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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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