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Found 494 results in Autonomies
December 02 2020

Commentary by Eoin Treacy

Email of the day on what's priced in

Sorry, but what does this mean? "As a result, the share offers a lot of optionality on future innovation."

Eoin Treacy's view -

Thank you for this question and I apologise for being less than clear. Options allow one to gain outsized exposure to an opportunity without having to pay for it upfront. The risk is that the opportunity fails to pan out.



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December 01 2020

Commentary by Eoin Treacy

It will change everything: "DeepMind's AI makes gigantic leap in solving protein structures

This article by Ewen Callaway for Nature may be of interest to subscribers. Here is a section:

“It’s a game changer,” says Andrei Lupas, an evolutionary biologist at the Max Planck Institute for Developmental Biology in Tübingen, Germany, who assessed the performance of different teams in CASP. AlphaFold has already helped him find the structure of a protein that has vexed his lab for a decade, and he expects it will alter how he works and the questions he tackles. “This will change medicine. It will change research. It will change bioengineering. It will change everything,” Lupas adds.

In some cases, AlphaFold’s structure predictions were indistinguishable from those determined using ‘gold standard’ experimental methods such as X-ray crystallography and, in recent years, cryo-electron microscopy (cryo-EM). AlphaFold might not obviate the need for these laborious and expensive methods — yet — say scientists, but the AI will make it possible to study living things in new ways.

And

The first iteration of AlphaFold applied the AI method known as deep learning to structural and genetic data to predict the distance between pairs of amino acids in a protein. In a second step that does not invoke AI, AlphaFold uses this information to come up with a ‘consensus’ model of what the protein should look like, says John Jumper at DeepMind, who is leading the project.

The team tried to build on that approach but eventually hit the wall. So, it changed tack, says Jumper, and developed an AI network that incorporated additional information about the physical and geometric constraints that determine how a protein folds. They also set it a more difficult, task: instead of predicting relationships between amino acids, the network predicts the final structure of a target protein sequence. “It’s a more complex system by quite a bit,” Jumper says.

Eoin Treacy's view -

The sheer breadth of what we do not yet know about biology is becoming more apparent all the time. That’s the greatest benefit of advances in technology, it makes answers possible where questions were never considered.



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November 27 2020

Commentary by Eoin Treacy

Email of the day on the Service

I have been a subscriber for just over 30 years, and in that time, I can't recall many times when a clear and concise analysis of economic and political conditions was as important as it is today. You are doing a wonderful job at keeping the collective informed, allowing us to see a broader picture than our individual biases might otherwise give us. Thanks so much!

And

Congratulations our last subscriber commentary was exceptional. You have done wonders for my confidence and ability to help my clients. Keep up the good work. Best wishes

Eoin Treacy's view -

Thank you both for your kind words and it is enormously gratifying that subscribers find value in the Service. That’s particularly true for veterans who have been with us for decades. Given both the demand and positive response for a reasonably succinct list of thematic investments that cover the prevailing market outlook, I’ll review the list on at least a monthly basis. The first Friday of the month which would coincide with the Big Picture Long-Term audio/video makes sense to me.



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November 23 2020

Commentary by Eoin Treacy

Email of the day - on the politicisation of monetary policy

I hope life for you in California is more fun than it is here in England. But let's hope we really are past the low point as far as the virus is concerned. I had thought that would be true for economies too, but this latest move by President Trump (summarised in the article by Ambrose Evans Pritchard) does raise questions. With this move, which asset classes do you think will benefit and which will lose on a 3-6 month timescale?

Best wishes to you and family. 

Eoin Treacy's view -

Thanks for the well wishes and this article which may be of interest to the Collective. All is well with us since the streets were blessedly free of protestors following the election. I guess they got the result they wished for. Here is a section from the article:

He instructed Fed chairman Jerome Powell to return the unused portion of a $454bn (£342bn) account approved by Congress during the market meltdown in March. This seed money gave the Fed $4.5 trillion extra lending power under a policy of 10:1 leverage and had an electrifying effect on market confidence, helping avoid the errors made in 2008.

Krishna Guha from Evercore ISI said the Fed’s market stabilisation policy had been politicised. Congressman Bharat Ramamurti, a member of the House oversight committee on stimulus, called Mr Mnuchin’s move an unjustified and ideological decision by the treasury department.

The Fed retains its monetary policy powers and can purchase further US treasury bonds but that is a blunt tool at this juncture unless it is married to aggressive fiscal expansion, which the Republican Senate has vowed to block.

The Fed is concerned that more QE will chiefly inflate asset prices without doing much to help the real economy, exacerbating social inequality.

Congress stripped the Fed of its discretionary powers under Article 13 after the Lehman crisis. The Fed now needs permission from the treasury to go beyond its normal mandate. This was granted immediately during the panic in late March.



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November 18 2020

Commentary by Eoin Treacy

Top Ten Market Themes for 2021: A Shot in the Arm

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

1.Vaccine-led Recovery to Lift Cyclical Assets
2. Navigating the Path
3. A Steeper Real Yield Curve
4. Europe: Two Steps forward, One Step Back
5. China: Forging Ahead, with Assets in Tow
6. A New Commodity Bull Cycle
7. EM Outperformance: More than Before, Less than Sometimes
8. Rotations: Cyclical, North Asia in Focus but Vaccine News Key to Near Term
9. In Search of New (and Old) Safe Havens, Hedges and Diversifiers
10. Risks from Corona and Beyond

Eoin Treacy's view -

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

If we had to distill the priorities of governments next year there is only one word captures their intentions. Reflation. With millions of unemployed people, defaults only kept at bay by massive intervention and rising public discontent economic revival is the only possible solution. That’s true of every country. No one has been left unscathed by the pandemic. Whether the challenge has been domestic or from a loss of export markets, the solution is the same. Reflation.



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November 17 2020

Commentary by Eoin Treacy

Amazon Expands Push Into Health Care With Online Pharmacy

This article by Angelica LaVito and Matt Day for Bloomberg may be of interest to subscribers. Here is a section:

Analysts have long expected Amazon to dive deeper into health care in a bet the company can bring its digital real estate and logistical prowess to bear on a roughly $4 trillion industry in the U.S. with a reputation for inefficiency. The company rattled drug retailers with its PillPack acquisition, but Amazon has been slow to integrate the online pharmacy startup into its offerings.

The announcement Tuesday marks the first time that shoppers can order prescription drugs directly on Amazon. Previously, they were redirected to PillPack’s website. An integrated pharmacy removes one of the few gaps in Amazon’s offerings compared with major big box and grocery rivals, some of whom have long filled shoppers’ prescriptions in the same stores where they sold flat-screen televisions or cans of soup.

The discounts are a clear play for people who pay for their medications with cash, whether they are uninsured or are looking to save money. Strong demand for transparency and better deals have helped fuel the rise of discount card programs like GoodRx Holdings Inc. Amazon will display both the price when using insurance and the price without. Infusing transparency into a system that has been frustratingly opaque for consumers could alter the supply chain.

“We designed Amazon Pharmacy to put customers first – bringing Amazon’s customer obsession to an industry that can be inconvenient and confusing,” said TJ Parker, vice president of Amazon Pharmacy and co-founder of PillPack.

Eoin Treacy's view -

Waiting for 15 or 20 minutes while a prescription is filled must be one of the biggest nuisances of the retail experience. Being forced to walk around aisles of products one has no interest in begs the question, “how long does it take to select a product from a shelf and put it in a bag?

The challenge for pharmacists is they spend much more time ensuring the veracity of a doctor’s instructions than they do filling them out. Yet, that is only small part of their business. The bulk of volume is focused on repeat custom and it is this business Amazon is targeting. Chronic conditions are where the money is in selling pharmaceuticals, Renewable prescriptions do not need to be verified all that often and cashflows are received on a subscription basis. That’s the kind of service Amazon excels at.



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November 10 2020

Commentary by Eoin Treacy

Email of the day on recovery candidates versus stay at home champions

Thank you for bringing Rolls Royce to our attention recently. Thanks to you I was able to open a position which looks excellent now. Do you think the volatility in the share will continue for much longer? And what are your views about this share now? Thanks again very much.  

Eoin Treacy's view -

Thank you for your kind words and congratulations on taking opportunities in the market. The big question at present is about the trajectory or interest rates and bond yields. It will shape where risk appetite focuses. Investors will either favour recovery candidates on the basis that survivors will have more market share to expand into or they will continue to favour high growth/high leverage plays as they continue to disrupt incumbents.



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November 09 2020

Commentary by Eoin Treacy

Welcome back America!

Thanks to a subscriber for this article by James Breiding. Here is a section:

Resolution requires concerted and consistent effort over a long period of time. It took 25 years to reform Finland’s primary education system before it topped the league in PISA scores. Singapore achieves superior health care outcomes at 25% of the cost of the US and 40% of Europe thanks to a system which gives consumers “skin in the game”.  It’s now thirty years in the making. Denmark’s commitment to wind power dates back to the 1970’s when the benefits were egregiously uneconomic. More than half of its energy is now from renewable sources. Ontario Teachers’ Pension Plan has evolved over thirty years since Lamoureux convinced Canada’s labor unions that the fund needs to attract and pay the best people from Goldman Sachs and Blackrock to work for them, rather than paying them fees.  Ontario Teachers’ has had an annualized total-return of 10% since reforms were made in 1990, and retirees’ pensions are fully funded with 100% inflation protection provided on all pensions.

It may be far-fetched to think that small, successful, experimental nations can fill this vacuum of leadership, but the world is begging for consistent leadership and a positive example, so an opportunity presents itself to step up.  

Eoin Treacy's view -

There is a good reason small countries tend to succeed in niche areas, and are often more successful than larger countries on specific metrics. They have to. Israel, South Korea or Switzerland have spent lifetimes grappling with the uncertainty of geopolitics. They understand the reality that if they don’t succeed on their own no one is going to help them.

Ireland is small rainy island on the tip of Europe, without a commitment to education and active courting of FDI, coupled with low corporate taxes and light regulation it would be a very dreary place indeed.



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October 29 2020

Commentary by Eoin Treacy

Email of the day the on Rolls Royce rights issue

RR shares finished the day at 84.54p whilst the newly issued rights finished at 51p.

When adding back the 10/3 of 51p to the share price of 84.54p, the result is 254p which is a very nice gain from the news of your first purchase at 154.75 p you gave the collective early October (your second purchase being adroitly at 105p). Thank you for advising us!

BUT:

Yesterday you wrote regarding RR  "...The knock-on effect of the rights issue could result in the share falling between 25% and 33% which may be priced into shares over the coming two weeks..."

Three interrelated questions:

1. Do you mean by this that the share price of 84.75 could go down to 57p (-33%) to 64p (-25%) which would be equivalent to the "old share price" coming down from today's 254p to 170p?

2. What would be the reason for this heavy decline - all endogenous factors should already be priced assuming a efficient pricing...

3. If such a decline is probable would it not make more sense to take good profits and then, if the share really comes down or stays where it is, and the turn-around story still seems valid, buy again a lower or more or less unchanged price?

It seems to me that from a risk-adjusted perspective, this would be the better action.

And

Dear Mr. Tracey,
Rolls Royce web site states for shareholder living in USA:
" Due to local regulations the rights issue cannot be offered in your country. We will arrange to try and sell your rights to new ordinary shares for you, and you will be sent the profit (after expenses) if it is £5 or more."
would elaborate on this process for those of us who are not familiar with it.
Many thanks for your great service.

Eoin Treacy's view -

Thank you both for these questions. The share was rebased yesterday and halved as a result of the rights issue. It subsequently rebounded from its lows because many investors were waiting for the uncertainty of the rebasing to pass before initiating long positions. The question now is what happens next.



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October 28 2020

Commentary by Eoin Treacy

GE "Tough to Argue With" Results Win Over Wall Street Critics

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

General Electric shares jumped as much as 10% on Wednesday after the company’s third-quarter results
topped projections, earning the company plaudits from even the most bearish Wall Street analysts.

* Gordon Haskett analyst John Inch (hold) said GE’s EPS beat follows the pattern of mostly all other industrial companies that have beat bottom-line forecasts this earnings season

** Said overall, stronger healthcare and better free cash flow, despite still tough aviation business, “are likely to reinforce the messaging that GE has fundamentally bottomed – although the company will likely continue to face years ahead of difficult climb-back,” while Covid resurgence could arrest aviation fundamentals and future improvement in healthcare business

* JPMorgan analyst Stephen Tusa (neutral) said the across-the-board nature of the beat “is what it is, positive”

** The 4Q guide for free cash flow of over $2.5 billion suggests cash will be well ahead of JPM’s below-consensus expectations, and a “headline like that is tough to argue with”

* RBC analyst Deane Dray (outperform) said GE is still battling through a multiyear turnaround, worsened by the Covid-pandemic, but “there were encouraging signs” in the company’s EPS beat

** As is typical with a GE earnings, there are a number of moving parts involving charges/reserves, the analyst noted

** Said the most notable of those is the $100 million reserve taken for a potential settlement with the SEC for legacy accounting issues; however, since these issues date back to two CEOs ago, Dray expects investors would view it as a positive to see this issue resolved via a settlement

* GE 14 buys, 8 holds, 1 sell; avg PT $8.07: Bloomberg data

* NOTE: Earlier, GE Jumps on Surprise Profit as Culp Sees Faster Turnaround

Eoin Treacy's view -

The global economy is in a state of flux because no one can have an accurate reading what the future patterns of activity will be following the pandemic. The travel/hospitality sector obviously has a place in the economy but at what scale? The stay-at-home champions have seen a step change in demand growth for their products but how sustainable is that growth trajectory? For industrials is the economy going to bounce back on infrastructure development or be mired in political infighting?



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October 27 2020

Commentary by Eoin Treacy

Rolls-Royce Gets Investor Nod for $2.6 Billion Equity Sale

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

The package is aimed at seeing Rolls-Royce through to 2022, when the company expects to resume sufficient cash generation alongside a gradual recovery in demand for air travel. Chief Executive Officer Warren East has also said the company could sell assets as it repositions for the future.

“We didn’t want to put the business and our shareholders’ interests at risk by gambling on the situation next year so that’s why we chose to go with this package now,” the CEO said at an investor meeting.

Even with funding secured, Rolls-Royce still faces an uphill road to recovery. The twin-aisle planes the company supplies are predicted to take until at least 2025 to recover to pre-pandemic levels and the group has announced plans to cut 9,000 jobs.

Eoin Treacy's view -

The 10 per 3 rights issue is due to close at November 11th and will ensure Rolls Royce has sufficient capital to see it through the next couple of years come what may. It’s a worst-case scenario funding raise and will take place against a background of low interest rates and high liquidity.



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October 26 2020

Commentary by Eoin Treacy

Jack Ma's Ant Seeks to Raise $35 Billion in Biggest-Ever IPO

This article by Lulu Yilun Chen for Bloomberg may be of interest to subscribers. Here is a section:

The company will issue no more than 1.67 billion shares in China, equivalent to 5.5% of the total outstanding before the greenshoe, according to its prospectus on the Shanghai stock exchange. It will issue the same amount for the Hong Kong offering, or about 3.3 billion shares in total.

