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August 15 2017

Commentary by Eoin Treacy

Video commentary for August 15th 2017

August 15 2017

Commentary by Eoin Treacy

Euro-Pound Parity Call Chimes as Morgan Stanley Joins HSBC

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

“In euro-sterling we’ve had a very strong conviction and it’s one of the biggest forecasts I ever remember making on a major currency,” David Bloom, HSBC’s London-based global head of currency strategy said in an interview last week.  That’s “a 20 percent move and that’s quite something. It’s very unusual that we make such, what was at that time, an outrageous forecast” but “we are roughly half way there and we believe in it,” he said.

Bloom first made his parity call a year ago, when the euro was around 83 pence. HSBC predicts the euro and the pound ending this year at $1.20, which are both “strong views,” he said.

Euro-sterling was little changed at 0.9085 as of 9:20 a.m. in London on Tuesday, having reached 0.9119 on Aug. 11, its strongest level since October. The pair reached a record 0.9803 in December 2008.
Diverging Politics

Since France elected pro-European leader Emmanuel Macron in May, risks of the currency bloc fragmenting have diminished. In addition, euro-region economic data are showing signs of improvement. In contrast, Brexit negotiations are far from clear and that’s weighing on the pound. That’s the main concern for Standard Bank’s Barrow.

It all “depends a lot of how the Brexit negotiations go,” he said. “On euro-sterling previously we thought the 90-92 area might be the peak, but obviously now I no longer do.”

While Morgan Stanley’s parity call is partly due to a bullish-euro outlook, the U.K. currency is “likely to weaken in its own right, driven by weak economic performance, low real yields and increasing political risks,” Hans Redeker, head of foreign-exchange strategy, wrote in a client note dated Aug. 10.

 

Eoin Treacy's view -

Parity in foreign exchange markets represents about the biggest round number there is so little wonder when traders look at the trend of the Pound’s decline against the Euro that they think of the 1:1 ratio as the most logical target. 



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August 15 2017

Commentary by Eoin Treacy

Chinese automakers covet FCA

This article by Larry Vellquette for Automotive News may be of interest to subscribers. Here is a section:

Why, after two years on the block, is FCA apparently drawing interest from at least one potential Chinese buyer now?
The answer: FCA's global network and product — specifically Jeep and Ram — fit the requirements the Chinese government has set for attractive acquisitions.

Quality gap
Chinese automakers have openly dreamed of cracking lucrative North America for a decade, spending millions to display their vehicles at high-profile U.S. auto shows. Early efforts showed that Chinese automakers had a long way to go before they were ready to compete here.

But in more recent years — through knowledge and expertise gained via joint ventures with the world's largest and most successful automakers — Chinese companies have closed the quality gap.

And the automakers feel like they finally have closed that gap enough to start selling their products in the U.S., said Michael Dunne, president of Dunne Automotive, a Hong Kong investment advisory company and an expert on the Chinese auto industry.

They also are under pressure from the government to expand beyond China, Dunne said. A government directive dubbed China Outbound pushes Chinese businesses to acquire international assets from their industries and operate them "to make their mark," much as Geely has done since acquiring Volvo in 2010. Bloomberg reported last week that Chinese companies plan to spend $1.5 trillion acquiring overseas companies over the next decade — a 70 percent increase from current levels.

 

Eoin Treacy's view -

Germanys auto sector has been garnering all the wrong sorts of attention lately with increasingly evidence that the major manufacturers may have colluded in hoodwinking the globe into believing diesel engines are clean. On the other hand, China’s auto manufacturers have been among the best performers this year as they have increasingly focused on partnerships with international brands. 



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August 15 2017

Commentary by Eoin Treacy

August 15 2017

Commentary by Eoin Treacy

Diversifying away from Aussie banks

This video from Liverwire caught my attention this morning. Here is a section:

Financials dominate the ASX200, comprising 35.4% of the index. This compares to 14.7% of the S&P500. Andrew Fleming, Deputy Head of Australian Equities at Schroders, points out, they are a big part of the index - because they make a lot of money. Here he questions whether this will continue.

Risks are clearly skewed one way, being down rather than up, from the starting point. The banks are not likely to make a lot more money than they do today in the future

In the short video above Fleming discusses this in more detail and also shares one simple strategy for achieving better diversification when investing in the ASX-listed banks.

 

Eoin Treacy's view -

A point I’ve made on successive occasions is that the weightings of Australian and Canadian banks in their respective domestic benchmark stock indices are at levels which have an undue influence on the market. 



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August 15 2017

Commentary by Eoin Treacy

48th Year of The Chart Seminar

Eoin Treacy's view -

The Chart Seminar 2017 

Our remaining venue for the 48th year of the seminar is:

London November 16th and 17th 

If you are interested or would like to suggest a venue please contact Sarah at sarah@fullertreacymoney.com 

The full rate for The Chart Seminar is £1799 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). Subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.



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August 14 2017

Commentary by Eoin Treacy

August 14 2017

Commentary by Eoin Treacy

Bitcoin Surges Past $4,000 as Speed Breakthrough to Fuel Spread

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

Bitcoin soared past $4,000 for the first time on growing optimism faster transaction times will hasten the spread of the cryptocurrency.

The largest digital tender jumped to a peak of $4,216 Monday, a gain of nearly 18 percent since Friday, after a plan to quicken trade execution by moving some data off the main network was activated last week. The solution -- termed SegWit2x -- had been so contentious that a new version of the asset called Bitcoin Cash was spun off earlier this month in opposition.

The split grew out of the tension between growing demand for the virtual currency and some of the design features that had fueled that popularity -- the decentralized verification procedures that ensured against hacking and government oversight. While this month’s confrontation ended up as little more than a speed bump in bitcoin’s more than 300 percent rally in 2017, concerns remain around the capacity to increase transaction volumes.

“Up until now a lot of people didn’t really believe bitcoin could go any higher until the scaling issue is resolved,” said Arthur Hayes, Hong Kong-based founder of bitcoin exchange BitMEX. “With this actually being implemented on protocol, theoretically the amount of transactions that can be processed at a reasonable speed is going to be much higher, so a lot of people are very bullish about bitcoin now.”

 

Eoin Treacy's view -

Blockchain’s ability to verify participation at every stage of a contract, to have legitimacy across international borders and to act as both a secure and incorruptible ledger was retarded by the slow pace of execution. That is the primary reason why the global bitcoin community agreed to implement the SegWit2x protocol at the beginning of the month.  It’s well and good to talk about developing a global payments network but when it takes anything from 20 minutes to hours to transact, the argument loses credibility. The imposition of the new code will greatly speed up the network, allowing greater room for the bitcoin market to expand. 



