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 16 2014

Commentary by David Fuller

Emerging Markets Dodge Fed Tapering in Best Bond-Sale Start

Here is the opening from this informative report by Bloomberg:

Borrowers in developing nations are flooding markets with a record amount of bonds before reductions to Federal Reserve monetary stimulus drive up funding costs.

International sales in emerging markets are up 21 percent to $55 billion this month, the busiest start to a year since Bloomberg began tracking the data in 1999. Poland is marketing $2 billion of 2024 bonds today after the European Union’s largest eastern economy raised 2 billion euros ($2.7 billion) last week. Petroleo Brasileiro SA (PETR4)Latin America’s largest oil producer, has sold the most debt among 108 issuers with a $5.1 billion offering of euro- and pound-denominated securities.

Companies and governments in developing countries are seeking to pre-empt any rise in borrowing costs that could result from the next round of tapering by the Fed, which decided in December to trim monthly bond purchases by $10 billion to $75 billion. U.S. policy makers next meet Jan. 28-29.

“Issuers want to tap the market now as they fear that Fed tapering and a rise in U.S. Treasury yields will lift their own funding costs,” Regis Chatellier, a London-based director of emerging-markets credit strategy at Societe Generale SA, said by e-mail yesterday. “They simply don’t want to take that risk. So I expect new issuance to remain strong, for now.”

David Fuller's view -

The difficult credit crisis recession has been very hard on most countries but they have had several years and counting in which to refinance debt at lower levels.  With US tapering imminent, additional borrowing at lower levels is a sensible policy because no advantageous window in finance stays open indefinitely.

An important question for investors: who are the major beneficiaries of these lower borrowing costs?

 



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January 16 2014

Commentary by Eoin Treacy

Nu Skin Plunges After China Says It Will Probe Its Operations

This article by Lauren Coleman-Lochner and Rachel Butt for Bloomberg may be of interest to subscribers. Here is a section: 

Scott Van Winkle, an analyst at Canaccord Genuity Inc., today cut his recommendation on the stock to hold, from buy, saying the Chinese market is large enough to significantly affect Nu Skin's results and valuation.

Network marketers such as Nu Skin have always been questioned, "causing outsized share price movements," Olivia Tong, an analyst at Bank of America Corp., wrote in a note yesterday. "There does not seem to be tangible evidence to validate negative claims targeted at the company thus far".

 

Eoin Treacy's view -

Nu Skin Enterprises derives almost 80% of its revenue from Asia where demand for its products is high and door to door selling meets with less social resistance. Given the incentive programs and networking strategies employed by such companies, there is a fine line between what might be construed as pyramid selling and the momentum driven sales process as it is currently structured.  



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January 02 2014

Commentary by Eoin Treacy

Email of the day on robotics, Crowd Money and The Chart Seminar

As Robotics is a theme mentioned with some frequency on FT Money I wanted to enquire whether you are aware of a relatively new Robotics ETF, with the Nasdaq ticker ROBO, and which was listed on 22 October 2013. I would appreciate if ROBO can be added to the chart library, as I believe it is the first purely robotics ETF of its kind and mirrors the performance of the world's top robotics companies, from the US, Japan, Taiwan, Korea and Europe. Following is the link to the Robo-Stox website, listing the fund's holdings, its prospectus and an updated report, as well as other useful insight into the global robotics industry. http://www.robostoxetfs.com/fund-holdings.aspx  

The October report was of particular interest as it provides details of holdings by company by country. The link is: http://www.robostoxetfs.com/Data/Sites/16/docs/fp0008959_ETC-RoboStox_Semi-Annual_2013_FINAL_web.pdf  

As this is a theme of personal interest, I would appreciate David or Eoin's insight as to whether this represents a reasonable method to participate in the robotics story without taking on single-company risk, and given Nasdaq's current overextension relative to its 200 day MA, whether ROBO's more international exposure would provide some insulation should the Nasdaq correct and revert to its mean. Thank you for your service.

I have almost finished reading "Crowd Money", and even though I have been a long term FT Money subscriber since the hard-copy days of the 80's, I must admit that I am guilty of regularly committing every single costly mistake Eoin identifies as typifying mass investor psychology. Consequently I feel that the only logical next step for me is to sign up for the Chart Seminar and Global Strategy Session next month in Sydney! I will be in touch with Sarah shortly. Best wishes to you and your family for healthy and successful 2014. Kind regards.

Eoin Treacy's view -

Thank you for this informative email and I'm delighted you enjoyed Crowd Money. With only six weeks to the Sydney Chart Seminar and Global Strategy Session, I'm busy preparing the course material and greatly look forward to discussing themes such as robotics and other future focused topics with delegates. 