Alibaba Group Holding Ltd., which was co-founded by Ma and currently owns about a third of Ant, has agreed to subscribe for 730 million of the Shanghai shares, which will be listed in Shanghai under the ticker “688688,” according to the prospectus. Alibaba will hold about 32% of Ant shares after the IPO.

Eoin Treacy's view -

AliPay prospered by offering a higher interest rate than banks which was earned daily. That sensation of seeing one’s balance increasing by the day, even if only by a small amount, drove massive consumer adoption. The reason it was able to circumvent strict banking regulation on how much interest can be paid was because the government was willing to look the other way by not insisting on a banking license.



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October 20 2020

Commentary by Eoin Treacy

Netflix 3Q Streaming Paid Net Change Misses Est

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

Sees growth reverting back to levels similar to pre-COVID as the world recovers, and sees paid net adds likely to be down year over year in 1h 2021 as compared to the big spike in paid net adds in 1h 2020
Sees 2021 free cash flow be -$1 billion to break-even
As productions increasingly restart, we expect Q4’20 FCF to be slightly negative and therefore, for the full year 2020, we forecast FCF to be approximately $2 billion, up from our prior expectation of break-even to positive
With $8.4 billion in cash on our balance sheet at the end of the quarter plus our $750m credit facility which is undrawn, our need for external financing is diminishing

Eoin Treacy's view -

Netflix is running a capital-intensive model that is entirely dependent on growth. It got a significant boost in subscriptions from the pandemic but in an increasingly crowded competitive space the ability to continue to sustain growth has to be questionable.



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October 13 2020

Commentary by Eoin Treacy

Email of the day on outperformance following the US election:

As per JPM and Nomura   the mkt is pricing a Biden win, caution that a blue wave is necessary, otherwise will get gridlock.

Even if it happens probably get turmoil specially if we do not get clean sweep. Otherwise legal problems will be forthcoming. The groups would be HC, alternative energies, cyclical, education, infrastructure. Also China as frictions will be reduced

Can you identify possible winners, using the charts and share them?

Trust you and your family are well. Stay safe.

Eoin Treacy's view -

The narrative about who will win the US Presidential election has morphed over the last couple of weeks to pricing in a Biden victory. The catalyst for this change was the debate where the two candidates harangued each other and dropped the bar for political decorum another notch lower. Since then, confidence among Democrats has increased substantially. There has been talk of a double-digit margin of victory and a blue wave where they control both legislative branches and the Presidency.



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October 08 2020

Commentary by Eoin Treacy

Email of the day on short covering

I hope you and the family are well. well done on your XXX trade. What would you do now if you are not in the shares? and why are the shares up 25 per cent today? Is that shorts closing out their positions, realisation that the company will not go bust or just volatility associated with the rights issue? Many thanks

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. I agree the most likely reason for today’s significant additional surge today was because of short covering. It’s up almost 100% this week so buying the rebound requires one to have some tolerance of volatility. The only way to deal with that and not lose sleep is to control the size of the position.



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October 07 2020

Commentary by Eoin Treacy

High Conviction Calls Amid Cross Currents

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

Eoin Treacy's view -

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

The fourth quarter is going to bring two strong sales events for Amazon. Prime Day usually occurs in July but was delayed because of the pandemic. It will now take place on the 13th. That might just kick off the beginning of the holiday season. Considering the extent of excess savings this year is likely to deliver a bumper holiday season for Amazon’s retail operation.



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October 07 2020

Commentary by Eoin Treacy

Email of the day on my investments

Hi Eoin, could you please state what your APPROXIMATE price objective is for XXX to know whether you see this more as an opportunistic trade or more of fundamental return to e.g., the 200dma? Thank you

Eoin Treacy's view -

Thank you for this question. I view my trades as opportunistic and my investments as holdings in a long-term portfolio. 



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September 30 2020

Commentary by Eoin Treacy

Email of the day on Switzerland and cosmetic surgery

Hello Eoin 1.) domiciled in Switzerland I wonder what is your opinion on the SMI? 2.) watching the presidential debate, I am impressed by Biden’s face lifting - would you know or could you find out which doctor did this great job?

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. Politics is a visual profession and looking good on TV has been important since the days of JFK. Whoever is looking after the appearance of the septuagenarians running for US President deserves every penny they are earning. I'll keep my ear to ground for who that is. 



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September 28 2020

Commentary by Eoin Treacy

Email of the day on industrials potential for outperformance.

Thanks for another good Friday’s audio and comment. I too have been watching XXX. But did not buy yet. Your purchase will be an incentive for me. I am also watching Airbus. Considering their main rival Boeing is in bigger trouble, I thought it would be a good company to own for the post pandemic era. I would love to read any reasons for not investing in Airbus and your/collective’s view on Airbus. Thanks in advance. And THANK YOU for the excellent service.

Eoin Treacy's view -

Airbus’s market cap is about half that of Boeing but their revenue figures are broadly in line. The primary reason for that divergence has been because Boeing was so aggressive in buying back its shares and has long been seen as the leader in the aerospace sector.



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September 25 2020

Commentary by Eoin Treacy

September 17 2020

Commentary by Eoin Treacy

GE Surges as Culp Predicts Positive Cash Flow in Second Half

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

Key markets are stabilizing and GE is making “good progress” in cutting costs by $2 billion and saving $3 billion in cash to contend with the coronavirus pandemic, Culp said. While the recovery will be gradual, results are improving and GE is poised for continued cash-flow gains through the end of the year, he
said.

“I sit here today feeling very confident about where we are and where we’re going despite all of the trials and tribulations that Covid has certainly thrown at us,” Culp said at a Morgan Stanley conference Wednesday.

The CEO’s optimistic tone marks a turnabout from late July, when he stopped short of saying GE would generate free cash flow in the second half. The pandemic has prompted an unprecedented collapse in air travel, gutting demand for the company’s jet engines and crimping sales of other products such as gas turbines and medical equipment.

Eoin Treacy's view -

Manufacturers of big pieces of equipment that require teams of people to operate were hit hard by COVID-19. However, a number had been trending lower for a long time before pandemic hit and rationalisation plans were already well underway. There is no doubt that the ill effects of the lockdown are non-trivial but valuations are much improved and a return to profitability is likely to be rewarded by investors.



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September 15 2020

Commentary by Eoin Treacy

Industrials Conference: Strategy Sector Views + Analyst Stock Picks

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

Eoin Treacy's view -

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

Media commentary continues to focus on the number of new cases of COVID-19 but that is an irrelevant figure. The numbers of hospitalisations and deaths and the fear that healthcare systems would be overrun was the reason for locking down economies. The reality today is even in countries where the number of cases is increasing, the hospitalization rate has not increased because most newly infected people are younger. Obviously, there are risks that younger people will infect older people but that is a manageable risk compared to the financial stress of total cessation of economic activity.



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September 03 2020

Commentary by Eoin Treacy

Stupid 'Rich' Skew in Apple, Greed Breaks Things

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

Jan $180 Strike Calls costs $4
Jan $80 Strike Puts costs $1

*Both options are $50 out of the money, approx data, BUT it is nearly 3x more expensive to buy upside risk in AAPL equity. Downside protection normally costs more than upside risk participation, NOT today. What does this mean? One large buyer has made a colossal splash in the market and the scent of greed has drawn thousands of other market participants into the dangerous game. Several clients in our institutional chat on Bloomberg have cited SoftBank as the original size buyer. We have NO IDEA if this is true, just that highly credible clients have made this reference several times over the last week. It’s a high-stakes game of musical chairs, the ultimate greater fool theory moment. The colossal call buyer has thrown meat in the water and drawn in the sharks, but unfortunately thousands of Robinhood minnows at the same time. When the large players’ exit, the little guy and gal will be left holding the bag.

Apple closed near $130, while the cost of speculative upside calls is weighted heavily against the buyer. Someone must have reached out to Buffett today because he can make a fortune in selling $AAPL upside calls.

Eoin Treacy's view -

Options volume has spiked higher over the last few months to hit multi-year highs. Options offer significant leverage to both the upside the downside and are among the primary vehicles for traders to take on outsized positions relative to their capital. The significant rebound in stay-at-home shares has resulted in an impressive momentum move which is not taking at least a breather. 



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September 01 2020

Commentary by Eoin Treacy

Rolls-Royce Disposal Raises Questions Over Balance Sheet

This note from Dow Jones may be of interest to subscribers. Here is a section:

Rolls-Royce's GBP2 billion disposal announcement is materially more than what the market had in mind, and may imply a lower need for fresh equity to repair its balance sheet, Credit Suisse says. This raises questions as to whether the company was waiting for things to improve before a rights issue or taking the risk of seeing things get worse, the Swiss bank says. The lack of visibility on the balance sheet rebuild, persistent volatility in forecasts and the unattractiveness of the underlying investment case mean the stock remains unappealing for many investors, CS says. The bank has an underperform rating on the stock, and lowers the target price to 200 pence, from 210 pence. Shares are down 9% at 219.40 pence.   

Eoin Treacy's view -

As a major plane engine supplier Rolls Royce has been significantly negatively impacted by the Boeing 737 Max debacle. As if that were not enough the collapse in air traffic and cancellation of orders for new planes has been a double blow. The share is down more than 80% since early 2019 and made a new low today.



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August 26 2020

Commentary by Eoin Treacy

Facebook Hits Record as Analysts See Opportunity From Shop

This article by Ryan Vlastelica for Bloomberg may be of interest. Here is a section:

Facebook analysts were positive after the social-media company added a new shopping section, called Facebook Shop, to its main app, seeing strong e-commerce growth potential.

JMP Securities (market outperform, PT $305)

There are “multiple catalysts” for Facebook, and e-commerce “can be a significant opportunity”
There is “a clear line of sight to monetizing Shop”
While advertising should remain Facebook’s focus, the growth in e-commerce means Facebook “can generate greater product discovery” for small and mid-sized businesses relative to other channels

Stifel (buy, PT $290)

The accelerated roll-out of the service “suggests the benefits to growth could be evident as early as 2021,” and Facebook waiving selling fees in 2020 “could accelerate the adoption of these tools”
Over the long term, Facebook’s e-commerce opportunity “should come more from increased adoption of digital ads” by small and mid-sized businesses than transaction fees

Shares up as much as 2.86%, the stock has nearly doubled off a March low, and it is trading at a record

Eoin Treacy's view -

Companies like Alibaba and Tencent were quick to introduce payment platforms into their social media and ecommerce products. The impending IPO of Ant Financial represents the consumer finance crown jewel of Jack Ma’s empire. It is a revenue engine that was successful because it afforded Chinese consumer the opportunity to earn daily interest at rates which were significantly higher than from banks. That’s the kind of regulatory two-step Silicon Valley start-ups have been performing for years and, so far, the Chinese government has been willing to look the other way.



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August 25 2020

Commentary by Eoin Treacy

A Robot Tried to Fix Value Investing and Ended Up Buying Amazon

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

The top three holdings of the machine-guided fund in July were Amazon.com Inc., Alphabet Inc. and Facebook Inc. Those are far from the kind of undervalued stocks typically favored by a value strategy. But to Qraft, it’s just value 2.0.

“Intangible assets have become a more important factor in the actual value of the company due to the development of information technology,” founder Hyungsik Kim wrote in an email.

“It is easy to tell which of the following is more important in measuring the value of Amazon: warehouses (tangibles) or automated logistics systems (intangibles).”

It’s the rallying cry for many remaining proponents of value: The factor isn’t dead, it’s simply plagued by outdated accounting rules that treat intangible investments such as research as expenses rather than capital.

As a result, knowledge-intensive firms end up with much lower book values and higher costs, which make them look more expensive than they actually are.

The new ETF’s eye-catching backtests also speak to the variety of methods underlying even the best-known equity factors. One study estimated there are well over 3,000 different ways to define a value strategy.

Eoin Treacy's view -

Intangible values is a fascinating subject because it forms the basis for the investing in technology firms but is the reason to avoid legacy firms. The challenge in teaching an algorithm to know the difference means a great deal of labeling would be required to identify the differences.



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August 21 2020

Commentary by Eoin Treacy

Email of the day - on risk appetites and the value of a subscription.

I am a pre-subscriber (financial constraints, exacerbated since Covid-19, make it impossible for me to become a full subscriber, I'm afraid, so I may not qualify for a reply. But David did reply to me on more than one occasion;  he was always so kind, and is greatly missed).

I remember your being on the panel at a money show in the conference centre in Westminster Square (I forget the name - possible Westminster Conference Centre) - it must have been about 2009 because I remember asking a question as to whether there were any "good" banks left that might be worth investing in.
  
Anyhow, in response to a question from another attendee about companies drilling for water in Australia, (or possibly into wind power or solar or even lithium miners (if it wasn't too early) - I forget exactly which), I remember you replying that you never favoured chasing these early-stage stories, and in general you have been proved right since.   

I still tend to class hydrogen fuel and battery power for vehicles in the same category, but perhaps you feel that times have changed sufficiently now?    Since I am only a pre-subscriber, and not able to read the full article, I appreciate that you may have said more on this there, or in previous Comments of the Day.
    
It seems to me that since hydrogen when mixed with oxygen is a very explosive mix (although this could also be said to a lesser extent of petrol vapour, I suppose), it would only take one careless mistake or faulty construction to cause a serious explosion.   But perhaps the design features are so tight that this would be impossible.   

At least I would trust an electric vehicle more than a self-driving one! In fact, I am a bit nervous by nature. I would never trust a Toyota now, after that stuck accelerator pedal caused a fatality. What the last minutes of those poor occupants were like I cannot face thinking about.

Whether it is possible to reply to this or not, many thanks Eoin for the comments that I am able to read daily. They give a very sane and reassuring perspective, especially in these difficult times.

Eoin Treacy's view -

David always saw value in conducting a public discourse with subscribers because it helped to educate us as much as the Collective. It also ensures we are covering topics of interest. I agree and one of the things I enjoy most is attempting to provide satisfactory answers to subscriber’ queries. However, as someone who has been familiar with the Service for at least 11 years, might I suggest you at least take a trial subscription?

If that is too much of a financial constraint it may be time to reassess your investment/trading ambitions. Investing involves a degree of risk. If you are uncomfortable with driving a Prius because of a fault corrected more than a decade ago, it might be time to conclude investing is not for you.

The response to this email continues in the Subscriber's Area. 



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August 18 2020

Commentary by Eoin Treacy

GM Shares Soar on Electric-Vehicle Spin-Off Speculation

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

GM does plan to sell more than 20 EV models around 2023. That business could be spun off for $20 billion and eventually be worth as much as $100 billion, Deutsche Bank’s Rosner said. GM’s core business selling gasoline-powered sport utility vehicles and pickup trucks is generating cash but viewed as being in long-term decline and is less exciting to investors than the company’s electric-car plans, he wrote.