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August 14 2017

Commentary by Eoin Treacy

The Continuum of Disruption

Thanks to a subscriber for this report from the team at Raymond James focusing on the revolution in the retail sector. Here is a section:

Reflecting on the past and examining the continuum, it was and is totally logical that that Amazon first attacked “media” (books, etc.) as its entry into eCommerce. Books are typically small, easily shipped and not damaged in shipping, require little additional selling by the vendor (other than recommendations from friends, families, or acquaintances), require no imagination to understand the form, and have an indefinite shelf life.

Nearby, we then positioned electronics – particularly consumer electronics including televisions, computers, and other similar electronic accessories. While some of these items are outsized, the form factors for most of these have become smaller as technology has advanced, thereby becoming easier to ship. Additionally, there is now so much online literature on the various alternatives available that make human selling interaction less necessary (or helpful or trusted). And finally, while the technological life of many of these products may be limited, the physical lives are longer, sometimes infinite.

At the other end of the continuum, we position heavy building materials such as gypsum, bags of cement, cinder blocks, and lumber. These items tend to be irregularly packaged and often not acceptable for shipment by UPS and/or Federal Express and subject to damage if shipped over-the-road by truck. Accordingly, Home Depot and Lowe’s, each of which has be developing their own eCommerce capabilities, have, to date, been less intermediated by the pure e-tailers than a host of other brick and mortar retailers. 

 

Eoin Treacy's view -

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

The big box departments stores have collapsed. The fact they had posted some of the most consistent uptrends from their respective 2008 lows; bouncing so early following the credit crisis is a testament to just how quickly the market is changing. 



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August 14 2017

Commentary by Eoin Treacy

Trump trade investigation will 'poison' relations with China, media warns

This article by for the Guardian may be of interest to subscribers. Here is a section: 

“Given Trump’s transactional approach to foreign affairs, it is impossible to look at the matter without taking into account his increasing disappointment at what he deems as China’s failure to bring into line [North] Korea,” the English-language paper said.

“But instead of advancing the United States’ interests, politicising trade will only exacerbate the country’s economic woes, and poison the overall China-US relationship.”

An administration official said diplomacy over North Korea and the potential trade probe were “totally unrelated”, saying the trade action was not a pressure tactic.

The China Daily said it was unfair for Trump to put the burden on China for dissuading Pyongyang from its actions.
“By trying to incriminate Beijing as an accomplice in [North Korea’s] nuclear adventure and blame it for a failure that is essentially a failure of all stakeholders, Trump risks making the serious mistake of splitting up the international coalition that is the means to resolve the issue peacefully,” it said.

 

Eoin Treacy's view -

The US Administration might be backing away from confrontational rhetoric regarding North Korea, but the question of China’s trade practices is now moving centre stage. China’s practice of insisting on technology transfer, which is then used to promote domestic manufacturing in direct opposition to the original foreign firm’s interests is predatory. It’s hard to imagine that a government investigation won’t be able to find evidence of unfair trade practices if it wants to. 



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August 14 2017

Commentary by Eoin Treacy

August 11 2017

Commentary by Eoin Treacy

August 11 2017

Commentary by Eoin Treacy

U.K. Consumers Get No Relief Just Yet From Inflation Squeeze

This article by David Goodman and Harumi Ichikura for Bloomberg may be of interest to subscribers. Here is a section: 

U.K. shoppers are in the “teeth” of a squeeze on their pockets and they’re going to have to ride it out for the rest of the year.

That’s the view of Bank of England Governor Mark Carney, who said this month that consumers may have to wait a bit longer to see real wage growth again. Data next week will reinforce that view, with inflation continuing to outpace incomes, leaving retail sales struggling to build momentum.

U.K. consumers, whose resilience was a key buttress of the U.K.’s initial performance after the Brexit referendum last year, have lost some of their muscle in 2017. With the pound’s drop fueling higher prices, they’ve been feeling the pinch, and a report earlier this week showed households cut back on spending for a third month in July.

“It will continue to feel like this, but then as we move into the new year we see inflation start to come down and household income start to go up so that we move out of this,” Carney said after presenting the bank’s Inflation Report on Aug. 3. “I’m not saying roaring out of this real income squeeze, but we move out of this real income squeeze.”

Eoin Treacy's view -

The Brexit decision is going to have long-term repercussions for the UK economy but the more pressing issue is how much progress can be expected in the negotiations. Both UK and Eurozone media outlets are full of stories about how far apart the sides appear to be in understanding the rather different views on what the future relationship should be. 



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August 11 2017

Commentary by Eoin Treacy

Why Are Stock Market Prices So High?

Thanks to a subscriber for this report from Jeremy Grantham which may be of interest. Here is a section quoting Ben Graham that particularly piqued my attention:

“In early 1955 when I testified before the Fulbright Committee the stock market was then about 400, my central value was also around 400 and the valuation of other ‘experts’ using other methods all seemed to come to about that level. The action of the stock market since then would appear to demonstrate that these methods of valuations are ultra-conservative and much too low, although they did work out extremely well through the stock market fluctuations from 1871 to about 1954, which is an exceptionally long period of time for a test. Unfortunately in this kind of work, where you are trying to determine relationships based upon past behavior, the almost invariable experience is that by the time you have had a long enough period to give you sufficient confidence in your form of measurement just then new conditions supersede and the measurement is no longer dependable for the future.” [Emphasis added. By the way, the deliberate total return from the S&P 500 from the end of 1963 until today has been 5.75% real, exactly what we at GMO assume to be the long-term, normal return.] 

“My reason for thinking that we shall have these wide fluctuations – of which we had a taste in 1962, in May particularly – is that I don’t see any change in human nature vis-à-vis the stock market which is sufficient to establish more restraints in the public behavior than it showed over so many decades in the past.” 

“But let me point out ‘for the record’ that it is not impossible in theory that the market’s high level alone could sooner or later precipitate a collapse without the necessity for these technical weaknesses [described above, Ed.] to show themselves. The collapse might be triggered by some untoward economic or political development. But if things do happen that way it will be the first time in market history, I believe, that we would have the end of a bull market without the excesses and abuses of the sort I have mentioned.” [Emphasis added.] 