While some worry about the role of robotics in contributing to high unemployment figures, there is no denying that they represent a major source of productivity growth and value creation for the companies that use them. While companies that manufacture robots have considerable growth potential, the companies that make the greatest use of these machines are likely to also be some of the greatest beneficiaries of this trend in technological innovation. 

 



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December 31 2013

Commentary by Eoin Treacy

"Mini-kidney" grown from stem cells

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

Little points out that while the work is indeed promising, human trials with full-size lab-grown kidneys are not likely to be happening anytime soon. In the meantime, however, the mini-kidneys could be used to test drug candidates without exposing human test subjects to harmful side effects.

A paper on the research was recently published in the journal Nature Cell Biology.

Earlier this year, scientists at the Massachusetts General Hospital Center for Regenerative Medicine created a functioning rat kidney. In their case, however, they did so by stripping the cells from an existing kidney, then "reseeding" the resulting collagen scaffold with endothelial cells.

Additionally, a team from Italy’s Mario Negri Institute for Pharmacological Research has created kidney-like “organoids” that perform the same functions as kidneys when implanted in rats.

Eoin Treacy's view -

The pace with which medical innovation is accelerating is truly breathtaking. However, the pace of drug approvals, human trials and products making it to market takes longer than we might wish for. Therefore while it is easy to become excited about the future and the potential it holds we must remain grounded in the practicalities of whether promising therapies can make money.



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December 24 2013

Commentary by Eoin Treacy

Autonomies

Eoin Treacy's view -

I clicked through the constituents of my Autonomies Favourites section this morning to get a feel for how the sector is performing. A number of shares such as NuSkin Enterprises continue to extend their advances but are becoming increasingly susceptible to mean reversion. On the other hand, a considerable number are now either finding support in the region of their respective 200-day MAs or just breaking out to new highs. 



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December 18 2013

Commentary by Eoin Treacy

Email of the day on selecting which companies to include in the Autonomies

"Hope all is well with you and yours?

"Could you ask either David or Eoin what selection/filter process is used to include a stock in the Autonomies list?

"All the very best to you all for the forthcoming festivities.

"Many thanks"
 

 

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. We began developing the Autonomies theme as early as 2011, as we identified a confluence of factors that were giving an advantage to truly global companies. I wrote extensively on this subject in my book Crowd Money but let me summarise.  

The rise of the global middle class is a secular development and represents the greatest poverty reduction in human history not least because it is focused on the world¡¯s major population centres. The corollary is that as more people have disposable income at the end of each month, both their needs and wants evolve. Companies with the ability to tap into this tide of rising demand for just about everything are therefore in a very favourable position. 



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December 17 2013

Commentary by Eoin Treacy

Chocolate Eaters Drive Record Cocoa Output Deficit

This article by Luzi Ann Javier, Marvin G. Perez and Isis Almeida for Bloomberg may be of interest to subscribers. Here is a section: 

Global sales of chocolate confectionary will gain 2.1 percent to a record 7.3 million tons next year, after a 2 percent gain in 2013, estimates Euromonitor International Ltd. Sales in China more than doubled in the past decade, outpacing gains in Western Europe, the biggest consumer. Tighter supplies will mean higher costs for food makers including Nestle SA, Barry Callebaut AG and Lindt & Spruengli AG.

"Demand for chocolate is great" said Ashmead Pringle, the president of Atlanta-based GreenHaven Commodity Services, which oversees about $340 million. "A lot of the world population is moving to the middle class and will have more money to spend, in particular in emerging markets and Asia"

 

Eoin Treacy's view -

Cocoa exhibits one of the firmer chart patterns within the commodity complex and has been supported by disappointing crops in West Africa as well as continued growth in demand. Since the life cycle of the cocoa tree involves five years from sapling to pod production, increasing supply represents a medium-term challenge. 
 

 



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December 16 2013

Commentary by Eoin Treacy

On Target on diabetes

Thanks to Martin Spring for this edition of his ever topical report. Here is a section on diabetes:

 

Unless the condition is controlled, the consequences are very unpleasant. Complications include problems with the eyes, kidneys, cardio-vascular system and the nervous system. The mortality rate for sufferers under 60 averages 28 per cent in Europe, 38 per cent in North America and the Caribbean.

The root cause is well known. Most people who develop the more common form of diabetes, type 2, are eating more calories than their bodies are using.

According to the US Centers for Disease Control, diet and exercise changes can more than halve the risk of pre-diabetic conditions such as elevated blood sugar content developing into diabetes type 2.

Diabetes cannot be cured, but it can be controlled through weight loss, low-carb diets, exercise, and a range of medical treatments.

The most important drug is synthetic insulin, which is injected into the bloodstream to compensate for the shortage of the pancreatic hormone.