Despite the share gains this week, the Detroit-based automaker’s stock is down about 17% so far this year while all-electric rival Tesla Inc.’s value is eight times that of GM. By spinning off its EV business, GM could get the kind of momentum enjoyed by Tesla and a handful of startups that have lured capital despite their having no vehicles on the market.

Battery-powered cars have caught the imagination of investors in recent weeks, sending shares of Tesla to successive record levels and boosting the value of electric startups such as Nikola Inc., Fisker Inc. and Lordstown Motors Corp., all of which took a fast track chasing public listings after being acquired by special purpose acquisition companies.

Eoin Treacy's view -

The entire automotive supply chain has concluded there is no future in internal combustion engines. Not only are battery costs coming down and efficiency improving but the regulatory environment continues to squeeze traditional manufacturers.



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August 07 2020

Commentary by Eoin Treacy

Trump Ban on Top Messaging App Risks Snarling Global Business

This article by Zheping Huang and Vlad Savov for Bloomberg may be of interest to subscribers. Here is a section:

Trump’s order on WeChat came after a similar injunction against ByteDance Ltd.’s TikTok, the viral video service the White House accuses of jeopardizing national security. But while ByteDance’s business outside of TikTok is largely confined to home, Tencent is central to the global distribution of games and a major conduit for American companies that sell products in the world’s No. 2 economy.

Apple, for instance, makes the majority of its iPhones in China, where WeChat is the oil that lubricates communications both on the factory floor and in the boardroom. In a worst-case scenario, American consumer brands like Walmart and Starbucks Corp. may be prevented from selling goods and services to Chinese buyers via WeChat’s “mini-programs” in China -- now one of the fastest-growing avenues for e-commerce. China accounts for about 9% of Walmart’s international sales and is its fastest-growing market.

“If you can’t pay for Starbucks coffee on WeChat, people will stop drinking it,” said BOCOM International analyst Connie Gu, commenting on the extreme cases where American brands are banned from using WeChat as a payment method.

Less quantifiable is the spillover effect on the gaming industry.
Tencent ranked as the world’s biggest games publisher by revenue in 2019, according to Newzoo data, and it collaborates with U.S. industry leaders like Activision and Electronics Arts Inc. It also holds a large stake in Fortnite maker Epic Games Inc. and owns League of Legends developer Riot Games Inc. That sprawling but somewhat stealthy gaming empire, deeply rooted in the U.S., was deemed under threat when the WeChat sanction was first announced, though a U.S. official later clarified that the action only involved the messaging service and not its parent.

Eoin Treacy's view -

Chinese language blogs were afire this morning with discussion of the WeChat ban. It is the primary vehicle many people use to communicate, shop, play and remit money across the Chinese diaspora. If India’s ban of Chinese apps is any guide, they will disappear from app-stores but will remain on consumers’ phones. That means existing users will still have access but will not have access to future updates.



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August 07 2020

Commentary by Eoin Treacy

How COVID-19 is changing the world of beauty

Thanks to a subscriber for this report from McKinsey which is dated May 5th but is no less relevant today.

Digital continues to rise. Pre-COVID-19 trends will likely accelerate, with direct-to-consumer e-commerce, such as brands’ websites, shoppable social-media platforms, and marketplaces becoming more important. Across the globe, consumers indicate they are likely to increase their online engagement and spending. Beauty-industry players will need to prioritize digital channels to capture and convert the attention of existing and new customers. On the operations side, the use of artificial intelligence for testing, discovery, and customization will need to accelerate as concerns about safety and hygiene fundamentally disrupt product testing and in-person consultations.

The pace of innovation accelerates. As the COVID-19 crisis has shown, the world can change quickly, bringing substantial shifts in demand. Sometimes, supply cannot catch up. Even before the pandemic, brands were under pressure to overhaul their product-innovation pipelines, inspired by the ability of digital-native direct-to-consumer brands to go from concept to cupboard in less than a month. Now, the need for speed is even greater. To achieve it, there may be a greater role for contract manufacturers, both to diversify (and thus reduce production risks) and to serve as thought partners in product innovation. There is also potential for closer collaboration—among brands and retailers, in particular—through data sharing and inventory pooling.

M&A rises as multiples fall. With the COVID-19 crisis causing significant damage to the balance sheets of brands, retailers, and suppliers, many companies will need to find new sources of capital. At the same time, given the hits to revenues and the global economy, multiples could fall from precrisis levels, when some brands were trading for more than eight times revenue or 10 to 15 times earnings.

Eoin Treacy's view -

The clearest trend in online retail is the evolution of the in-person sales experience. Most men think of shopping in a perfunctory manner but most women think of it as a pleasurable experience which is part of a daily social experience. It is very difficult to replace the sales experience of in person contact online and from a purely technological experience it is inefficient. That’s where livestreaming comes in.



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August 05 2020

Commentary by Eoin Treacy

Lightweight-banking via messaging services are getting Gen Z buzz

This article by Mike Butcher for techcrunch.com may be of interest to subscribers. Here is a section:

They are not alone. Other players in the “banking services via a messaging” space include Kotak Mahindra Bank in India (on WhatsApp) and ICICI in WhatsApp (India). However, neither of these can do actual provisioning of the card and addition to Apple Pay and Google Pay in the messengers, which is what Zelf can do.

With Zelf, users get an account and a virtual card via their Facebook Messenger, WhatsApp, Viber and Telegram accounts. For offline and online purchases Zelf supports Apple Pay and Google Pay. This lightweight onboarding means card issuance takes less than 30 seconds via a Passport or national ID. Users then get a virtual Mastercard debit card available in their favorite messenger app. Operating inside the EU’s “Single Euro Payments Area” means it’s pretty easy for the startup to scale its offering to other countries.

Eoin Treacy's view -

One of the biggest advantages emerging markets have is they are afforded the opportunity to skip whole stages of development. This is because technology is immediately available to them without having to develop it themselves. China has been able to progress meaningfully because of its adoption of technological knowhow and the introduction of India’s 4G network offers India the same opportunity to evolve the entertainment, communication, banking and ecommerce sectors.



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July 31 2020

Commentary by Eoin Treacy

Robusta Coffee Heads for Biggest Monthly Gain in a Decade

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

Robusta coffee futures have surged about 16% in London this month, the biggest gain for a most-active contract since June 2010 amid a shift toward home coffee consumption. Worldwide lockdowns that shuttered cafes, restaurants and offices have supported demand for robusta beans, typically favored to brew instant coffee at homes.

“Nestle results provide confirmation at-home sales is doing very well,” said Carlos Mera, an analyst at Rabobank in London. “It was priced in to some extent, based on IRI data from the U.S., but this is more global.”

Robusta spreads have firmed up and its certified stockpiles have fallen to the lowest since the start of last year. Speculators covering their negative positions has also helped prices rally in recent weeks. Smaller robusta crops expected in Brazil and Vietnam in the 2020-21 season are also bullish for prices, Rabobank said.

Eoin Treacy's view -

I’ve been working from home for 13 years and even I am drinking more coffee than normal lately. Many people have probably discovered that with the help of capsules of home espresso machines it is possible to get better tasting coffee than what is available from Starbucks. Arguably, that wouldn’t be difficult.



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June 26 2020

Commentary by Eoin Treacy

Email of the day - on island reversals

Looking at the daily charts of the Dow Jones and S&P there appears to be potential "island reversals". Do these "islands" carry much weight in charting terms?

Eoin Treacy's view -

Thank you for this question which I believe will be of interest to the Collective. In order for an island reversal to form we need to first see a breakaway gap form which is generally consistent with a burst of enthusiasm. That has to be followed shortly afterwards by a breakdown gap which is consistent with a sudden bout of fear which nullifies the initial surge.



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June 25 2020

Commentary by Eoin Treacy

Occidental, AB InBev Lead Debt-Laden Firms Buying Back Bonds

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

Occidental Petroleum Corp. and Anheuser-Busch InBev SA/NV are seeking to buy back bonds through separate tender offers launched Thursday. Both are targeting debt due in the next three years.

Companies are seeking breathing room on debt payments as they contend with lower earnings amid the coronavirus outbreak, threatening to push leverage even higher. Credit raters are running out of patience: Occidental, already one of the largest fallen angels of this cycle, may be cut again by Moody’s Investors Service and S&P Global Ratings, while AB InBev was recently downgraded by S&P with a negative outlook.

Both companies largely amassed their massive debt loads by funding acquisitions. Much of Occidental’s nearly $40 billion of debt came from borrowing to help finance its takeover of Anadarko Petroleum Corp. last year, while AB InBev’s roughly $103 billion of obligations mostly stems from its purchase of SABMiller Plc in 2016.

While some firms are looking to buy back debt outright, others are pursuing different liability management exercises to push out maturities. Rite Aid Corp. launched a $750 million exchange offer Thursday, while Macy’s Inc. initiated one earlier this week. They’re also trying to amend certain covenants through what are known as consent solicitations.

Eoin Treacy's view -

Corporate debt issuance has surged over the last three years to a new all-time high and combined total of $2.4 trillion in only a couple of months. That is all aimed at ensuring they have enough capital to see them through a particularly uncertain period.



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June 24 2020

Commentary by Eoin Treacy

Bayer Pays Billions to Put Monsanto Legal Liabilities Behind It

This article by Jef Feeley and Tim Loh for Bloomberg may be of interest to subscribers. Here is a section:

The settlement is more comprehensive than expected, since it includes the dicamba and PCB cases, and the price will be reasonable for most investors, Sebastian Bray, an analyst at Berenberg, said by email.

It’s a “big relief,” Bray said, and “should allow investors to draw a line under the saga of the last two years.”

The Roundup agreements will resolve 75% of about 125,000 filed claims and those that were unfiled, the company said Wednesday in a statement. Bayer said it will pay $10.1 billion to $10.9 billion to resolve all lawsuits over the popular herbicide, including $1.25 billion for future claims handled as a class action.

Eoin Treacy's view -

Bayer pretty much bet the value of the entire firm on the speculation they would be better able to settle the Roundup claims than Monsanto. It’s looking increasingly likely that they were correct.



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June 23 2020

Commentary by Eoin Treacy

The 'Fed story' will win out over second wave and election fears, UBS says. It's time for investors to get off the sidelines

Thanks to a subscriber for this article by Callum Keown for MarketWatch. Here is a section:

The analysts, led by chief investment officer Mark Haefele, said three narratives were currently driving markets; the ‘Fed story’ — ongoing central bank stimulus — the second-wave story, and the U.S. election story. Fears of a second coronavirus wave have come to the fore in recent days, with spikes in Beijing, Germany and a number of U.S. states. The UBS team said that U.S.-China tensions fed into the election narrative, which would come into focus over the next four months.

“Overall we see the second-wave and U.S. election stories as contributing to market volatility as headlines feed investors’ hopes and fears about the speed and strength of the economic recovery. But it is the Fed story that will endure over the medium term,” they said in a note on Monday. They said they were positive on the outlook for both equities and credit, preferring USD high yield, Asian high yield and USD-denominated emerging market sovereign bonds as well as stocks in sectors that have so far lagged behind the market.

“Against this backdrop, we think the most important thing an investor can do is to be invested, rather than sitting on the sidelines. As earnings are likely to recover in the second half of the year and excess liquidity continues to support risk assets, we see further upside potential in global equities, in particular among sectors that have lagged the rally so far,” they added.

Eoin Treacy's view -

Monetary policy beats most other factors most of the time” was one of David’s favourite sayings and it has certainly helped to inflate asset prices over the last 12 years. The process began another upward cycle when the Fed reversed its quantitative tightening program last year in response to the illiquidity in the repo market. It went into overdrive when following the imposition of the lockdowns.



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June 11 2020

Commentary by Eoin Treacy

Mnuchin Says U.S. Can't Shut Economy Even If Virus Resurges

This article by Saleha Mohsin for Bloomberg may be of interest to subscribers. Here it is in full:

Treasury Secretary Steven Mnuchin said the U.S. shouldn’t shut down the economy again even if there is another surge in coronavirus cases.

“You create more damage, not just economic damage -- medical problems that get put on hold,” Mnuchin said Thursday on CNBC. “We can’t shut down the economy again.”

Mnuchin added that he believed President Donald Trump made the right decision to urge states to ease social distancing rules that have crippled the U.S. economy. He said that in the event of a resurgence, it will not be necessary to impose restrictions again because Covid testing and contract tracing are improving and they understand more about how to contain outbreaks.

As restrictions are lifted across the country, signs of a second wave of coronavirus cases in the U.S. have been raising alarms. More than 2 million people in the U.S. have been infected so far.

Eoin Treacy's view -

The majority of coronavirus cases in the USA emerged on the coasts. The middle of the country was comparatively unaffected initially and was afforded the luxury of lax containment measures as a result. The uptick in locations which had large protests a week ago, like Los Angeles, and the rising infection rates in places that did not have a significant issue in March, suggest the first wave of infections is still rolling through communities.



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June 11 2020

Commentary by Eoin Treacy

How London Transport Is Preparing for Life After Lockdown

This article from Bloomberg highlights just difficult social distancing is in a dense city environment. Here is a section:

According to the city’s transit manager, Transport for London (TfL), maintaining social distancing means that buses and London Underground trains will only be able to carry around 13–15% of the 9 million passengers who use the services daily. One of eight carriages on a Central line train can carry 131 people in a typical peak hour crush. Only 7% of these passengers could travel if 2-meter distancing was achieved.

TfL has imposed a limit of 20 passengers on its double-decker buses, that can usually carry up to 87.

To help alleviate this precipitous drop in passenger capacity, TfL and London Mayor Sadiq Khan unveiled their ‘London Streetspace’ program in May, which aims to accommodate a possible 10-fold increase in cycling and a fivefold increase in walking. “Many Londoners have rediscovered the joys of walking and cycling during lockdown and by quickly and cheaply widening pavements, creating temporary cycle lanes and closing roads to through traffic we will enable millions more people to change the way they get around our city,” Khan said.

Eoin Treacy's view -

I’m all for walking or cycling to work but a 90% drop in occupancy for the Tube and a 75% drop in bus occupancy is completely unworkable. The age of the Tube network has always mean ventilation is a problem. The 10 to 15 degree pick up in temperature when entering the network has long been a testament to that fact.



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June 10 2020

Commentary by Eoin Treacy

Fed Sees Zero Rates Through 2022, Commits to Keep Buying Bonds

This article by Craig Torres and Matthew Boesler for Bloomberg may be of interest to subscribers. Here is a section:

“We’re not even thinking about thinking about raising rates,” he told a video press conference Wednesday. “We are strongly committed to using our tools to do whatever we can for as long as it takes.”

The Federal Open Market Committee earlier said it would increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities “at least at the current pace” to sustain smooth market functioning.

A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.

“Acting on mortgage-backed securities and Treasuries underscores their belief that more support is needed,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “The Fed does not see a victory in the employment bounce-back. The risk of deflation is still high and the economy needs more support to heal more fully.”
 