“The main need here is for the investor to select some rule which seems to be suitable for his point of view, one which will keep him out of mischief, and one, I insist, which will always maintain some interest in common stocks regardless of how high the market level goes. For if you had followed one of these older formulas which took you out of common stocks entirely at some level of the market, your disappointment would have been so great because of the ensuing advance as probably to ruin you from the standpoint of intelligent investing for the rest of your life.”

Eoin Treacy's view -

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

Anticipation is a big topic in the first day of The Chart Seminar not least because it’s a big part of life. Think about how you plan your holidays. When you first go on vacation you might book a last-minute deal to anywhere, next year you will do some additional research and plan ahead. While at your chosen location you might meet someone, who got a better deal by buying early. On the following year you plan ahead even further. By the time you are spending time on cruise ships you’ll notice they take reservations three years in advance. More data and experience allow us to plan ahead for what are in many cases predictable events. That planning changes the nature of market. 



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August 11 2017

Commentary by Eoin Treacy

J.C. Penney Plummets After Loss Renews Concerns About Retail

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

J.C. Penney is the bearer of more bad news for department-store investors.

On Friday morning, the company followed Macy’s Inc., Kohl’s Corp. and Dillard’s Inc. in reporting declining sales in the second quarter. J.C. Penney also posted a deeper loss than analysts expected -- hurt by clearance sales -- sending the shares on their worst decline in more than four years.

The results renewed fears that there’s no end in sight for the department-store industry’s drought. J.C. Penney Chief Executive Officer Marvin Ellison is trying to win back customers by expanding the company’s partnership with cosmetic retailer Sephora and bolstering the assortment of high-price items, like appliances. The company is also pushing services like salons that require shoppers to come into stores. But progress has been slow.

The company also is closing about 140 underperforming stores. And the liquidation of inventory in 127 of those locations hurt profit in the period, Ellison said in a statement.

“These events were isolated to the second quarter,” he said, adding that the company expects to “deliver improved results in the back half of the year.”

But investors saw little reason for optimism. The shares tumbled as much as 18 percent to $3.85 after the report was released, the biggest intraday drop since February 2013. That followed a 43 percent decline this year through Thursday’s close, bringing the stock to a record low.

Eoin Treacy's view -

The back end of the year is always better for retailers since it includes the run up to the holiday season. However, the big question is not whether they can improve their revenue numbers, but rather how any growth they achieve measures up to the inexorable growth of online retail. 



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August 11 2017

Commentary by Eoin Treacy

Biohackers Encoded Malware In A Strand of DNA

This article by Andy Greenberg for Wired.com may be of interest to subscribers. Here is a section:

When biologists synthesize DNA, they take pains not to create or spread a dangerous stretch of genetic code that could be used to create a toxin or, worse, an infectious disease. But one group of biohackers has demonstrated how DNA can carry a less expected threat—one designed to infect not humans nor animals but computers.

In new research they plan to present at the USENIX Security conference on Thursday, a group of researchers from the University of Washington has shown for the first time that it’s possible to encode malicious software into physical strands of DNA, so that when a gene sequencer analyzes it the resulting data becomes a program that corrupts gene-sequencing software and takes control of the underlying computer. While that attack is far from practical for any real spy or criminal, it's one the researchers argue could become more likely over time, as DNA sequencing becomes more commonplace, powerful, and performed by third-party services on sensitive computer systems. And, perhaps more to the point for the cybersecurity community, it also represents an impressive, sci-fi feat of sheer hacker ingenuity.

“We know that if an adversary has control over the data a computer is processing, it can potentially take over that computer,” says Tadayoshi Kohno, the University of Washington computer science professor who led the project, comparing the technique to traditional hacker attacks that package malicious code in web pages or an email attachment. “That means when you’re looking at the security of computational biology systems, you’re not only thinking about the network connectivity and the USB drive and the user at the keyboard but also the information stored in the DNA they’re sequencing. It’s about considering a different class of threat.

Eoin Treacy's view -

Digital code is compiled of 1s and 0s but genetic code is made up of A, C, G and Ts so the scale of complexity in DNA is many multiples of basic computer code. Therefore, it represents an attractive vector for both coding and data storage for future development and in miniature size. 



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August 10 2017

Commentary by Eoin Treacy

August 10 2017

Commentary by Eoin Treacy

Wall Street's "fear gauge" nears 3-month high as "fire and fury" sparked stock-market slump

This article from MarketWatch covers most of the relevant points on the uptick in volatility in response to heightening brinksmanship with North Korea. Here is a section:

The downdraft for the equity market comes amid rising geopolitical tensions, after a North Korean army commander said “sound dialogue” isn’t possible with U.S. President Donald Trump and “only absolute force can work on him,” according to state media. North Korea also laid out detailed plans of how it would launch a missile strike on U.S. military bases in Guam.

The recent testy exchange underlines mounting tensions between Pyongyang and Washington that Wall Street investors are fretting could risk an all-out nuclear war between the nations.

Against that backdrop, the VIX has been steadily rising over the past three sessions coinciding with a pullback in stocks and a jump in demand for assets perceived as havens including gold GCZ7, +1.03%   which was trading around a two-month high and 10-year benchmark Treasurys TMUBMUSD10Y, -0.47%, which were hovering at yearly yield lows around 2.22%. Bond prices move inversely to yields.

Eoin Treacy's view -

Betting on persistently low volatility has been among the best performing trades this year with stock markets continuing to advance while leveraged short VIX ETFs surged higher. Whether that strategy is likely to continue to perform is now being questioned.



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August 10 2017

Commentary by Eoin Treacy

Glencore Slashes Debt as It Positions for M&A in Commodities

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

"These results indicate the strong position Glencore has built in the recent past and we expect the momentum to continue," said Heath Jansen, a mining analyst at Citigroup Inc. Glencore shares slipped 1.8 percent to 333.55 pence as of 8:56 a.m. in London.

Glasenberg, 60, said in February that the "time is right" to reward shareholders after difficult years in 2015 and 2016, when the company suspended dividends and sold shares to raise cash.

Glasenberg, the pugnacious South African CEO, now appears to be strengthening Glencore’s balance sheet first, a sign the company is looking at deals, rather than immediately returning more money to shareholders.

Eoin Treacy's view -

Glencore held their dividend and a couple of weeks ago Rio Tinto raised theirs but not as much as investors had been hoping. Appetite for M&A has been floated as a reason for these decisions to conserve cash and that argument has merit. 