Eoin Treacy's view -

Diabetes is a global epidemic, particularly for people whose ancestors subsisted on a scarcity of calories. This is particularly poignant for India and China where rising incomes are fuelling growth in snack foods with high sugar content. Since the disease is a chronic condition rather than something that can be cured, it can also be considered a growth industry, regardless of how personally distasteful that way of viewing the world might be. 



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December 11 2013

Commentary by David Fuller

Bond Mutual Funds Headed for Record Withdrawals This Year

Here is the opening for this informative article from Bloomberg:

Bond mutual funds are headed for record redemptions in 2013 amid signals the U.S. Federal Reserve will reduce its stimulus.

Investors have removed $70.7 billion so far this year from bond funds, TrimTabs Investment Research said today in an e-mailed statement. Unless the trend reverses, the redemptions would surpass a record $62.5 billion that investors removed from bond mutual funds in 1994, according to TrimTabs.

Investors have been pulling money from bond funds since May, when Federal Reserve Chairman Ben S. Bernanke first hinted that the central bank might begin scaling back its unprecedented asset purchases. The yield on the 10-year Treasury note is 2.8 percent, up from 1.93 percent on May 21, the day before Bernanke spoke about the possibility of tapering its stimulus.

“The ‘taper talk’ that started in May proved to be a huge inflection point for the credit markets,” David Santschi, chief executive officer of TrimTabs, said in today’s statement, which didn’t provide details of redemptions across various categories within fixed income.

Bill Gross’s Pimco Total Return Bond Fund (PTTRX), which lost its title as the world’s largest mutual fund in October, had its seventh straight month of withdrawals in November as investors continued to flee bonds. The $244 billion fund suffered $36.9 billion in estimated redemptions in the first 11 months of the year, according to Chicago-based Morningstar Inc.

David Fuller's view -

Eoin and I have been mentioning the new risks in holding bond funds, not least the fact that they offer no yield to maturity for investors, now that the bull market in terms of a secular decline in yields is over.



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December 09 2013

Commentary by David Fuller

Email of the day On when to buy individual Autonomies

“In view of your comment about buying autonomies low.

“In practice it's so difficult to interpret what is causing them to be low! Take a look at Experian (EXPN on LSE).  Do I say "no this has clearly lost its upward trend consistency, keep away" or "here is a unique opportunity to buy this autonomy low"? 

The recent downdraught was caused by a sell rating from Goldman Sachs, fearing lower growth.  Other analysts have buy ratings.  What to do?

“In the past I have been guilty of always buying into good trends, which then topped out and went down. I am a little afraid to get into the opposite habit now of ignoring the good trends because the shares are too extended, and just buying losers.”

David Fuller's view -

Thank you for an interesting question of general interest.  You will appreciate that your questions are more challenging after a bull market of five year’s duration, albeit from a very low level.  In other words, the risks are higher today, any way you chose to measure them.



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December 05 2013

Commentary by David Fuller

Cutting Research on Warren Buffett

Here is the opening for this informative article from Bloomberg:

Warren Buffett isn¡¯t just a great investor. He¡¯s the best investor, an economic study has found

An index measuring returns adjusted by price fluctuations shows the billionaire chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A) has done better than every long-lived U.S. stock and mutual fund.

The ratio is also larger than all 196 U.S. mutual funds that have been around for 30 years. The median Sharpe ratio for them is 0.37.

The review of Buffett¡¯s investments concluded he has been rewarded for his use of leverage, coupled with a focus on cheap, safe, quality shares.

The study said Buffett is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap -- with low price-to-book ratios -- and are high quality, meaning they are profitable and have high payouts.

By breaking down Berkshire Hathaway¡¯s portfolio into ownership of publicly traded stocks versus wholly owned private companies, the authors also found the tradable equities performed best. That suggested to them that Buffett¡¯s returns are due more to stock selection than to the pressure he puts on companies he has stakes in to improve their management.
¡°Buffett¡¯s performance appears not to be luck, but an expression that value and quality investing can be implemented,¡± said Andrea Frazzini and David Kabiller of AQR Capital Management LLC and Lasse H. Pedersen of Copenhagen Business School. ¡°If you travel back in time and pick one stock in 1976, Berkshire would be your pick.¡±

David Fuller's view -

Informative article on Warren Buffett



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December 05 2013

Commentary by Eoin Treacy

Herbalife Audit Will Clear Borrowing for Buyback Bass Says

This article by Saijel Kishan and Leslie Patton for Bloomberg may be of interest to subscribers. Here is a section:

Once the Grand Cayman-based company completes its three- year audit in the next 60 days, it will be able to access capital markets and borrow 2.5 times earnings before interest, taxes, depreciation and amortization, he said today in a Bloomberg Television interview with Stephanie Ruhle.
     