Eoin Treacy's view -

$120 billion a month for the next two years will add nearly $3 trillion to the size of the Fed’s balance sheet. It sounds like a lot but the Fed added nearly $500 billion to its balance sheet in May, so $120 billion is a significant deceleration of support.



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June 09 2020

Commentary by Eoin Treacy

Speculative Fervor in U.S. Stocks Surges to 'Stunning' Levels

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

At the heart of the speculative activity are smaller investors, according to Sundial. Small trader call buying made up more than 50% of total volume last week, the highest since 2000, it said.

Past instances when bullish small trader positions made up 45% or more of volume preceded a median loss for U.S. stocks of about 3% in two months time and 15% in a year, according to the note.

“Small traders are pushing their luck in a major way,” said Goepfert. “It seems increasingly risky to try to chase this rally along with traders who have traditionally been extremely reliable contrary indicators.”

Eoin Treacy's view -

Regardless of any mitigating argument, chasing the rally has been the right decision. The major Wall Street indices blazed through potential areas of resistance in short order. The Nasdaq Composite is now at a new all-time high and the worst performing, most at risk of bankruptcy companies, have staged spectacular rallies. The determination of retail investors to ride the coattails of the Fed while institutional investors stepped aside is a clear example of speculative fervour.



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June 05 2020

Commentary by Eoin Treacy

Email of the day on caution at potential areas of resistance

“You have been calling for some ‘consolidation’ for equity markets for a number of weeks now (which I expected too), but this just hasn’t come to pass. Instead we have seen a relentless charge higher in virtually every market. You’ve stated that it’s liquidity driven which until recently at least, little participation from the professional money managers. Short term yields no longer can be relied upon as a risk indicator with the Fed deliberately compressing yields at the front end. To what extent, if any, has this recent episode viewed the way you look at markets through a charting lense. A despondent sceptic of this rally here, it seems the only winning strategy is just to ride the liquidity train, and rotate one’s positions towards riskier assets (travel, emerging etc) as the new safe havens (tech) reach maturity.

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. In a response to a similar email on May 12th. I led with this observation. “The best time to buy is following a significant pullback. The next best opportunity is following the first reaction from an important low. The next will be when a breakout to new highs occurs.



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May 28 2020

Commentary by Eoin Treacy

Europe's Stimulus Package Sparks "Mother of All" Market Dreams

This article by Cecile Gutscher and Ksenia Galouchko for Bloomberg may be of interest to subscribers. Here is a section:

There’s no sign yet that the stimulus package is anything more than a one-off response to an unprecedented crisis. Even so, investors are viewing it with a bullish lens. “It’s completely new territory for the European Union,” Michael Strobaek, global chief investment officer at Credit Suisse Group AG, said in a Bloomberg TV interview. “And that would make the European Union as an investment much more attractive for global investors.”

That would represent a shift for European markets, which have been unpopular compared with the U.S. For example, European equity funds suffered from outflows more than any other major region this year, losing about $31 billion, according to data from EPFR Global and Bank of America Corp.

Bond Buyers Toast EU Ambition in Moment They Were Waiting for Gary Kirk, a money manager at TwentyFour Asset Management in London, which oversees 17.8 billion pounds ($22 billion), is sticking with his U.S. bias. “It’s a bit early to get overly excited,” said Kirk, who’s waiting to see how the details are hammered out and whether it will pass muster with more austere governments in north Europe.

Eoin Treacy's view -

The Eurozone’s so-called sovereign wealth crisis arose because investments creditor nations’ pension funds made in private enterprises in the Eurozone’s periphery went bad. That was blamed on lax regulation and egregious behaviour with the result respective governments were forced to absorb private sector debts. That blew out sovereign debt ratios and caused a crisis. The response to the coronavirus could not be more different. Coupled with a willingness to loosen fiscal constraints, there is now also willingness to break the taboo of direct transfers to weaker nations. That is significant development even if it proves transitory in the near term.



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May 18 2020

Commentary by Eoin Treacy

Doordash and Pizza Arbitrage

This article by Ranjan Roy for themargins is a wonderful story of life imitating art. Here is a section:

But he brought up another problem - the prices were off. He was frustrated that customers were seeing incorrectly low prices. A pizza that he charged $24 for was listed as $16 by Doordash.

My first thought: I wondered if Doordash is artificially lowering prices for customer acquisition purposes.

My second thought: I knew Doordash scraped restaurant websites. After we discussed it more, it was clear that the way his menu was set up on his website, Doordash had mistakenly taken the price for a plain cheese pizza and applied it to a 'specialty' pizza with a bunch of toppings.

My third thought: Cue the Wall Street trader in me…..ARBITRAGE!!!!

If someone could pay Doordash $16 a pizza, and Doordash would pay his restaurant $24 a pizza, then he should clearly just order pizzas himself via Doordash, all day long. You'd net a clean $8 profit per pizza [insert nerdy economics joke about there is such a thing as a free lunch].

He thought this was a stupid idea. "A business as successful a Doordash and worth billions of dollars would clearly not just give away money like this." But I pushed back that, given their recent obscene fundraise, they would weirdly enough be happy to lose that money. Some regional director would be able to show top-line revenue growth while some accounting line-item, somewhere, would not match up, but the company was already losing hundreds of millions of dollars. I imagined their systems might even be built to discourage catching these mistakes because it would detract, or at a minimum distract, from top-line revenue.

So we put in the first order for 10 pizzas.

Eoin Treacy's view -

I had to smile when I read this article because it is almost the exact plot line from an episode of HBO’s Silicon Valley Mrs. Treacy and I watched over the weekend but from two years ago. Start-ups lighting money on fire is about as clear a sign of bubbly activity one might wish for.



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May 18 2020

Commentary by Eoin Treacy

Justice Department, State Attorneys General Likely to Bring Antitrust Lawsuits Against Google

This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

Both the Justice Department and a group of state attorneys general are likely to file antitrust lawsuits against Alphabet Inc.’s Google—and are well into planning for litigation, according to people familiar with the matter.

The Justice Department is moving toward bringing a case as soon as this summer, some of the people said. At least some state attorneys general—led by Texas Attorney General Ken Paxton, a Republican—are likely to file a case, probably in the fall, people familiar with the matter said.

Much of the states’ investigation has focused on Google’s online advertising business. The company owns the dominant tool at every link in the complex chain between online publishers and advertisers. The Justice Department likewise is making Google’s ad technology one of its points of emphasis. But it is also focusing more broadly on concerns that Google uses its dominant search business to stifle competition, people familiar with the matter said.

Eoin Treacy's view -

The issue of Google abusing its power to give preferential treatment to some advertisers over others has been brewing for some time. The additional charge that the company actively censures free speech and anyone who does not agree with their view of the world is an additional challenge which will be tackled eventually.



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May 14 2020

Commentary by Eoin Treacy

Email of the day on inconsistency in medium-term trends.

Eoin - appreciate your use of both the P&F and weekly chart against the moving average in your discussion of Microsoft.  When evaluating the consistency pattern of stocks (Microsoft and others), how do you "adjust" for circumstances such as COVID 19?  Clearly, Microsoft was negatively impacted like many other equities in the COVID induced meltdown, but has also rebounded more smartly than others.  Thanks, as always, for your insight and willingness to share same.

Eoin Treacy's view -

Thank you for this question which gets to the heart of a question I think most people are thinking at present. There are three important considerations when looking at market reaction. These are: where are we in the secular trend? Is liquidity expanding or contracting? What does the chart tell us about sentiment?



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May 12 2020

Commentary by Eoin Treacy

Email of the day - on when to use point and figure charts

Thanks for your very clear and objective commentaries at moment. It is good that you are looking beyond the current crisis and thinking about what investments are likely to do best over the longer term. I notice that you have been referring to point and figure charts more recently. Under what circumstances do you find it best to use these, rather than a 'standard' daily / weekly price chart? Also, what do you recommend using for box size / reversal as an unleveraged investor, taking a medium / long term view?

Eoin Treacy's view -

Thank you for this question. It was pointed out to me at the last Chart Seminar that it had historically always been conducted using point and figure charts and that David had been known as a point and figure analyst so what caused the change.

David’s Chart Craft business produced chartbooks because they were the only way to get good charts before the internet changed everything. Point and figure allows one to look at a vast amount of history in a very condensed area and since the patterns do not change all that often, they were ideal for a monthly publication. When I started to work with David in 2003, just as we transitioned to a fully online service, the only time I saw David use p&f was at The Chart Seminar.

P&F is best in my opinion for investors rather than traders. We have always used closing prices, a 3-box reversal and the system defaults to a 2% box size. However, p&f charts need to be tailored and that is why a custom box size option is available.

I think p&f charts are most useful for clearly depicting how a trend’s consistency has broken down.



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May 12 2020

Commentary by Eoin Treacy

Email of the day - on chasing outperformers

With respect to the second note, and knowing your own preference to stay with the "winners" and cut the "losers", at what point do you look to valuations and question the sky-high prices people are willing to pay for these "winners"? I personally have a tough time chasing stocks that have already run, but for now at least, they just keep going, proving highly frustrating!

Eoin Treacy's view -

Thank you for this question which others may also have an interest in. The best time to buy is following a significant pullback. The next best opportunity is following the first reaction from an important low. The next will be when a breakout to new highs occur.



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May 07 2020

Commentary by Eoin Treacy

Market Keeps Distancing Itself From Economy

This article by Mohamed A. El-Erian for Bloomberg echoes a common sentiment among institutional investors. Here is a section:

The rate of labor force dislocation, albeit distressing, appears to be moderating. The weekly 3 million jobless claims number is the lowest in the last seven weeks and less than half the worst level.

The report highlights the urgent and important policy priorities of dealing both with the implications of such a terrible shock to jobs and with ensuring that short-term problems don’t become long-term ones that are much harder to solve.

With markets focusing on the improvement in the “second derivative,” that is a reduction in the rate of labor force dislocation, U.S. stocks rose. This widens an already considerable decoupling from the real economy and will fuel the debates on Wall Street versus Main Street, companies versus people and the well-off versus the marginalized. 

Eoin Treacy's view -

Didi’s CEO was quoted today stating the company has recovered to about 70% of the number of rides taken before the Chinese lockdown began. That’s an impressive rebound, particularly as we look at what the trajectory of recovery will be for countries only beginning to ease lockdowns today.



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April 30 2020

Commentary by Eoin Treacy

Email of the day on dividend champions and contenders

I am really enjoying Mr Treacy’s comments of the day and look forward to it every morning.

Mr Treacy in today’s update mentioned key sectors that have the most chance of trending up over the next decade – and alluded to a couple shares (e.g. Google and Apple) that may make it to dividend aristocrat list in 10-15 years.

It would be great if Mr Treacy could provide a list of top 20-50 shares that have steadily increased dividends over the last 10 years and based on trends have the highest probably on making it to dividend aristocrat list in 10-15 years.

Eoin Treacy's view -

Thank you for your kind words and this email which may be of interest. I mentioned in last night’s audio that technology companies are often among the most reliable in increasing their dividends once they eventually decide to initiate payments. That’s been true of companies like Apple and Microsoft but Google and Amazon do not pay dividends so even if they started today it would be 2045 before they become dividend aristocrats. For a list of companies with solid records of dividend increases, but which do not yet fulfil the criteria to be dividend aristocrats, take at a look at the dividend champions and contenders sections of the International Equity Library. 



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April 23 2020

Commentary by Eoin Treacy

Facebook's $5.7 Billion Bet on Jio Is a Move Beyond Ads

This note from Bloomberg Research may be of interest. Here is a section:

Facebook's investment of $5.7 billion in India's top telecom operator Reliance Jio highlights a broader bet on India’s online growth beyond ads. Jio has more than 388 million subscribers with reach in content, payments and ecommerce, all of which Facebook can scale up via its 380 million WhatsApp, Facebook or Instagram users in India. Plans to integrate Jio’s small businesses to enable shopping on WhatsApp shows an acceleration in e-commerce.

THESIS: Facebook will be the hardest-hit internet company in 2020 from the virus fallout as a sharp ads decline and small and medium business exposure can take growth down to low-single digits, while surging usage hits profit harder. Yet we believe exiting this uncertainty with a higher user base and new habits means diversification into new businesses and a 2021 ad rebound will make its growth emerge the strongest among peers. More than 60% of Facebook's sales are in the U.S., the U.K., Germany, Japan, France and Italy. Small and medium business make up the majority of Facebook's 7 million advertisers. Earnings in 1Q will likely reset growth expectations, creating room for longer-term sales outperformance as Facebook pushes into diversifying its business post-virus.

Eoin Treacy's view -

Where are the largest tech companies going to find the next billion users? There are only three potential options. China, Africa and India. They have been cut out of China as it champions its domestic firms. Africa is a continent rather than a country, and on aggregate is further down on the per capita income scale. That leaves India with a massive young population, large number of English- speaking consumers, an independent judiciary, financial market norms familiar to westerners and a democracy intent on raising living standards.



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April 17 2020

Commentary by Eoin Treacy

A Restaurant Meal Is Going to Become a Luxury Good

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

 

Although it's true that millions of hospitality workers now are out of work and available for immediate employment, the generous unemployment benefits passed by Congress in the $2 trillion rescue bill may make some of them less interested in going back to their old jobs. Ernie Tedeschi of Evercore ISI notes that between state insurance and the federal supplements, the average weekly unemployment benefit for workers in states such as New York, California, Washington and Massachusetts will be more than $1,000. That's the equivalent of $25 an hour for a 40-hour work week. For restaurant workers who earn significant tips, returning to work may offer enough economic incentive to be worth it. For lower-paid dishwashers and line cooks, unemployment might be a better deal -- at least through the end of July, when the benefits are set to expire. That means restaurants may have to pay much higher wages than in the pre-virus market level to staff up.

Combining these two dynamics -- restaurants aren't going to be able to serve as many patrons and they will have higher labor costs -- and it's likely that many restaurants won't survive. The most obvious way for the survivors to make up for this is to charge more for the same menu offerings, perhaps much more. The good news for the restaurants that do survive is that between fewer seats available at each restaurant, and fewer restaurants competing for customers, eating out might become a scarce, coveted experience, particularly after weeks or months of much of the population sheltering in place.

Eoin Treacy's view -

Not everyone is a good cook and few are ever likely to be. If eating out and receiving full service becomes inordinately expensive then the law of supply and demand means dark kitchens will proliferate. Uber was helping to pioneer this trend ahead of the virus outbreak and the sector is likely to pick up a lot of the slack from fast casual dining.



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April 08 2020

Commentary by Eoin Treacy

Musings from the Oil Patch April 7th 2020

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

When we look at the company’s costs and expenses per barrel of oil equivalent (BOE), we find they totaled $14.01 for 2019.  Based on the company’s average oil price (which was not adjusted for its gas output given its low price), this translates into a cash profit margin per BOE of $36.88.  If we include the cost of depreciation, depletion and amortization expense (largely a non-cash expense), but indicative of the amount of investment the company needs to make to insure it replaces produced barrels and remains an ongoing enterprise, the cash profit per BOE falls to $19.06, or 37.4% of the average selling price after adjusting for hedging.  That is a pretty attractive return.  