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August 10 2017

Commentary by Eoin Treacy

August 10 2017

Commentary by Eoin Treacy

This could be 'the scariest chart in the financial markets right now'

This is an example of one of the articles I have received from subscribers quoting the same data point. Here is a section: 

“As investors go ‘kookoo’ for risk assets, they have pushed (with the help of ECB) the yield of European junk bonds towards that of the U.S. Treasury yield. Honestly… I’m speechless,” Brkan adds.

Another one worried about low yields for European junk bonds is Wolf Street blogger Wolf Richter, who notes they offer around 2.42%, while the U.S. 10-year pays out about 2.24%. And Bank of America Merrill Lynch’s credit strategists are concerned, highlighting the “eye-watering levels that European high-yield has now reached.”

Eoin Treacy's view -

I initially saw a similar article on Monday, assessed the argument and set it aside. However, a number of subscribers have emailed me variations on the story so I thought it might be instructive to highlight why I set it aside in the first place.  



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August 09 2017

Commentary by Eoin Treacy

August 09 2017

Commentary by Eoin Treacy

Ten-years from global financial crisis: a decade in charts

This article by Ritvik Carvalho for Reuters may be of interest to subscribers. Here is a section:

Ten years ago on Wednesday marked the start for many observers of the global financial crisis - a series of rolling credit shocks and bank crashes that led to the deepest world recession for a generation and a decade of slow growth and painful repair.

On Aug. 9, 2007, the European Central Bank flooded its money markets with billions of euros of emergency cash to prevent a seizure in the European banking system after France's BNP Paribas became the latest to shut down investment funds hobbled by a collapse of U.S. mortgage and asset-backed bond markets.

Serial bank collapses in Britain, the United States, Germany and elsewhere were to follow over the following 18 months. These culminated in U.S. investment bank Lehman Brothers being allowed to go bankrupt in September 2008, triggering a world financial panic, deep recession and eventual rescue package by the U.S. government, Federal Reserve and the rest of the G20 economic powers.

Eoin Treacy's view -

The number of articles pointing out this historical milestone has proliferated over the last week. It’s not particularly positive for sentiment because it reminds investors that everything comes to an end and often in a manner deleterious to one’s financial health. 



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August 09 2017

Commentary by Eoin Treacy

Elon Musk Inspires World's Top Miner to Target Electric Vehicle Boom

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

“As we delved in to understand more about the lithium-ion battery market, it became clear that demand from EVs was accelerating,” Haegel said Wednesday in an interview. “It also became clear that we had competitive advantages.”

As a result, BHP approved a $43 million project to begin production at its refinery from April 2019 of nickel sulfate, a product needed for lithium-ion batteries. The move will make BHP the top exporter of the material, Haegel said in Kalgoorlie, Western Australia.

Global nickel demand could more than double by 2050, fueled in part by rising electric-vehicle sales, Bloomberg Intelligence analyst Eily Ong wrote in a June report. Demand for nickel from lithium-ion batteries may rise to more than 190,000 metric tons a year by 2030 from about 5,200 tons in 2016, Bloomberg New Energy Finance analyst Julia Attwood forecast in April.

Eoin Treacy's view -

Lithium, nickel and cobalt are the primary metals used in the manufacture of lithium batteries. With demand for large batteries from the transportation and utility sectors growing the mining and refining sectors are scrambling to keep up.

 



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August 09 2017

Commentary by Eoin Treacy

Currency-Manipulating China Gives Trump What He Wants -- A Cheap Dollar

This article by Bradley Keoun for The Street may be of interest to subscribers. Here is a section:

While China still keeps an iron grip on its exchange rate, 2017 has thus far brought a reversal of a three-year stretch in which the dollar weakened against the yuan, also known as the renminbi or by its trading symbol RMB.

Some of the Chinese currency's strength stems from appreciation in major currencies like the euro and yen against the dollar, putting upward pressure on the yuan on a trade-weighted basis. But the gains versus the dollar show a willingness on the part of China to cede a marginal advantage to the U.S., its biggest single destination for exports.

"We do expect that the RMB should continue to gradually strengthen versus the weakening dollar over the next few years," said Jan Dehn, head of research at London-based Ashmore, which specializes in emerging-market stocks and bonds.

The exchange-rate reversal comes amid increased tensions between Trump and Xi, who has taken steps to improve his country's standing as a powerhouse in international trade even as the U.S. president pledges to renegotiate trade deals he considers unfair -- in order to protect American manufacturers and workers.

Eoin Treacy's view -

Greece couldn’t get a deal on debt restructuring until after the German election so that Merkel could further cement her place as the nation’s longest serving Chancellor. The rush to get deals done with Cuba and Iran in the last 18 months of Obama’s administration were equally aimed at legacy building. It’s plain for anyone to see that politicians care about their legacy and go to rather extreme lengths to get the headlines they want. Why should China be any different? 



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August 09 2017

Commentary by Eoin Treacy

August 08 2017

Commentary by Eoin Treacy

August 08 2017

Commentary by Eoin Treacy

Basking in Sun, Italian Markets May Face a Bleaker Autumn

This article by Marco Bertacche and Heather Burke for Bloomberg may be of interest to subscribers. Here is a section:

The quickening growth and solid corporate earnings that have propelled the rally face a series of stern tests in the coming months, not least a looming general election in which populist, anti-euro parties may play a key role. The country is also one of the most exposed to a shift in monetary policy from the European Central Bank, which has bought almost 284 billion euros ($335 billion) of Italian debt under its latest asset- purchase program.

“Enjoy a quiet August ahead of September’s challenges,” UniCredit SpA Deputy Head of Fixed-Income Strategy Luca Cazzulani and Chief Italian Economist Loredana Federico wrote in a note last week. “What could go wrong in the coming weeks? Not much, really. The usual culprits are poor economic data at the domestic level, politics, a step up in expectations of policy tightening and a sudden shock in global financial markets,” all of which have only an outside chance, they said.

In the current window, the good news has stacked up for Italy. The nation’s Services Purchasing Managers’ Index reached a 10-year high on Aug. 3, supporting the view growth is catching up with the rest of Europe. The International Monetary Fund has upgraded its forecast for the country’s expansion to 1.3 percent, which would be the fastest in seven years.

Eoin Treacy's view -

The ECB wouldn’t be considering beginning to taper the size of its quantitative easing program unless economic growth were improving. Some of the countries hit hardest by the region’s recession have the greatest potential for recovery not least because they are coming off such low bases. 



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August 08 2017

Commentary by Eoin Treacy

Email of the day on batteries

Welcome back from China, I would also reciprocate the glowing comments
on Saturdays missive.