“We’re catalyst-driven investors, and in this case the catalyst is coming in the next 60 days when they have their three-year audit done,” Bass said, adding that Herbalife is a business that generates “significant” cash flows, has no debt and is growing. Dallas-based Hayman owned about 436,000 Herbalife shares, or 0.4 percent of the stock outstanding, as of Sept. 30, according to data compiled by Bloomberg.

Herbalife has recently been under scrutiny amid allegations by hedge-fund manager Bill Ackman that the company is a pyramid scheme. While Herbalife has consistently denied Ackman’s claims, the activist investor last month said he will take his bet against the company “to the end of the earth.”

Eoin Treacy's view -

Few companies have gained such notoriety as a result of their sales strategy as Herbalife, but regardless of whether one agrees or not, there is no denying that the company makes money.



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November 28 2013

Commentary by Eoin Treacy

Denmark

Eoin Treacy's view -

 I wrote about Fedex and UPS last week in the context of companies benefitting from continued growth in ecommerce. On my morning click through of markets, I was reminded of this on seeing Denmark's outperformance and the fact that it plays host to some of the world's largest shipping and logistics companies. 

DSV has a relatively similar pattern to the KFX Index and is among the world's larger logistics companies. A break in its progression of higher reaction lows would be required to question medium-term scope for additional upside. 



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November 25 2013

Commentary by Eoin Treacy

November 18 2013

Commentary by Eoin Treacy

Email of the day (1)

on some educative infographics

November 15 2013

Commentary by David Fuller

BMW Makes Lone Shift to Carbon Fibre to Gain Auto Edge

Here is the opening to this fascinating article by Chris Reiter for Bloomberg

Bayerische Motoren Werke AG (BMW)'s bid to save its cars from potential extinction starts with hundreds of thousands of fine white strands snaking upwards in a production hall in ruralWashington.

Looped through an almost mile-long course, what looks like the world's thinnest rice noodles will be stretched, toasted and eventually scorched black to create carbon fiber -- a material thinner than human hair and yet tougher than steel.

BMW will use the sleek, black filaments for the passenger frame of the i3 electric car, which goes on sale at dealers inGermany tomorrow and around the world in the coming months. It's the first effort to mass produce a car made largely from carbon fiber and represents the biggest shift in automobile production since at least the 1980s when the first all-aluminum car frames were made.

The strategy started taking shape six years ago, as Norbert Reithofer, then the newly appointed chief executive officer, examined trends affecting the industry and concluded that increased environmental awareness would likely prompt tougher emissions regulations that could make the future of autobahn cruisers like the 5-Series sedan unsustainable.

"Looking forward to 2020, we saw threats to our business model," Chief Financial Officer Friedrich Eichiner, who was head of strategic planning at the time, said in an interview in his sparsely furnished office in BMW's landmark four-cylinder headquarters building in Munich. "We had to find a way to bring models like the 6-Series, 7-Series and X5 into the future."

For BMW to continue to sell cars that live up to the company's "ultimate driving machine" claim, the manufacturer needed to offset those emissions with a viable electric vehicle for growing cities, where more and more potential customers would live. That was the start of the i3.

At the time, electric cars had the reputation of being sluggish because of the heavy battery needed to hold a charge capable of moving the car at least 100 kilometers (62 miles) -- the range considered necessary for daily use. That meant the car needed to be lighter to reduce the size and cost of the power pack and improve handling. The lightest and strongest material available is carbon fiber.

David Fuller's view -

There are a number of interesting points in this article which the introduction above only begins to touch on. For instance, why build a $100 million plant at Moses Lake Washington, a little town of approximately 20,000 people? Well, the local utility charges only 3 cents per kilowatt hour for hydro-power to run the plant's energy-hungry ovens and furnaces. Bloomberg says this is less than one-fifth the cost of fuel in Germany. The town is also also appears to be reasonably close to a port.



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August 29 2013

Commentary by Eoin Treacy

Generic drugs

Eoin Treacy's view -

The generic drug sector is dominated by a relatively small number of countries not least India, Israel and the USA. Heightened currency market volatility is likely to be of benefit to Indian manufacturers since the Rupee's weakness will enhance consolidated earnings for these global businesses.

Among foreign listed Indian generic drug makers Ranbaxy has a listing on London's International Exchange and generates 81% of its revenue from outside India. The share has fallen from $14 to $4 since 2010 and posted a large upward dynamic last week. It is currently unwinding its overextension relative to the 200-day MA but will need to find support at progressively higher levels if recovery is to be given the benefit of the doubt.



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