With WTI oil futures prices falling to $20 per barrel, and assuming the location and quality discount remains at $6, Whiting Petroleum was looking at generating no positive cash from the oil it produced.  It also assumes cash operating expenses remain at 2019 levels.  This means Whiting Petroleum would be unable to invest in new exploration and development, which makes the company a self-liquidating entity.  In that condition, the company essentially has no value.  The bankruptcy filing indicates that reality, as current shareholders will only retain 3% of the shares of the reorganized company, as the debt holders will hold 97% in return for agreeing to cancel their bonds.  

Under today’s very depressed oil and gas prices, few producers will be able to fund operations.  If the companies have a significant amount of debt on their balance sheets, they will face serious challenges to sustain their businesses if they do not address their financial leverage.  To understand the precarious health of the producer sector, energy consultant Rystad has prepared a chart showing the debt maturity schedule and annual interest expense for a group of 29 significant producers.  While this represents only 29 producers, we believe it is indicative of the financial condition of the balance of the producer sector.  

Eoin Treacy's view -

The only way the unconventional oil sector is going to make it through the current crisis is to reduce the cost of production. There is no getting around the fact hydraulic fracturing and horizontal drilling operations are considerably more expensive than conventional drilling. Technological innovation will help improve that spread but it will be impossible to eliminate. Therefore, scale and proximity to end markets are the primary route to reducing costs.



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April 07 2020

Commentary by Eoin Treacy

Nobody ever pressed "Stop" before

Thanks to Iain Little and Bruce Albrecht for this insightful report which may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

Let’s set aside for the moment questions of timing and think about what changes we can expect to be durable from the virus-induced recession.

The first thing that springs to mind is a loss of income which will take a while to recover. For some that will be quite soon, for others who need to find a new job it will take longer. As we go from full employment in many countries to something less that necessarily represents lower growth overall and by extension lower corporate earnings.



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April 01 2020

Commentary by Eoin Treacy

Email of the day - on the outlook for banks

Many thanks for your continuing high-quality service, exemplified by the comprehensive Income ITs spreadsheet you produced yesterday. It will be invaluable for Private Investors such as myself. On a separate topic, do you have any views on the banks in the light of the suspension of dividends? In particular, I see that HSBC shares are approaching chart support from 1997-98 and 2016.

Eoin Treacy's view -

Thank you for this question. There is no denying that bank shares have declined significantly so it is logical to question whether they are close to a low. With dividends being eliminated, a rise in defaults inevitable, a moratorium on buybacks, and tight margins from low interest rates the big question is whether the bad news has been priced in.



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March 26 2020

Commentary by Eoin Treacy

Fed Set to Launch Multitrillion Dollar Helicopter Credit Drop

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

“The Fed has effectively shifted from lender of last resort for banks to a commercial banker of last resort for the broader economy,” said JPMorgan Chase & Co. chief U.S. economist Michael Feroli.

The coming rain of credit -- historic in both size and scope -- will be made possible by $454 billion set aside in the aid package for Treasury to backstop lending by the Fed. That’s money the central bank can leverage to provide massive amounts of financing to a broad swathe of U.S. borrowers.

“Effectively one dollar of loss absorption of backstop from Treasury is enough to support $10 worth of loans.” Fed Chairman Jerome Powell said in in a rare nationally-televised interview early Thursday morning. “When it comes to this lending we’re not going to run out of ammunition.”

He told NBC’s “Today” show that the Fed was trying to create a bridge over what may well be a substantial decline in the economy in the second quarter, to a resumption of growth sometime in the latter half of the year.

“It’s very hard to say precisely when that will be,” he said. “It will really depend on the spread of the virus. The virus is going to dictate the timetable here.”

While the Fed can help by keeping interest rates low and ensuring the flow of credit, “the immediate relief” for Americans will come from the Congressional aid package, Powell said. The bill includes direct payments to lower- and middle-income Americans of $1,200 for each adult and $500 for each child.

Combined with an unlimited quantitative easing program, the Fed’s souped-up lending facilities are set to push the central bank’s balance sheet up sharply from an already record high $4.7 trillion, with some analyst saying it could peak at $9-to-$10 trillion.

Eoin Treacy's view -

The new stimulus plan is providing money to 90% of consumers, but also to corporations, municipals and both the government and corporate bond markets. In terms of both size and scope the package is designed to provide a life line to all markets and, so far, it is having the desired effect.



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March 19 2020

Commentary by Eoin Treacy

Reduce/ re-orientate equities, raise cash, favour USD, EUR and CHF

Thanks to Iain Little and Bruce Albrecht for this edition of their Global Thematic Investors’ Diary. Here is a section:

The Coronavirus crisis, the most serious event since the Global Financial Crisis (“GFC”) of 2008/2009, has set in motion a series of governmental policies whose unfortunate effect is to choke both demand and supply in the global economy.  These policies - prudential measures taken by governments united in their desire to appear to be “doing something”- are likely to be worse, economically speaking, than the disease itself.  Relief comes only with the passing of time or the finding of an anti-viral remedy, the latter a distant prospect at this stage.

Earnings news, monetary news, fiscal news and pandemic news are all following the disheartening course that we feared.  An emergency Fed meeting last Sunday, slashing rates to near zero, failed to reassure.  The next day, Wall Street produced the second of 2 record points drops in a week, falling -13%.  Equity markets have fallen by an average of about -30% from their January highs.

Equity markets are now oversold and distorted by panic.  The market finds it hard, if not impossible, to “price” risk when an end to the crisis is undefined and earnings unknown. And what discount rate should one use in a global panic when rates are near zero?  Many stocks trade under “fair value” on “normalized” earnings.  But the risks being taken by governments are such that there may be worse to come: bankruptcies in directly affected sectors like leisure, hospitality, airlines, hotels and “bricks and mortar” retail.  There may even be nationalizations in troubled sectors.  On the other hand, other sectors, also hit hard by the same waves of panic selling, may emerge as new long-term leaders in a changing world where personal safety, health fears, depersonalizing technology and e-commerce may enjoy further and more widespread adoption.

Eoin Treacy's view -

Millions of people just lost their jobs in the retail and restaurants sector. Weekly jobless figures are reported with a two-week lag, so today’s 281,000 increase is reflective of the week ending March 7th. Most cities in lock down made the decision over last weekend so next week’s figure will be higher but the release on April 2nd is likely to take jobless figures to new highs. The only limiting factor is the ability of people to sign on for benefits given the system’s capacity restraints.



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March 16 2020

Commentary by Eoin Treacy

Email of the day on lists dividend aristocrats

I used to be able to find a list at the chart library for a list of the shares that are dividend aristocrats by Eoin. I was unable to do so today. Is it still available and if so, can you please advise how I can reach it? Tks in adv.

Eoin Treacy's view -

Thanks for this question which others may have an interest in. The route to find the lists of dividend aristocrats is to open the Chart Library. Select the International Equity Library. The lists of Dividend Aristocrats stocks are the second item on the left-hand column. Here is a link to the lists
 



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March 11 2020

Commentary by Eoin Treacy

Boeing Plans Full Drawdown of $13.825 Billion Loan

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

Boeing obtained the loan from a group of banks last month to help it deal with its cash burn while it prepares to return its 737 Max plane to the skies. It initially tapped about $7.5 billion of the debt, and is now expected to draw the rest, said the people, asking not to be named discussing private information. Boeing plans to draw the remainder of the loan as a precaution due to market turmoil, one of the people said.

Companies affected by the virus are increasingly turning to banks for short-term financing to provide a safety net. United Airlines Holdings Inc. raised $2 billion in new liquidity with a secured term loan, while Norwegian Cruise Line Holdings Ltd. recently signed a new $675 million revolver. Should credit conditions worsen, more firms may start to draw down their credit lines, market watchers say. Boeing’s loan came about before Covid-19 spiraled into a global crisis and was expected to be fully drawn eventually.

“They want to have cash on the balance sheet,” said Bloomberg Intelligence’s Matthew Geudtner. The Max grounding, the company’s joint venture with Embraer SA and looming debt maturities will also weigh on Boeing’s cash hoard, he said.

Eoin Treacy's view -

The easiest way to determine where the biggest risks reside in this market is to use this metric: Whatever people were worried about in 2019, the coronavirus makes things worse.



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March 09 2020

Commentary by Eoin Treacy

Rosneft Plans to Increase Output as Russia Digs in for Price War

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

Last week in Vienna, ministers from Russia, Saudi Arabia and other members of the group left a fractious meeting with no deal to continue the cuts beyond April 1. Saudi Arabia heavily discounted its oil over the weekend, triggering a plunge of more than 20% in international crude futures.

Rosneft’s London-listed shares dropped 19.5% on Monday, while markets in Moscow were closed for a public holiday. In a separate statement, Russia’s finance ministry said that the country’s oil-wealth reserves would be sufficient to cover lost revenue “for six to 10 years” at oil prices of $25 to $30 a barrel.

 

Eoin Treacy's view -

Unconventional oil and gas has been one of the biggest gamechangers for the global economy in history. When the world’s biggest consumer, where production peaked decades ago morphs into the world’s biggest producer and a net exporter it changes the fundamentals and interrelationships of the market.



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March 06 2020

Commentary by Eoin Treacy

Covid-19 and Global Dollar Funding

Thanks to a subscriber for this edition of Zoltan Pozsar and James Sweeney’s report for Credit Suisse on the plumbing of the global financial sector. Here is a section:

Eoin Treacy's view -

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

The Credit Suisse team do an excellent job of highlighting where the risks are and provide a handy list of instruments to monitor to get an idea of how liquidity flows are functioning.

The repo market illiquidity in September was a signal to everyone that the tightening program had gone too far. There was nowhere near enough available capital in the system to allow the global money market to function. The Fed stepped in with a large swift injection of liquidity; inflating its balance sheet by $400 billion in four months.



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March 06 2020

Commentary by Eoin Treacy

Coronavirus: The Black Swan of 2020

This note from Sequoia may be of interest to subscribers. Here is a section:

Unfortunately, because of Sequoia’s presence in many regions around the world, we are gaining first-hand knowledge of coronavirus’ effects on global business. As with all crises, there are some businesses that stand to benefit. However, many companies in frontline countries are facing challenges as a result of the virus outbreak, including:

Drop in business activity. Some companies have seen their growth rates drop sharply between December and February. Several companies that were on track are now at risk of missing their Q1–2020 plans as the effects of the virus ripple wider.

Supply chain disruptions. The unprecedented lockdown in China is directly impacting global supply chains. Hardware, direct-to-consumer, and retailing companies may need to find alternative suppliers. Pure software companies are less exposed to supply chain disruptions, but remain at risk due to cascading economic effects.

Curtailment of travel and canceled meetings. Many companies have banned all “non-essential” travel and some have banned all international travel. While travel companies are directly impacted, all companies that depend on in-person meetings to conduct sales, business development, or partnership discussions are being affected.

It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. Some of you may experience softening demand; some of you may face supply challenges. While the Fed and other central banks can cut interest rates, monetary policy may prove a blunt tool in alleviating the economic ramifications of a global health crisis.

Eoin Treacy's view -

The knock-on effect to consumer confidence from the coronavirus and most particularly its influence on social interaction is a wild card for the global economy. It should help to focus minds on how best to deal with the situation but the global response, so far, has been haphazard. 



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March 05 2020

Commentary by Eoin Treacy

The Coronavirus Hunter Is Racing for Answers in a Locked Lab

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

Over the last five years, Baric, working closely with Vanderbilt University infectious-disease specialist Mark Denison, tested almost 200,000 drugs against SARS, MERS and other bat coronavirus strains.  He found at least two dozen that appeared to hinder the virus.

Among the most promising was Gilead’s remdesivir, a drug that fared poorly when used against a recent Ebola outbreak in Africa. In the lab, it worked against numerous coronavirus strains, including SARS and other bat coronaviruses that are similar to the new strain. Every coronavirus it was tested on, “it had high potency and efficacy,” Denison says.

That work was fortuitous. In early January, Baric got an urgent call from an infectious-disease colleague to send his unpublished data on remdesivir to colleagues in China who were dealing with a then-mysterious outbreak. Baric says he “was shocked” to see how fast the coronavirus was spreading.

Since then, work at his lab has been virtually nonstop. Each scientist puts in from one to six hours inside two different clean rooms equipped to handle the virus. The lab’s workday begins at 6 a.m. and often goes until 11 p.m. Individual sessions are short for safety and practical reasons — researchers aren’t permitted to eat, drink or visit the bathroom once inside the lab. Everyone has to pass an FBI background check and undergo months of safety training.

Eoin Treacy's view -

The WHO has stated remdesivir is their best bet for a suitable treatment for coronaviruses. It’s another question whether Gilead will make money form that evolving market since it will be under extreme pressure to provide an affordable range of treatments ahead of a vaccine being developed over the next year. 



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February 28 2020

Commentary by Eoin Treacy

Lead Indicators of Recession

Eoin Treacy's view -

After a week characterised by selling across the board, a great deal of profit taking has taken place and many overextensions relative to the trend mean have been unwound. The question I believe many people will be concerned with is whether the coronavirus is going to be the catalyst for an economic contraction? I thought it would therefore be worth monitoring the kinds of instruments that offer a lead indicator for that kind of concern.



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February 26 2020

Commentary by Eoin Treacy

Berkshire Hathaway Inc Shareholder Letter

Thanks to a subcsriber for this letter by Warren Buffett. Here is a section on utilities:

Berkshire Hathaway Energy is now celebrating its 20th year under our ownership. That anniversary suggests that we should be catching up with the company’s accomplishments.

We’ll start with the topic of electricity rates. When Berkshire entered the utility business in 2000, purchasing 76% of BHE, the company’s residential customers in Iowa paid an average of 8.8 cents per kilowatt-hour (kWh). Prices for residential customers have since risen less than 1% a year, and we have promised that there will be no base rate price increases through 2028. In contrast, here’s what is happening at the other large investor-owned Iowa utility: Last year, the rates it charged its residential customers were 61% higher than BHE’s. Recently, that utility received a rate increase that will widen the gap to 70%.

The extraordinary differential between our rates and theirs is largely the result of our huge accomplishments in converting wind into electricity. In 2021, we expect BHE’s operation to generate about 25.2 million megawatt-hours of electricity (MWh) in Iowa from wind turbines that it both owns and operates. That output will totally cover the annual needs of its Iowa customers, which run to about 24.6 million MWh. In other words, our utility will have attained wind self-sufficiency in the state of Iowa.

In still another contrast, that other Iowa utility generates less than 10% of its power from wind. Furthermore, we know of no other investor-owned utility, wherever located, that by 2021 will have achieved a position of wind self-sufficiency. In 2000, BHE was serving an agricultural-based economy; today, three of its five largest customers are high-tech giants. I believe their decisions to site plants in Iowa were in part based upon BHE’s ability to deliver renewable, low-cost energy.