FYI attached please find some headlines from the Asian Nikkei, unfortunately I am not a subscriber, but for all the battery fanatics following you and I agree with the view that battery technology is a game changer. I thought you would be interested in the following :

Eoin Treacy's view -

Battery technology was a fringe industry for a long time because there was no compelling commercial reason to invest the money required to develop it. That changed when oil prices surged higher and consumers were forced to begin to think about economizing to reduce how much they were spending on energy. 

The dynamics that have unfolded in the energy sector are a perfect example of how high prices influence spending decisions by producers and economizing by consumers while low prices have the opposite effect. These long-term dynamics contribute to the long-term cyclical nature of markets. 



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August 08 2017

Commentary by Eoin Treacy

August 08 2017

Commentary by Eoin Treacy

Email of the day on diet and South African politics:

On diet. I have followed the recent discussions on diet with great interest. Having been in the veterinary profession for the last 50 years my own experience may be of interest. Two dictums I have always followed. You are what you eat and moderation in everything. For the last few million years or so humans have been omnivores and have a gut designed with that in mind, so a diet of vegetables, nuts, berries, meat and fish is ideal. 

When I joined a small animal practice on the North Yorkshire border so long ago I was given a tip by my then boss who incidentally was a great friend of James Herriott and was featured in his books. He had observed the huge beneficial effects that certain formulations of the antioxidant Vitamin E had on elderly canines prone to mini strokes and heart problems. Some forty years ago I decided to take a daily dose myself. At any rate, I have reached the age of 76 (David's vintage) Mild blood pressure, normal cholesterol and in possession of all my original joints in good working order. I now have a pretty stress-free life spent for the most part in South Africa and the only thing now that tends to affect my blood pressure is the politics of the place!

Eoin Treacy's view -

Thank you for the valuable feedback from a lifetime of healthy living which I’m sure will be appreciated by the Collective. I notice that your list of what is healthy in moderation conspicuously avoids carbohydrates and other processed sugars. In the meantime, the politics of your adopted home were on full show today. 



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August 07 2017

Commentary by Eoin Treacy

August 07 2017

Commentary by Eoin Treacy

BlackRock, Vanguard Say Bond Market's Got This Trade All Wrong

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

Two titans of the bond market are still clinging to the idea that inflation is going to make a comeback.

Time and again, weak economic data have made the market’s inflationistas -- many of whom were beguiled by President Donald Trump’s pro-growth promises -- look a little foolish.

But for Vanguard and BlackRock, it’s only a matter of months before inflation is back at 2 percent. Regardless of what does (or doesn’t) happen in Washington, a tight job market will boost wages, lead Americans to spend more and push up consumer prices. Add to that a weak dollar and prospects the Federal Reserve will hold off raising interest rates until 2018, and they see a good chance the bond market is too downbeat about inflation.

 

Eoin Treacy's view -

The 10-year US Treasury yield today is just about where it was in early 2009. There has been a great deal of back and forth trading in between but the reality is yields have gone pretty much nowhere for over eight years. In that time supply has increased substantially, but central banks have been buying up bonds at such a prodigious rate they have ensured the yield has stayed low. 



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August 07 2017

Commentary by Eoin Treacy

Bitcoin Soars to Record as Buyers Look Beyond Miners' Split

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

“The miner-orchestrated hard fork has had limited traction and will not impact the price or future development of bitcoin,” said Aurelien Menant, chief executive officer of Gatecoin Ltd., a cryptocurrency exchange in Hong Kong, referring to the split. “The activation of SegWit is a significant milestone in bitcoin’s technological evolution.”

At the heart of the dispute is an issue that has dogged bitcoin’s development: as its popularity grew, transactions slowed because of a cap on the amount of data processed by the blockchain. Under SegWit2x, some of that data will be moved off the main network while block sizes will be doubled to 2 megabytes in November -- a quarter of that for Bitcoin Cash. While the first step of SegWit2x has been locked in and the technology will probably be adopted at some point in August, infighting could disrupt the transition.

The price of Bitcoin Cash has plummeted 62 percent from a record high reached last week to $274, CoinMarketCap data show, bolstering the appeal of its older cousin. For now, Bitcoin Cash still pales in comparison to the original asset: the former has a capitalization of $4 billion, compared with the latter’s $53 billion, according to CoinMarketCap.

“The scaling debate is not over yet,” Menant added. “The promised 2 MB block size increase due in November in accordance with the SegWit2x agreement may still be rejected by certain stakeholders.”

 

Eoin Treacy's view -

When Ethereum’s hard fork took place a year ago, it was the original version of the cryptocurrency that garnered the most adherents subsequently. That now also appears to be happening following the bitcoin hard fork. 



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August 07 2017

Commentary by Eoin Treacy

Email of the day on the Big Picture Long-Term video:

Many thanks for a truly excellent long-term outlook video this week. This was quite exceptional bearing in mind your travels to China over the past two weeks. Thanks for putting so much effort into the service

And

I just wanted to say what a terrific broadcast you did this weekend. It was really exceptional. Thank you for giving so much thought to the broadcast, there is a great deal to reflect on.

 

Eoin Treacy's view -

Thank you both for your kind words. Sitting on a plane for 13 hours, with not much to do but watch movies of questionable quality gives one time to think. Since the video was not posted until the middle of day on Saturday UK time I am posting the link again here. It is a 1:30 hour broadcast. 



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August 07 2017

Commentary by Eoin Treacy

Bluebird Bio Lockup Expiring Aug. 12 as Stock Lags Benchmark

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

The equity lockup period for Bluebird Bio Inc. shares ends in a week following its $460.1 million stock sale.

Bluebird Bio sold 4.38 million shares at $105 on June 27. The sale increased the outstanding shares by 9.7 percent.
Since then, the stock has declined 9.5 percent and the benchmark Russell 2000 Health Care Index fell 1.1 percent. The S&P 500 Index climbed 2.4 percent in the same period.

The underwriters restricted sales by the company, directors and executives for 45 days. The agreement limits the sale of 344,300 shares, according to data compiled from prospectus documents. Those represent 1 percent of its market capitalization, 1 percent of its float and 0 days worth of average trading volume. The company has also set one other lockup date on Aug. 27.

Bluebird Bio rose 54.1 percent so far this year and advanced 64.4 percent in the past 52 weeks. The stock closed at $95.05 in the previous session. This story was produced by Bloomberg Automation

 

Eoin Treacy's view -

This story, produced by a computer rather a reporter is an example of what we can expect from factual reporting in future. 