Of course, wind is intermittent, and our blades in Iowa turn only part of the time. In certain periods, when the air is still, we look to our non-wind generating capacity to secure the electricity we need. At opposite times, we sell the excess power that wind provides us to other utilities, serving them through what’s called “the grid.” The power we sell them supplants their need for a carbon resource – coal, say, or natural gas.

Berkshire Hathaway now owns 91% of BHE in partnership with Walter Scott, Jr. and Greg Abel. BHE has never paid Berkshire Hathaway a dividend since our purchase and has, as the years have passed, retained $28 billion of earnings. That pattern is an outlier in the world of utilities, whose companies customarily pay big dividends – sometimes reaching, or even exceeding, 80% of earnings. Our view: The more we can invest, the more we like it.

Today, BHE has the operating talent and experience to manage truly huge utility projects – requiring investments of $100 billion or more – that could support infrastructure benefitting our country, our communities and our shareholders. We stand ready, willing and able to take on such opportunities.

Eoin Treacy's view -

I found this to be an enlightening discussion of the utilities sector. The long-held perception is that these kinds of businesses can afford to pay out the majority of free cashflow in dividends because they are charging rents on established pieces of infrastructure with easily forecastable maintenance and renewal trajectories. As Berkshire’s experience with wind demonstrates, this ignores the long-term risk of exogenous shocks, technological innovation, changing regulation and infrastructure reaching the end of its useful life.



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February 24 2020

Commentary by Eoin Treacy

Risk Parity Nirvana; Buyer's Compendium - 9 Screens Across Growth & Value

Thanks to a subscriber for this report by Mike Wilson for Morgan Stanley. Here is a section:

Eoin Treacy's view -

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

“The Fed has got your back and they will do whatever is necessary to support asset prices” That is the mantra of stock market investors who have been following a diversified or balanced investment strategy for the last decade. In between there have been occasions when the mantra was challenged, particularly following Jay Powell’s appointment as Fed chair. However, the pivot to easier policy and the response to the repo tightness in Q3 have reasserted belief in the mantra.



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February 14 2020

Commentary by Eoin Treacy

Kraft Heinz Cut to Junk by Fitch Following Lackluster Earnings

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

Kraft Heinz Co. was downgraded to junk status by Fitch Ratings, which predicted the company’s leverage will remain high for an extended period as the maker of Jell-O and Classico pasta sauce works to stabilize declining sales.

The food company was cut to BB+ from BBB- by the credit-ratings company, with a stable outlook. Fitch said the company may need to divest a sizable portion of its business in order to reduce its debt.

The downgrade follows Thursday’s earnings report, in which Kraft Heinz reported a drop in fourth-quarter sales that sent its bonds and stock tumbling. It was the latest sign that the company’s turnaround plan still has a long way to go.

Kraft Heinz said Thursday it would release a more detailed turnaround plan around the time of its next earnings report in early May, though many investors and analysts had been looking for it sooner.
 

Eoin Treacy's view -

Kraft Heinz’ dividend was 62.5¢ in 2018, 40¢ in 2019 and is expected to be 20¢ in 2020. The decline in the share price has supported the yield, which is currently 5.98% but the outlook for additional dividend cuts puts that under question. The company is likely to be a case study in how intangible values cannot be used to underpin a credit rating during a time of technological and social upheaval.



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February 05 2020

Commentary by Eoin Treacy

Trump's Farmer Base Will Make More Money Thanks to Trade Deal

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

Still, a last taste of aid is creating a temporary buffer. Payments of the final tranche started in January, contributing to the gains for this year’s profit projection. The USDA forecasts farmers will receive $15 billion in direct government payments in 2020, down from $23.7 billion in 2019 but still above the $11.5 billion received in 2017, before the trade war started.

While the USDA’s estimates take into account the trade pact, they may not reflect the true scope of the impact, according to Carrie Litkowski, a senior economist with the USDA’s Economic Research Service.

The projected gain for income also doesn’t reflect any potential blow-back from the outbreak of the deadly coronavrius in China, the world’s biggest food importer. The health crisis has in recent days called into question whether the Asian nation will meet the purchase targets established in the trade deal.

Eoin Treacy's view -

Soybeans has been ranging mostly above 850¢ since 2018 and returned over the last month to test the lower side of its range. This area represents the lower side of the volatile trading pattern which has evolved since the breakout in 2007. Bull markets in commodities are defined by an increase in the marginal cost of production and prior to 2007 the price failed to hold moves above 850c. That suggests we are seeing a long-term example of past resistance offering future support.



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January 24 2020

Commentary by Eoin Treacy

Fed Seen Holding Rates Steady, Ending Bill Purchases by June

This article by Christopher Condon and Sarina Yoo for Bloomberg may be of interest to subscribers. Here is a section:

Economists had a broad range of forecasts for when the Fed would stop buying Treasury bills, though June 2020 received the highest response at 43%. Respondents overwhelmingly expected officials will taper the monthly purchases rather than stop them suddenly. The Fed has been buying $60 billion in T-bills each month since October.

A scarcity of bank reserves was blamed for an unexpected spike in overnight funding rates in September. This led the fed funds rate to stray briefly out of its target range. The new cash created by the Fed’s T-bill purchases has since relieved that scarcity. The Fed, intent on ensuring an ample supply of reserves, has said it will continue the purchases at least into the second quarter.

Eoin Treacy's view -

The news headlines are full of news about the coronavirus and the number of countries where it has been found continues to rise every day. That injected a degree of caution in the markets that was not present a week ago. The clearest effects are evident in safe haven assets where Treasuries, precious metals and the Dollar have steadied.



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January 23 2020

Commentary by Eoin Treacy

January 21 2020

Commentary by Eoin Treacy

Boeing Sees 737 Max Approval Slipping to Mid-2020 in New Delay

This article by Alan Levin and Julie Johnsson for Bloomberg may be of interest to subscribers. Here is a section:

Boeing Co. is telling 737 Max customers that the grounded jet won’t be approved to fly until June or July, months later than previously anticipated, said people familiar with the matter.

The new delay comes after two recent discoveries, a software flaw that will require more work than expected and an audit that found that some wiring on the plane needs to be rerouted. The timetable also includes a buffer for unanticipated complications, said one of the people, who asked not to be named because the discussions are private.

The new expectations mean that Boeing’s best-selling jet would miss the busy summer travel season for the second straight year, adding to the compensation that the U.S. planemaker is likely to pay airlines. The Max was grounded in March 2019 after two deadly crashes that killed 346 people.

Eoin Treacy's view -

Trading was halted on Boeing’s shares ahead of the above announcement. The retort from the FAA that no timetable for the recertification of the aircraft has been set and that safety remains the top priority represents an additional blow.



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January 17 2020

Commentary by Eoin Treacy

DoubleLine Round Table Prima 1-6-20 - Segment 2: Markets

This video which is the second in the three-part series highlights some of the differences between economists’ perspective on growth and the forward-looking perspective offered by the stock market. I commend it to subscribers.

Eoin Treacy's view -

The one point that jumps out to me is how eager the majority of participants are to point out the potential problems in the market. Even allowing for the fact that DoubleLine is a bond house, and therefore more predisposed to the bearish case because of the benefit that provides to bonds, the extent of the bearishness is interesting.



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January 16 2020

Commentary by Eoin Treacy

Boeing Lost Its Way by Going on a Wall Street Detour

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

By the time Boeing decided to cobble together the 737 Max, its engineering culture was completely broken. Here’s how Aboulafia described it to Useem in the Atlantic:

It was the ability to comfortably interact with an engineer who in turn feels comfortable telling you their reservations, versus calling a manager [more than] 1,500 miles away who you know has a reputation for wanting to take your pension away. It’s a very different dynamic. As a recipe for disempowering engineers in particular, you couldn’t come up with a better format.

You can see that disempowerment — and its consequences — in the recently released emails. Instead of bringing their fears and complaints to superiors, the engineers grouse to themselves about the problems they see with the plane. They are bitter about management’s unwillingness to slow things down, to build the plane properly, to take the care that’s required to prevent tragedy from striking.

There is one email in particular from an unidentified Boeing engineer that I can’t get out of my head. It was written in June 2018, about a year after the company had begun shipping the 737 Max to customers:

Everyone has it in their head that meeting schedule is most important because that’s what Leadership pressures and messages. All the messages are about meeting schedule, not delivering
quality…

We put ourselves in this position by picking the lowest cost supplier and signing up to impossible schedules. Why did the lowest ranking and most unproven supplier receive the contract? Solely based on bottom dollar…. Supplier management drives all these decisions — yet we can’t even keep one person doing the same job in SM for more than 6 months to a year. They don’t know this business and those that do don’t have the appropriate level of input… .

I don’t know how to fix these things … it’s systemic. It’s culture. It’s the fact that we have a senior leadership team that understand very little about the business and yet are driving us to certain objectives. It’s lots of individual groups that aren’t working closely and being accountable …. Sometimes
you have to let things fail big so that everyone can identify a problem … maybe that’s what needs to happen instead of continuing to just scrape by.

Of course that’s exactly what happened: the 737 Max failed big — at a cost of 346 lives. Shareholder value has caused much harm in the three decades since it became the core value of American capitalism: diabetics who can’t afford insulin; students ripped off by for-profit universities; patients gouged by hospital chains; and so much else. But none worse than this.
 

Eoin Treacy's view -

General Electric basically invented financial engineering and built a massive business based on moving money around while its industrial core withered. That resulted in unique exposure, for an industrial company, to the credit crisis. The erasing of goodwill, forced sell-off of prime income producing assets and failure to reinvent a business model, resulted in the complete collapse of the share down to the low in late 2018.



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December 23 2019

Commentary by Eoin Treacy

Saut Strategy Soooooooooooooooooo?!

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

Eoin Treacy's view -

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

It’s all about the consumer. If the consumer is working, they are spending and that helps to keep the economy chugging along. Therefore, unemployment rates remaining well contained are one of the primary factors in ensuring growth remains on an upward slope.  



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December 20 2019

Commentary by Eoin Treacy

Boeing Capsule Misses Space Station Rendezvous as Crisis Deepens

 This article by Justin Bachman may be of interest to subscribers. Here is a section:

 

The mishap jeopardizes U.S. plans for human flights as soon as next year by Boeing, which was hired to ferry astronauts to the ISS as part of NASA‘s commercial crew program along with Elon Musk’s Space Exploration Technologies Corp. Boeing’s failure also deepens the sense of crisis around the aerospace giant as it tries to persuade regulators to end a flying ban on its 737 Max after two deadly crashes.

Boeing fell 1% to $330.04 at 10:40 a.m. in New York. The stock rose 3.4% this year through Thursday while the S&P 500 advanced 28%. NASA and Boeing officials said they were still trying to understand the cause of the timer failure. It’s too soon to assess the impact on subsequent Boeing space flights, they said. About 50 minutes after liftoff, the Starliner was out of position to begin its orbital insertion burn, the last boost into an orbit so the vehicle could dock at the space station. Had astronauts been on board, they might have been able to correct the problem, Bridenstine said.

Eoin Treacy's view -

Planes falling out of the sky and a space craft missing its rendezvous is not exactly confidence inspiring. Boeing is a major defense contractor so it is not going out of business but the catalogue of errors keeps growing and it is only a matter of time before activists starting calling for scalps.



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December 18 2019

Commentary by Eoin Treacy

FedEx Slides on Profit Outlook, Pressuring Dow Transports

This note by Nancy Moran and Thomas Black for Bloomberg may be of interest to subscribers.

FedEx Corp. erased its gains for the year after cutting its profit forecast for the second straight quarter as e-commerce puts a squeeze on margins. The stock also weighed on the Dow Jones Transportation Average, where it held the third-biggest weighting prior to Wednesday. FedEx was already reeling this week after Amazon.com Inc. stoked competitive tensions by banning third-party sellers from using the courier’s services, citing poor service.

 

Eoin Treacy's view -

Fedex is being squeezed between the preferred status of UPS as an Amazon shipper but also by Amazon performing its own deliveries via its own network of shippers. The clear divergence between Fedex and UPS highlights the fact there are some clear winners and losers in the evolving ecommerce shipping landscape.



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November 19 2019

Commentary by Eoin Treacy

Crispr Surges as Gene Editing Shows Promise in Blood Disease

This article by Bailey Lipschultz and Michelle Fay Cortez for Bloomberg may be of interest to subscribers. Here is a section:

“While the data are early, we are quite excited about what we are seeing,” he said in a telephone interview. “This is a pretty significant milestone, not just for us as a company but for the entire field. This could be an important landmark in medicine, when we saw the first promise for providing cures for a number of diseases using a gene editing approach.”

The early findings may benefit rival companies also studying medicines based on Crispr technology, as they are the first results from publicly traded companies using the platform. Editas Medicine Inc.’s lead drug will be given to its first patient at the start of next year as a treatment for a form of blindness, while Intellia Therapeutics Inc. is on track to file for its first human trial by mid-year.

Eoin Treacy's view -

Gene editing deals in cures rather than treatments. That’s a major challenge for the traditional pharmaceuticals business. Chronic conditions which requite ongoing treatment but have no cure have been massive money spinner for the pharmaceuticals business for decades. Right now, the cost of cures is extraordinarily high because a one-shot solution has to load all of the revenue from a treatment into one bill rather than spacing it out with a chronic condition. However, as the sector moves out of the orphan disease sector and into the mainstream over the next decade the potential for costs to come down is quite compelling.



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November 14 2019

Commentary by Eoin Treacy

Luckin Coffee's Stock Shoots Up After Revenue Rises Above Expectations

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

Shares of Luckin Coffee Inc. (LK) shot up 7.6% in premarket trading Wednesday, after the China-based coffee seller reported wider third-quarter loss but revenue that rose above expectations. The net loss was RMB531.9 million ($74.4 million), or RMB3.60 per American Depository Share, after a loss of RMB484.9 million, or RMB2.24 per ADS a year ago. Excluding non-recurring items, the adjusted per-ADS loss was RMB2.08, compared with the FactSet consensus for loss per ADS was RMB2.75. Revenue rose to RMB1.54 billion ($219.6 million) from RMB240.8 million, to beat expectations of RMB1.47 billion. Average monthly items sold were 44.2 million, up from 7.8 million a year ago, while the average monthly transacting customers grew to 9.3 million from 1.9 million. "During the third quarter, sales from freshly-brewed coffee drinks continued to maintain very strong growth, and we believe we will reach our goal to become the largest coffee player in China by the end of this year," said Chief Executive Jenny Qian. The stock. which went public on May 17, has tumbled 22.7% over the past three months, while the S&P 500 has gained 5.7%.

Eoin Treacy's view -

I wanted to try a Luckin Coffee while in Guangzhou over the summer but I was voted down by my daughters who could not get enough of boba tea. Since they discovered smores frappacinos the two alternatives are more balanced but they will always still choose a boba tea over a trip to Starbucks.