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August 07 2017

Commentary by Eoin Treacy

Email of the day on good food and the length of the video

Saturday’s video was absolutely great, except that you apologized too many times for the length. If there are good things to tell as it was the case, the length is not a problem.

The piece about your insights from your China trip was particularly interesting and informative. And your views about the likely developments in automation and the consequences are phenomenal

So don’t worry to talk 90 minutes if you have interesting things to explain

PS: I discovered that I share other things with you (that I learnt by reading the daily report, listening to the audio and since last year watching the video). I am 5 years older than you, love food and share the high cholesterol problem
Against the cholesterol I am still fighting without resorting to statins. I don’t how long (I feel otherwise healthy, my blood pressure is perfect I am not overweight, don’t smoke and run a lot, but the cholesterol values don’t want to go down.)
Food and restaurant are my other passion. I am fortunate to spend lot of my spare time and holidays in Italy and love to travel around for good restaurants and great food. Last week on the way back from Croatia we traveled along Friuli and stopped by in San Daniele and Sauris, both well known by “gourmands” for their ham (prosciutto crudo). Fantastic... I am now in South Tyrol spending the rest of the holidays and some restaurants here around are fantastic. Yesterday evening we went with friends to a restaurant whose chef – Matteo Metullio from Trieste - got a Michelin star at the age of 28 and he’s now 31. After the excellent dinner, we spent ¾ hour or so talking with him and I was amazed at the passion he puts in his job, we talked about the next recipes for the winter season, about how and where to get good game from, about when to eat the best row fish, etc. etc.). The dim sum you show on the plate at the end of the video were also very interesting. I have been in HK several times but never in mainland China. Must be also a great food experience.

 

Eoin Treacy's view -

Thank you for sharing your views and experiences of restaurants in Italy’s north east. As humans, we are sensual beings and there are few experiences as satisfying as a good meal with friends which engages all our senses and heightens our mood. The quality and attention to detail that goes into food on both a local and national level is one of the richest evocations of culture there is, which is why our family generally travels to eat more than any other single factor. 

China is a vast nation and regulation of the food sector is spotty at best. Therefore, the best policy is to focus on historic significant restaurants and/or those which serve Communist Party cadres. Those are the most likely to use original unadulterated ingredients. 

What I have found is that making small changes to my diet has had a positive effect on my cholesterol. I have introduced nuts, particularly walnuts to my diet. I eat a lot more vegetables and fruit and I avoid meat at least a couple of days a week. We also tend to balance meat intake between seafood and animal products on about a 50/50 basis. I make my own granola bars which are high in oatmeal and also eat oatmeal with fruit for lunch most days. 

Perhaps the biggest lessons from “Ending the Food Fight” was that there are significant differences in the nutritional value between different kinds of the same food. For example, rolled oats are much more highly processed than steel cut oats. They metabolise much quicker and do not have the same fibre content. The other big point is that how we combine different foods has a large impact in how they are metabolized and what effect they have on our health. 

 



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August 04 2017

Commentary by Eoin Treacy

August 04 2017

Commentary by Eoin Treacy

Apple removes VPN apps from the App Store in China

This article may be of interest to subscriber’s. Here is a section:

The Chinese governmENt’s crackdown on the internet continues with the news that Apple has removed all major VPN apps, which help internet users overcome the country’s cENsorship system, from the App Store in China.

The move was first noted by ExpressVPN, a provider based outside of China, which said in a blog post “all major VPN apps” including its own had beEN purged from Apple’s China-based store. The company shared a note from Apple (below) explaining that its app was removed because “it includes contENt that is illegal in China.”

The app continues to be available for users across the world outside of China, the company said. However, the process to create an App Store account in a differENt country is unknown to many users, so it is unlikely to fill the void of the missing Chinese app.

Another provide, Star VPN, tweeted that its app had also beEN removed.

Apple had not replied for commENt at the time of writing. In a statemENt issued later it said it was “required” to remove the apps because they violate Chinese law.

Eoin Treacy's view -

For much of the last decade China’s Great Firewall has been relatively porous. As with so much in a command economy, rules tend to be for other people. Virtual Private Networks (VPNs) have been available for much of the last decade and allowed individuals access to the unfiltered version of the internet available in much of the world outside China. 



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August 04 2017

Commentary by Eoin Treacy

Macro Morsels report

Thanks to a subscriber for this edition of Richard Harding’s report for Maybank. Here is a section:

These are the conditions we’re seeing develop in the index funds and index ETFs right now, Puplava stated, and this is the epicenter of the current bubble. He thinks we’ll enter into the final stages at the end of this year or the beginning of next year.

This move toward passive investing in the form of an index ETF or an index mutual fund is generating the same behavior we’ve see in past bubbles.

“It’s being driven by computers,” Puplava said. “No thought is given to what is bought or sold. It’s the downfall of human psychology.”

Right now, it is estimated that $800 billion will flow into index ETFs this year, up 60 percent from the previous year, and next year it’s estimated we will top over $1 trillion.

As we’ve seen in every crisis, the implosion of margin debt eventually brings this to an end. As this happens, it accelerates the stampede out of the bubble asset. That’s how every cycle always ends.

Echoing Ray Dalio's recent comments, Puplava, who has been managing money for over 30 years, ended by saying, “Right now, we’re still dancing.” However, as we move into the final phase of the bubble, Puplava intends to take profits, raise cash, and take advantage of potentially cheaper prices once the tide turns.

Eoin Treacy's view -

There is an increasing number of investors coming out to clearly state they believe the eight- year bull market is developing into a bubble. The final stages of a bull market, particularly If the ending is a Type-1 acceleration, is the time when the prices rise fastest. 



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August 04 2017

Commentary by Eoin Treacy

Germany Giving Gigafactory a Home in Latest Challenge to Tesla

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

German executives are preparing to announce a new home for a lithium-ion battery plant designed to rival the output at Tesla Inc.’s Gigafactory.

Terra E Holding GmbH will choose one of five candidate sites in Germany or a neighboring country next month to build its 34 gigawatt-hour battery factory, Frankfurt-based Chief Executive Officer Holger Gritzka said in an interview. The former ThyssenKrupp AG manager has helped to assemble a consortium of 17 German companies and won government support for the project, which will break ground in the fourth quarter of 2019 and reach full capacity in 2028, he said.

"The battery factory is the latest sign that German industry, the motor behind the world’s fourth-biggest economy, is gearing up for a new stage in the energy revolution. Lithium- ion batteries can help stabilize intermittent flows of wind and solar power on electricity networks. They’re also projected to power millions of plug-in cars expected to roll off German production lines beginning early next decade.

“We have to be better in process technology than competitors, a constant step ahead,” said Gritzka, who emphasized that Terra E will be counting on Germany’s competitive edge in manufacturing robotics and automated production to make money.

Global battery-making capacity is set to more than double by 2021, reaching 278 gigawatt-hours, up from about 103 gigawatt-hours in the second quarter, according to Bloomberg New Energy Finance. Asia electronics makers including South Korea’s LG Ltd. and Samsung SDI Co. currently control the market. Tesla will become the world’s No. 2 battery maker once it finishes building its $5 billion, 35 gigawatt-hour Gigafactory in Nevada, according to the London-based researcher.

Merkel’s Endorsement

Some of Terra E’s consortium members also may become its clients, according to Gritzka, who declined to name companies participating. The project, which won 5.2 million euros ($6.2

million) in subsidies from Germany’s Ministry of Education and Research, expects to need upwards of a billion euros before completion, the CEO said.

Terra E will be seeking strategic investors that are attracted by the government-paid research embedded in Terra’s technology and Chancellor Angela Merkel’s endorsement of the company, said Gritzka. In May, Merkel broke ground at another 500 million-euro plant to assemble lithium-ion energy-storage units for Daimler AG, which produces Mercedes-Benz and Maybach luxury cars.

Terra E will focus its batteries on stationary units, Gritzka said. The project aims to tap an emerging market for mobile and non-automotive power and storage, said Gritzka. The bet rests on projected faster demand for lithium storage in the next decade.

Eoin Treacy's view -

Germany’s dominant automotive sector is under pressure following the diesel cheating scandal which continues to remain an open sore, as various cases make their way through the US courts system. 



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August 03 2017

Commentary by Eoin Treacy

August 03 2017

Commentary by Eoin Treacy

Textile companies go high tech in Arkansas

This press release from Softwear may be of interest to subscribers. Here is a section:

 

"From fabric cutting and sewing to finished product, it takes roughly four minutes," said Tang Xinhong, chairman of Tianyuan Garments. "We will install 21 production lines. When fully operational, the system will make one T-shirt every 22 seconds. We will produce 800,000 T-shirts a day for Adidas."

Tang said that with complete automation, the personnel cost for each T-shirt is roughly 33 cents. "Around the world, even the cheapest labor market can't compete with us. I am really excited about this," he said.

Tianyuan announced last October it would invest $20 million in the 100,000-square-foot defunct Little Rock plant it had acquired. In time, it will bring 400 new jobs to Arkansas.

The signing ceremony was witnessed by a Chinese textile delegation led by Xu Yingxin, vice-president of the China National Textile and Apparel Council.

Xu said that establishing a clothing factory in Arkansas enables Tianyuan to satisfy instant order demands from its clients. He praised Tianyuan's working with American partners in automation as a smart move at a crucial junction in the technology revolution.

"The idea of Industry 4.0 and Intelligent Manufacturing is gradually becoming the reality," Xu said. "It is revolutionizing labor-intensive clothing manufacturing."

 

Eoin Treacy's view -

I first wrote about Softwear two years ago following a visit to a garment factory in Los Angeles. It was clear that the labour intensive nature of sewing garments was ripe for automation and Softwear was in the process of developing a robot to make people obsolete. 

 



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August 03 2017

Commentary by Eoin Treacy

Email of the day on the travails of a Euro denominated investor

As an investor whose income is in Euros I have a problem. The rising value of the Euro will probably hit the bottom-line profits of European multinationals. The European economy is recovering and seems to be a good place in which to invest funds. American shares are attractive in terms of profit potential but the rising euro makes it dangerous to me to invest in them. The same applies to investments in the developing countries. Brexit makes investment in sterling denominated shares questionable. What is your opinion on this question?

Eoin Treacy's view -

Thank you for topical question. The question of how to invest against a strong currency market environment is something Euro denominated investors have not had to deal with for quite some time. 



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August 03 2017

Commentary by Eoin Treacy

Japan Inc. Might Finally Have to Fatten Paychecks

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

It's all a question of the tipping point: When do labor shortages become so acute that there's a scramble and employers both big and small have to pay up or risk, literally, running out of people? 

Izumi Devalier, head of Japan Economics at Bank of America- Merrill Lynch, thinks we've reached that point. "There have been many false dawns, so making the case this time can be quite difficult," she acknowledges over lunch. But, using an admittedly anecdotal example, she observes that famously high levels of service at Japanese restaurants are starting to slip subtly because of the gathering labor shortage. "People know that if they don't secure talent now, it's going to get harder and harder."

For those that want to stay in business, the need to retain staff will outweigh all others. Yamato Holdings Co. Ltd., the parcel delivery company with the cat-and-kitten logo that seems to be everywhere in Tokyo, is instructive. Faced with a shortage of drivers and efforts by competitors to poach those it did have, the firm raised its base rate for customers in April.

It took almost three decades, but what's important is that it happened. Fierce competition among delivery firms had made Yamato Transport wary of raising prices, but overworked and underpaid staff had better offers. Something had to give. Forty- seven thousand employees were subsequently compensated for unpaid overtime.

One might compare the shock to the system to the 1985 Plaza Accord, when Japan and West Germany agreed to let their currencies strengthen against the dollar. Among other things, Plaza accelerated the overseas expansion of Japanese corporations. Now companies need to make equally wrenching decisions about how best to deal with shrinking labor liquidity.

 

Eoin Treacy's view -

Japan is a petri dish for experiments on how to deal with a declining population without recourse to immigration. So far it has failed in stimulating inflation and while it may be necessary to pay employees more to ensure they are not poached, there is the additional question of where demand growth is to come from when such a large proportion of the population is in the latter stages of life. 



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August 03 2017

Commentary by Eoin Treacy

Email of the day on the video commentaries

I also love the video recordings. They really bring your commentary to life and are much more powerful than just listening to the audio recordings. Thanks and best regards

Eoin Treacy's view -

Thank you for your kind words and I’m truly delighted you are enjoying the videos. I’ll be flying back from China tomorrow so depending on time constraints I may need to record the big picture long-term audio first thing on Saturday morning LA time. 