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November 13 2019

Commentary by Eoin Treacy

Google Deepens Push for Financial Data With Citigroup Tie-Up

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

“We’re exploring how we can partner with banks and credit unions in the U.S. to offer smart checking accounts through Google Pay, helping their customers benefit from useful insights and budgeting tools,” Google said in an emailed statement, adding that the accounts will carry federally guaranteed insurance.

The move is the latest sign of Silicon Valley’s determination to muscle in on financial firms’ territory, looking to expand their hold on customers and accumulate data on their finances. At the same time, it shows banks are more willing to pair up with technology companies in their quest to avoid getting shut out of the relationship entirely. In the Google arrangement, the financial institutions will handle most of the compliance requirements.

Google has spent years building out its payments capabilities, offering consumers the ability to send money to friends and check out both online and in stores through Google Pay. With the checking accounts, consumers will be able to receive their paychecks and transact solely inside the Google ecosystem.

Eoin Treacy's view -

Apple has teamed up with Goldman Sachs to branch into consumer credit while Amazon, Berkshire Hathaway and JPMorgan are planning on tackling the health care market. Google is partnering with Citigroup on consumer credit but Ascension on patient data. These stories highlight how eager tech companies are to branch into these data-rich sectors, where legacy players are ill-equipped to monetise the value, they have access to.



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November 11 2019

Commentary by Eoin Treacy

Electric cars are changing the cost of driving

This article by Michael J. Coren for Quartz may be of interest to subscribers. Here is a section:

It’s difficult to know how representative this data is of Teslas overall, given that Tesloop’s fleet is small, but it likely includes a large share of the highest-mileage Teslas on the road—several are nearing 500,000 miles. Finding conventional vehicles to compare is virtually impossible since most fleet cars are typically sold off after 100,000 miles.

But the implications could be huge. Every year, corporations and rental car companies add more than 12 million vehicles in Europe and North America to their fleets (pdf). Adding EVs to the mix could see those cars lasting five times longer—costing a fraction of conventional cars over the same period—while feeding a massive new stream of used electric cars into the marketplace. Whether the future of fleets is really electric, however, depends on the data. And that’s still in short supply.  

The promise of EVs
Most commercial vehicle fleets still run on gasoline and diesel, David Hayward, a fleet expert with Deloitte consulting, said. But EVs are top of mind. “Everyone is excited about it and everyone wants it,” he told Quartz. “But there’s trepidation.” The potential savings are huge. Fleet owners’ biggest expenses after depreciation (44%) are fuel (22%) and maintenance and repairs (11%), according to Deloitte.  EVs could slash those by more than half.

Eoin Treacy's view -

The original electric vehicles that entered service about ten years ago have some of the lowest resale values and steepest depreciations of any car. Meanwhile the Tesla Model 3 was the car with the least depreciation of any vehicle this year. That is a function of both supply and built up demand but the success in limiting the erosion of the battery’s charge potential has reversed the economics of the electric vehicle market. If a car can comfortably drive 500,000 miles with little to no maintenance, other than tyres, the only limitation is range. Right now, a Model 3 has about a 300 miles range which more than enough for most people. My SUV will do around 480 miles on the highway to a tank but probably closer to 200 in the stop/go of the city so the range issue is less of an issue today.



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November 08 2019

Commentary by Eoin Treacy

Inside Amazon's plan for Alexa to run your entire life

This article by Karen Hao for the MIT Technology Review may be of interest to subscribers. Here is a section:

In another scenario, you might ask Alexa through your communal home Echo to send you a notification if your flight is delayed. When it’s time to do so, perhaps you are already driving. Alexa needs to realize (by identifying your voice in your initial request) that you, not a roommate or family member, need the notification—and, based on the last Echo-enabled device you interacted with, that you are now in your car. Therefore, the notification should go to your car rather than your home.

This level of prediction and reasoning will also need to account for video data as more and more Alexa-compatible products include cameras. Let’s say you’re not home, Prasad muses, and a Girl Scout knocks on your door selling cookies. The Alexa on your Amazon Ring, a camera-equipped doorbell, should register (through video and audio input) who is at your door and why, know that you are not home, send you a note on a nearby Alexa device asking how many cookies you want, and order them on your behalf.

To make this possible, Prasad’s team is now testing a new software architecture for processing user commands. It involves filtering audio and visual information through many more layers. First Alexa needs to register which skill the user is trying to access among the roughly 100,000 available. Next it will have to understand the command in the context of who the user is, what device that person is using, and where. Finally it will need to refine the response on the basis of the user’s previously expressed preferences.

“This is what I believe the next few years will be about: reasoning and making it more personal, with more context,” says Prasad. “It’s like bringing everything together to make these massive decisions.”

Eoin Treacy's view -

A year ago Google gave a sample of what its artificial intelligence was capable of when it made a restaurant booking for some users by phoning a restaurant and impersonating a person. The company received a great deal of backlash from the liberal media about how much data it had to collect from a person to make that kind of service available and whether the company could be trusted with the information.



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November 07 2019

Commentary by Eoin Treacy

Expedia and TripAdvisor Lead Sharp Sell-Off in Online Travel

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

According to Piper Jaffray, “the most concerning trend” in the quarter was “the reduced efficiency of SEO,” or search engine optimization. Google, part of Alphabet Inc., is favoring its own “Hotel Finder” platform, along with paid links for search results, and this trend could require higher marketing costs.

D.A. Davidson noted that Expedia is exploring alternatives to mitigate its “reliance on search/Google,” but wrote that it sees “no alternatives that will be able to efficiently ‘move the needle’ from a volume perspective anytime soon.” Morgan Stanley wrote that Alphabet is now the “best way to invest in travel.”

TripAdvisor’s adjusted earnings and revenue both missed the lowest analyst estimates. The results “more than disappointed,” Jefferies wrote, reiterating its underperform rating. Analyst Brent Thill added that TripAdvisor’s preliminary 2020 outlook “is not encouraging,” in part because of “continued SEO pressure from Google.”

Eoin Treacy's view -

Third party vendors learned a long time ago that the biggest threat from selling on Amazon is being too successful. When sales move the needle enough to pique the attention of some quant, the risk of Amazon deciding to sell the same product, but cheaper, increases exponentially. The rise of the Amazon Basics line of products is a perfect example.



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November 04 2019

Commentary by Eoin Treacy

Rates Could Soar or Go Negative as Fed Pause Divides Wall Street

This article for by Liz Capo McCormick Bloomberg may be of interest to subscribers. Here is a section:

The message from the Fed, combined with solid U.S. job creation last month and optimism about U.S.-China trade talks, has pushed expectations for the next rate cut well into 2020. Fed fund futures aren’t penciling in a full quarter point cut until about September.

The yield move London-based Panigirtzoglou envisions would mirror what happened when the Fed engineered a similar three-quarter-point cut in a counter cycle maneuver in 1995. JPMorgan’s U.S.-based rates team is more sanguine, lifting its Treasury yield forecasts to 1.65% for year-end 2019 and 1.85% for mid-2020. That would be little changed from around 1.79% Monday.

Panigirtzoglou did add some big caveats to his bolder prediction. It assumes that the U.S. macro picture remains consistent with a mid-cycle adjustment, with resilience in employment and consumer confidence, as well as a rebound in manufacturing.

Eoin Treacy's view -

These two views are not mutually exclusive. The outlook for rates is quite capable of fulfilling both scenarios, just not at the same time. Right now, the case for a mid-cycle slowdown, like what was seen in the mid ‘90s, is looking increasingly credible as stock markets push new highs and cyclicals return to outperformance. The argument for even lower yields is looking like an increasingly distant possibility.



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November 01 2019

Commentary by Eoin Treacy

State of AI Report 2019

Thanks to a subscriber for this report for stateof.ai which may be of interest. Here is a brief section on robotics:

Certain Chinese industrial companies have automated away 40% of their human workforce over the past 3 years. This could be due in part to China’s annual robot install-base growing 500% since 2012 (vs. 112% in Europe). However, it’s unclear to what extent AI software runs these installed robots or has contributed to their proliferation.

Eoin Treacy's view -

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

The drive to automate manufacturing is one of the most challenging for any company but is also a major consideration in which countries benefit from manufacturing as a large, relatively well-paying employer. Many low-tech businesses have already migrated away from China while higher value-added businesses are under increasingly pressure to increase productivity by adopting technological solutions.



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October 31 2019

Commentary by Eoin Treacy

Shell Shares Continue Slide After Tense Call With Analysts

This article by Kelly Gilblom and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

At one point, van Beurden quipped that the buyback program would be cheaper now because the shares were falling, which invited a terse response from an analyst who said: “I agree.”
“Please help me with my confused state,” said Christopher Kuplent, an analyst at Bank of America Corp., before asking the penultimate question on the call about whether they are
disclosing information in the right way.

Van Beurden responded that they could have avoided the cautionary note about the buybacks completely. He said that people could have done the math that lower oil prices make life more financially challenging for Shell, however, he said it was better to acknowledge a likely stormy year ahead to the market.

Then he offered another mind-bending answer as shares slipped further. “That macro does actually have an effect on our cash flow is obviously a statement of the obvious. So we could also have said: ‘Well that’s hopefully all understood isn’t it?”’ he added. “But not making a statement of the obvious it is also making a statement.”

Eoin Treacy's view -

When CEOs are candid and state the obvious it tends to have unintended consequences. Royal Dutch Shell’s management just told the market they may not have the money to buy back as many shares next year because oil prices are low and are likely to stay that way for the next 12 months. That’s not exactly what investors were expecting to hear.



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October 30 2019

Commentary by Eoin Treacy

GE Soars as Another Boost to Cash Forecast Buoys Turnaround

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

General Electric Co. surged the most in eight months after the manufacturer raised its 2019 cash-flow forecast for the second straight quarter, giving Chief Executive Officer Larry Culp’s turnaround effort a much-needed boost.

The industrial businesses will generate as much as $2 billion in free cash this year, GE said Wednesday as it reported third-quarter earnings. The company previously projected no more than $1 billion in cash flow.

The revised forecast bolsters “another quarter of progress” as GE also works to improve operations and bring down debt, Culp said. That came despite headwinds from tariffs and a cash strain on the jet-engine business from the grounding of Boeing Co.’s 737 Max.

“There’s still a lot to do, it is a reset year,” he said in an interview. “But net-net, we’re pretty encouraged.”

Eoin Treacy's view -

The story of GE’s demise from bluest of blue chips to near bankruptcy will likely be studied at business schools for generations to come. The hubris of management, selling off the most productive assets to plug holes in the balance sheet, focusing on the industrial sector at the beginning of the trade war and coming to terms with the overvaluation of intangible assets will all be considered in retrospect as huge mistakes but what does the outlook for the future look like?



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October 25 2019

Commentary by Eoin Treacy

Microsoft Rallies as Results Beat "Virtually Every Metric"

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

Growth in commercial bookings highlight “an impressive start” to the year. The results also featured a strong second-quarter earnings outlook, operating margins that “significantly outperformed,” and “solid” growth with Azure. “Microsoft remains the best positioned name in tech for the emerging Hybrid Cloud architecture, with improving margins sustaining a durable mid-teens total return profile.” Overweight rating, price target raised to $157 from $155.

Bernstein, Mark Moerdler
The company “beat virtually every metric driven by strength in Cloud, Sever & Tools, and Windows Pro.” Outperform rating, price target raised to $167 from $162. The analysts “remain positive & like buying” the stock.

RBC Capital Markets, Alex Zukin
This was “a strong start” to the year, “with bookings strength across the board” and “no macro weakness.” The revenue outlook “was lower than expected but with stronger margins, as gaming is expected to be weak.” Outperform rating, price target raised to $163 from $160.

Eoin Treacy's view -

Microsoft has transformed itself from a software maker to a software as a service company (SaaS). In the process it has transformed its lumpy cyclical cashflows into a steady revenue stream which is much more easily modellable. That allows analysts a much higher degree of comfort with the balance sheet and that generally commands a higher multiple. This subscription business model affords Microsoft and other companies growth rate and margins of a tech company but with the cashflows of a consumer staples company.



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October 23 2019

Commentary by Eoin Treacy

California's Gasoline Panic

This article from the Wall Street Journal’s Editorial Board may be of interest to subscribers. Here is a section:

But about 95% of gas stations with convenience stores are independently owned, which includes mom-and-pops that license brand names. Some consumers will pay more for brand-name gas as they will for Prada purses or Starbucks lattes. As gas prices rise, consumers may also burn more money than they save driving in search of the cheapest stations.

Notably, the commission ignores that retail margins include labor costs, utilities, rent and taxes. In 2012 the state increased taxes on high earners, which hit many small businesses. California’s minimum wage has increased by 50% since 2013. According to the Bureau of Labor Statistics, worker wages at California gas stations over the last five years have increased 50% more than nationwide.

Mr. Newsom has threatened legal action against oil companies to “protect the public.” But liberals have long wanted higher gas prices so folks will ditch gas-powered cars. The Governor last month ordered revenue to be redirected from the last gas tax hike, which was supposed to fund highway construction, to projects that “reverse the trend of increased fuel consumption and reduce greenhouse gas emissions.”

So Californians in the future can look forward to paying more to drive on deteriorating roads as they head to homes without electricity due to blackouts. How long will it take California voters to figure out that these are problems made in Sacramento by politicians?

Eoin Treacy's view -

Spikes in crude oil prices are associated with recessions because they represent a tax on consumption. It’s not coincidence that one of the reasons Europe’s economies have subpar growth is because they tax economic output through regulation and carbon trading with the express aim of increasing costs. California is well on the way to achieving the same outcomes.



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October 22 2019

Commentary by Eoin Treacy

Normal Yield Curve Doesn't Mean Everything's Normal

This article by Mohamed A. El-Erian for Bloomberg may be of interest to subscribers. Here is a section:

The more that markets internalize this shifting monetary policy sentiment inside central banks, the more that they will unwind the policy expectations that fueled several forces acting to invert the U.S. yield curve, including indirect ones such as the enormous pressure on foreign investors to flee negative yields in Europe and Japan and go into longer-dated U.S. bonds. Look for this phenomenon to also maintain the yield spread between German and U.S. bonds at its current lower range despite what will continue to be relative economic outperformance by the U.S.

Just as I argued in March that it was unwise to react to the inversion of the Treasury yield curve with extreme anxiety about a U.S. recession, it would be premature to celebrate the recent partial reversion as an indicator of significant strengthening of U.S. economic prospects. Instead, both are reminders of the extent to which traditional economic signals have been distorted by a prolonged period of extraordinary central bank policies. And they should also been seen as just one of the unusual consequences of a monetary stance that, imposed for several years on central banks by the lack of proper policy action elsewhere, will now see the hoped-for benefits give way to a broadening and deepening recognition of the unintended consequences and collateral risks.  

Eoin Treacy's view -

An inverted yield curve has been one of the most readily available lead indicators for a US recession for decades. There is always an argument that this time is different and that it only works for the USA’s economy. It is also worth remembering that no US recession has occurred without an inverted yield curve first but is a very small number of false positives. When considering the history of the measure anyone who is willing to buck the historical trend is betting on the signal giving a false positive.



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October 11 2019

Commentary by Eoin Treacy

U.S., China Said to Reach Partial Deal, Could Set Up Trade Truce

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

The U.S. and China reached a partial agreement Friday that would broker a truce in the trade war and lay the groundwork for a broader deal that Presidents Donald Trump and Xi Jinping could sign later this year, according to people familiar with the matter.

As part of the deal, China would agree to some agricultural concessions and the U.S. would provide some tariff relief. The pact is tentative and subject to change as Trump prepares to sit down with China’s Vice Premier Liu He later Friday.

Stocks jumped Friday after the news. Equities had advanced globally earlier in the day amid growing conviction that the U.S. and China would negotiate a trade truce. Trump tweeted earlier Friday that “good things” were happening in the meetings -- and that if the countries did reach an agreement, he would be able to sign it without a lengthy congressional approval process.

On Thursday and earlier Friday, Liu and U.S. Trade Representative Robert Lighthizer held the first senior-level discussions between Washington and Beijing since a previous agreement fell apart in May and tariffs were raised in the months after. The world’s two biggest economies have been trying for the past year and a half to settle their trade dispute.

Eoin Treacy's view -

The words from Bill Clinton’s early ‘90s election campaign must be ringing in President Trump’s ears, “It’s the economy, stupid”. There is a clear rationale for pressuring China on trade but is it worth losing the election for? The hardest hit parts of the US economy just about all voted for President Trump in the last election and have been specifically targeted by Chinese tariffs. Little wonder then that agricultural imports are front and centre in whatever deal is to be announced. With the election less than 13 months away it’s time to at least put the trade war on hold and let animal spirits loose. 



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October 10 2019

Commentary by Eoin Treacy

Market Internals

Eoin Treacy's view -

I have to admit I don’t look at the internals of the market all that often because it is the trend rather than the day to day moves which lend some insight into the health of the market. I thought it might be useful to look at some of the most common measures to discern if any clues to market direction are evident.

The Total Number of New 52 Week Highs on the NYSE Index is coming back down towards the lows December 2018 and towards the end of 2015. The significant spike on the upside in late 2017 was an anomaly suggesting a period of underperformance ahead, but generally lows are better predictors of market bottoms than spikes are of tops.



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October 03 2019

Commentary by Eoin Treacy

The Global Internet Phenomena Report

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

Google (Alphabet): YouTube, Google Cloud, Google Play, Google Search, Google Docs, Google Drive, DoubleClick, Gmail, and Crashlytics
Netflix: Netflix Video
Facebook: Facebook, Instagram, Facebook Video, WhatsApp, Facebook Messenger, Oculus Rift Microsoft: Xbox Live, Windows Update, Skype, Outlook 365, Office 365, SharePoint, OneDrive, Windows Store, LinkedIn
Apple: iTunes, iCloud, Apple Software Update, FaceTime, Apple Music, Apple.com, iCloud Photo Stream, Mac App Store

The brands with video traffic have a significant advantage on the downstream. Google (YouTube), Netflix, Facebook, and Amazon (Amazon Prime) have strong video offerings. Apple soon will, and Microsoft’s entry into gaming streaming (Mixer) will likely move them up this list if they can continue to recruit high profile gamers.

As shown in the chart, Google is #1 overall and on the upstream. The combination of YouTube, Google Search, and Google Cloud are the biggest contributors to the upstream traffic, as they are an integral part of any Android device’s experience.

Netflix is the #1 on the downstream and #2 overall as the only pure play in the bunch. As we mentioned last year, if Netflix was not the most efficient streamer at every resolution, their total could easily be twice what it is today, and they continue to excel in video codec work and efficiency in resolution downshifts and upshifts.

Google is also #1 on connections. This is a much more collaborative effort among Google apps. YouTube, Google Cloud Messaging, Google Search, Crashlytics, DoubleClick, and even Nest are the biggest contributors to Google connections per device.

Amazon: Amazon Prime, Twitch, Amazon.com, Alexa, Amazon Glacier, Amazon Music

When combined, these brands took up over 43% of all traffic volume on the internet: The details are interesting. Overall, Google edged out Netflix as the top consumer of bandwidth on the internet (as well as upstream) and dominated in the percentage of connections. Unsurprisingly, Netflix was the single largest consumer of traffic downstream, but Google was not far behind. This is confirmation that brands can build synergies, expand their business, and succeed. The obvious outlier in this case is Netflix, which does one thing and does it exceedingly well, albeit at very high volume. With new streaming services coming out from Facebook and Apple, with 4K and live streaming taking hold, these numbers might climb even higher next year.

Eoin Treacy's view -

The companies that dominate the internet have almost all adopted some form of the subscription business model. Their success in capturing the attention of hundreds of millions of consumers and the ad revenue and spending power that goes with it represent powerful cashflows. Their success also encourages competition and the evolution of new streaming services is a challenge to the early hegemony of some companies.



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October 01 2019

Commentary by Eoin Treacy

Xi Says China's Rise Unstoppable in Face of Protests, Trade War

This article by Annie Lee, Peter Martin and James Mayger for Bloomberg may be of interest to subscribers. Here is a section:

President Xi Jinping declared that no force could stop China’s rise, exuding confidence during a key
anniversary as he faced unprecedented challenges from protesters in Hong Kong and Donald Trump’s trade war.

Speaking at the start of grand parade marking 70 years since the founding of the People’s Republic, Xi called for stability in Hong Kong, unity among Chinese ethnic groups, and the “complete unification” of the country. Xi delivered the remarks at the site where late Communist Party patriarch Mao Zedong proclaimed the nation’s founding on Oct. 1, 1949.

“Today, a socialist China is standing in the east of the world and there is no force that can shake the foundation of this great nation,” Xi told a crowd of carefully vetted guests under smoggy skies in the center of the capital. “No force can stop the Chinese people and the Chinese nation forging ahead.”
Xi’s rallying cry came before an hours-long pageant showcasing China’s industrial and scientific achievements, including sophisticated weaponry such as DF-17 ballistic missiles believed capable of circumventing U.S. defense systems.

The closely scripted proceedings sought to reinforce the strength of a party facing multiple threats, from the slowest economic growth in decades to violent unrest in one of Asia’s top financial hubs.

Eoin Treacy's view -

Sometimes I feel like a broken record always repeating the same point about China, but governance is everything. The ranks of apologists for tyranny continue to advocate strongly for China despite its record on human rights, the environment, intellectual property, corruption, censorship and a host of additional factors.

The one thing China has going for it, is its economic expansion. Investors will be willing to give it the benefit of the doubt provided the expansion persists. It will an entirely different narrative if China has a recession.



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September 20 2019

Commentary by Eoin Treacy

Round numbers and indecision

Eoin Treacy's view -

One would be forgiven for concluding that algorithms have been programed with round numbers in mind. Roundophobia has been a topic of conversation at The Chart Seminar for decades but it is particularly relevant now because so many instruments have paused in the region of big round numbers. I’m greatly looking forward to the next event which will be in London on October 3rd and 4th.



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September 18 2019

Commentary by Eoin Treacy

FedEx Plunges After Slashing Forecast on Trade War, Slowdown

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

“In reality, FedEx’s release is largely the result of many management missteps over the years, including overspending on aircraft despite weaker returns in Express over the long-term, and acquisition debacles,” he said in note to investors.

Trade-War Impact
The U.S.-China trade war has weighed on manufacturers, disrupting a key market for FedEx. A surge in industrial jobs seen in the first two years of Trump’s presidency has reversed in parts of the country, and there’s evidence that some corners of the U.S. economy are sliding toward recession. Companies have slowed business investment and capital expenditures as uncertainty over trade policies has clouded the outlook for future growth.

For FedEx, the weaker outlook underscored the hurdles as the company introduces costly changes to its ground network to handle surging e-commerce deliveries while contending with rising competition from Amazon.

Eoin Treacy's view -

Amazon is now a larger shipper of items than either UPS or Fedex within the US market, from a standing start a couple of year ago. UPS still ships items for Amazon but that business is declining while Fedex is attempting to forge relationships with upstarts in the warehousing sector like Deliverr and Shopify. If the share price is any guide that latter strategy is in its infancy at best. Meanwhile it has been my experience that Fedex is successfully. competing on price for international bulk shipping business to Amazon’s European warehouses.



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September 13 2019

Commentary by Eoin Treacy

Sturdy Sales, Confidence Show U.S. Consumer Holds Up as Pillar

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

Spurred by a resilient labor market and income gains, the consumer remains the chief source of firepower for economic growth that’s slowed amid fragile global demand, uncertainty surrounding trade policy and lackluster factory output. The report suggests another solid quarter of household consumption, which grew in the April-June period at the fastest pace since 2014.

“At a time when recession risk dominates most economic discussions, the strength of the U.S. consumer is among the more compelling examples of an economy that is still firing on all cylinders,” Tim Quinlan, senior economist at Wells Fargo Securities LLC, said in a report.

Eoin Treacy's view -

The consumer has been largely shielded from the inflationary pressures of the trade war by the lack of duties on imported apparel and some other manufactured goods. That is now changing with new tariffs on these goods being implemented and the wholly domestic factor of rising health insurance costs pushing inflation higher.



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September 11 2019

Commentary by Eoin Treacy

Factors or Fundamentals, Quant Tremor Is Field Day for the Geeks

This article by Sarah Ponczek and Vildana Hajric for Bloomberg may be of interest to subscribers. Here is a section:

You wouldn’t know it from benchmarks, but beneath a tranquil surface violent swings are lashing traders along obscure fault lines. Companies like real-estate firms that rose the most in 2019 are plunging, and some that have trailed are being pushed out front. It’s been a mild reckoning for hedge funds and others who have bet on the status quo persisting.

Amid all the churn has been a renewed focus on a quantitative concept known as factor investing, which groups companies not by industry but traits such as how fast their prices move or profits rise. A question gaining currency in the past few days is whether these categories are just handy descriptions of twists in the market -- or are at some level guiding them.

“It seems very mechanical right now,” said John Swarr, investment specialist at Penn Mutual Asset Management, which has $27 billion under management. “If you look within some of these stocks that are being hit the hardest, some are in much better shape than others and yet they’re all being affected similarly,” he said. “It does feel like it’s a rules-based rotation.”

Eoin Treacy's view -

The total of negative yields bonds was at $17 trillion for a brief time at the end of August and has since contracted to $14.3 trillion. That’s a big more in a little less than two weeks.

The failure of the German government to sell a full allocation of bonds and failed auctions at the US Treasury in August were probably the catalysts for sapping investor demand for bonds globally. The unwinding of leveraged long positions now has the scope for meaningfully move bond yields higher with clear upward dynamics evident across multiple markets.



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August 16 2019

Commentary by Eoin Treacy

Alibaba's Financial Superstar is Shining Once More

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

At 1.63 billion yuan ($237 million), Alibaba’s share of Ant’s profit was the highest in almost two years. In three of the past eight quarters, Ant ran at a loss or provided zero earnings to Alibaba, according to the data. Despite this uptick, Ant’s contribution to Alibaba’s bottom line remains minor at around 7% of operating income. It could shrink again if Alibaba’s e-commerce business dwindles.

Yet Ant has plans to expand its reach throughout China’s economy, including moves deeper into wealth management and other financial products. This could make it relatively robust against any weakness in online and offline commerce should a macroeconomic slowdown continue. 

Given Alibaba’s moves to broaden its business into offline shopping, cloud computing and entertainment, investors may not need to get panicky about retail just yet. But when that time comes, Ant may have grown large enough to shine a bright enough light across the rest of the business. 

Eoin Treacy's view -

Both Amazon and Alibaba are discovering that the future of retail is a hybrid online and bricks & mortar experience. That is not what investors believed would be the case when they accepted massive valuations. The theory was the high costs of physical infrastructure on the high street would be replaced by smaller workforces and remote warehouses. The truth is we need both and that comes at a cost. The benefit both companies have is they are in a better position to provide this kind of hybrid experience than many established retailers.



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August 09 2019

Commentary by Eoin Treacy

Revealed: how Monsanto's 'intelligence center' targeted journalists and activists

This article from The Guardian may be of interest to subscribers. Here is a section:

The documents, mostly from 2015 to 2017, were disclosed as part of an ongoing court battle on the health hazards of the company’s Roundup weedkiller. They show:

Monsanto planned a series of “actions” to attack a book authored byGillam prior to its release, including writing “talking points” for “third parties” to criticize the book and directing “industry and farmer customers” on how to post negative reviews.

Monsanto paid Google to promote search results for “Monsanto Glyphosate Carey Gillam” that criticized her work. Monsanto PR staff also internally discussed placing sustained pressure on Reuters, saying they “continue to push back on [Gillam’s] editors very strongly every chance we get”, and that they were hoping “she gets reassigned”.

Monsanto “fusion center” officials wrote a lengthy report about singer Neil Young’s anti-Monsanto advocacy, monitoring his impact on social media, and at one point considering “legal action”. The fusion center also monitored US Right to Know (USRTK), a not-for-profit, producing weekly reports on the organization’s online activity.

Monsanto officials were repeatedly worried about the release of documents on their financial relationships with scientists that could support the allegations they were “covering up unflattering research”.

Eoin Treacy's view -

It’s hard to imagine how much more toxic Monsanto’s reputation can get but as the record of the company’s nefarious actions come to light it is understandable why they were so willing to be taken over by Bayer. They are now attempting to settle the Roundup weedkiller class action lawsuits for $6-$8 billion while lawyers are looking for more upwards of $10 billion.



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August 08 2019

Commentary by Eoin Treacy

Bridgewater's Ray Dalio Discusses the Impact of China's Growth on the World Economy

This is a fascinating interview where Ray Dalio discusses the merits of betting on China.

Eoin Treacy's view -

There are two very big questions we have to answer which are fundamental to the construction of a long-term portfolio. The first is does governance really mean anything? The second is how do you value private assets in a portfolio?
 
At this service we have long held that governance is everything. Is that still true? Ray Dalio appears to be agnostic on whether property rights, respect for minority shareholder interests, an independent judiciary and a free press are important. What I personally find particularly interesting is that the performance of China’s stock market, during the decade where it has achieved the heights of its ambition has been dismal.



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July 30 2019

Commentary by Eoin Treacy

Musings From The Oil Patch July 30th 2019

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

Eoin Treacy's view -

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

Autonomous vehicles represent the marriage of hardware and software but perhaps more importantly the transition of the automotive industry from the industrial to the consumer electronics sector. Electric vehicles have a lot fewer parts, are a lot easier to manufacture and the cosmetic features are mostly about fit and click rather than precision welding. That’s the primary challenge facing legacy automotive companies. Coupled with slowing economic growth the sector remains under pressure.



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