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August 02 2017

Commentary by Eoin Treacy

August 02 2017

Commentary by Eoin Treacy

Mobile money is only just starting to transform some of Africa's markets

This article by Moses Gahigi for Quartz may be of interest to subscribers. Here is a section:

The glossy numbers however only tell part of the story, the real equalizer effect of mobile money has been the impact of the innovation around financial services, where telecom players have churned out multiple use cases cutting across all economic divides in Africa, from simple ones like money transfer and air time top-up to more sophisticated ones like bill payments and bank-to mobile wallet transactions.

As more people overcome the digital cultural shock and become digitally literate they are shopping with tap & pay and other merchant payment solutions, while they also pay their utility bills, cable TV subscriptions and even taxes. Using mobile money significantly increases efficiencies, for instance Dar es Salaam water and sewerage cooperation registered a 38% increase in revenue collections when it started collecting it through mobile money.

Granryd also noted that telecoms have to develop more Non-communication services that ease life and solve problems, while consolidating the existing user-cases, that it is through these new revenue streams that the industry will stay afloat.

Mobile money has become a lifeline to unfortunate members of society, for instance up to 52% of refugees from Nyarugusu refugee camp in Tanzania use mobile money to receive humanitarian cash donations, remittances from home countries as well as wage payments.

Although the innovation was born in East Africa, West Africa has emerged as the new mobile money frontier, where adoption is currently almost 29% of active mobile money accounts in Sub-Saharan Africa are now based, compared to just 8% five years ago.

Markets such as Gabon, Ghana, Kenya, Namibia, Tanzania, Uganda and Zimbabwe have more than 40% of users as active mobile money users.

 

Eoin Treacy's view -

The transition of a mobile phone into a mobile wallet is global phenomenon but is moving particularly swiftly in markets with less robust networks of retail banks or where there is a problem with counterfeit currency. While online payments are progressing swiftly in Europe and North America but pace with which the technology is being picked up in Africa, India and China is startling. 



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August 02 2017

Commentary by Eoin Treacy

Apple Signals Resilient IPhone Demand Helped by Supporting Cast

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

“There is some relief from the fear of a significant pause before the 10th anniversary iPhone refresh,” said Michael Obuchowski, chief investment officer at Merlin Capital LLC in Boston, which holds Apple stock. “I’m beginning to think it won’t matter if the new iPhones aren’t that exciting.”

Apple is likely to introduce three new handsets this year: a revamped top model, known for now as the iPhone 8, and upgrades to the existing iPhone 7 and iPhone 7 Plus, people familiar with the plans have told Bloomberg News. The high-end iPhone will include an organic light-emitting diode screen, and inadequate OLED supplies mean that it will not be as readily available as the cheaper handsets at launch, the people said.

Cook said reporting about the new versions of the iPhone “has created a pause” in consumer buying “that is likely larger than previously.” Apple’s stock has soared on expectations that the new high- end smartphone, which will also include a front-facing three- dimensional sensor to enable facial recognition, will spur a resurgence in demand that will carry into the holiday quarter and beyond. Sales growth of the company’s flagship product has slowed over the past two years as the market has become increasingly saturated and competitors have offered cheaper products with similar capabilities.

New Technologies
Slowing smartphone sales have prompted Apple to invest more heavily in developing new technologies. It’s working on smart glasses, an autonomous driving system, improved health and fitness offerings, and its own semiconductor technology.

Research and development spending jumped 15 percent to $2.9 billion in the most recent quarter. Apple unveiled the early fruits of its spending on augmented reality technology in June, releasing a set of tools which let developers build AR software for the iPhone and iPad when the next operating system for those devices is rolled out later this year. Cook has over the past 18 months repeatedly said how excited he is about the prospects for AR.

Cook is preparing to release Apple’s first new hardware category since 2015. The HomePod, the smart speaker that will go on sale in December, is the company’s response to Amazon.com Inc.’s Echo and Alphabet Inc.’s Google Home speakers. The company is hoping that advanced acoustic capabilities will encourage consumers to pay $349 for the device -- almost three times as much as the Google Home.

 

Eoin Treacy's view -

Apple faces stiff competition in the smartphone market but comes with two distinct advantages. The size and breadth of the app store is a considerable benefit for the company and acts as an anchor for customers. The second is Apple’s followers are among the most devoted fans of any brand and represent a latent source of demand for new products. 



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August 02 2017

Commentary by Eoin Treacy

StanChart Plunges as Troubled Outlook Overshadows Revenue Gain

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

Bill Winters’ overhaul of Standard Chartered Plc has stalled. The emerging-market-focused lender fell the most in almost nine months after the chief executive officer sounded caution about growth prospects and blamed “extraordinary uncertainty” around regulations for a decision not to reinstate the dividend.

The comments overshadowed a second quarter of revenue gains and pretax profit that doubled. “The absence of a dividend is a negative surprise,” said Ian Gordon, an analyst at Investec Bank Plc. “Revenues remain weak, improving only by $6 million quarter on quarter. The run- rate is far too low to generate the scale and pace of recovery” investors expect, he said, noting the “sheer scale” of the $5 billion decline in income between 2012 and 2016.

Winters, 55, is in his third year of trying to rebuild Standard Chartered’s reputation and balance sheet after an expansion into risky emerging-market lending led to billions of dollars of writedowns and misconduct fines. He’s led efforts to clean up the culture, while reducing risk and pulling back from underperforming businesses, such as an internal private-equity arm that lost $650 million last year.

“The external environment is still weighing on our full potential. Some of our markets are beginning to recover nicely, others are still in the doldrums,” Winters said on a call with reporters Wednesday. The bank has “a clear need to improve earnings,” with income rising at “a relatively modest pace.”

 

Eoin Treacy's view -

Standard Chartered might be emerging market focused but that is not what got the bank into difficulties. It was its aggressive lending practices to commodity businesses, based on the assumption Chinese demand growth was interminable, that resulted in the share collapsing as the commodity bull reversed. 



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August 02 2017

Commentary by Eoin Treacy

Email of the day on biotech's recent performance and the Subscriber's videos

Would you care to comment on the sudden decline in biotech shares over the last few days?  

I have just started following your videos, after being a stickler for the audios all this time.  I must say they add depth.  It's like have a running chart seminar all year round!  I particularly admire the way you can multitask, carrying on a seamless commentary about something else while your fingers are busy looking for the next chart, without long audio pauses while you wait for the screen to catch up

 

Eoin Treacy's view -

Thank you for your kind words and I’m delighted you are enjoying the videos. I’m still getting the hang of recording videos and to my embarrassment there have been more bloopers with regard to the microphone and uploading than I would like so please regard them as a work in progress. 



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August 01 2017

Commentary by Eoin Treacy

August 01 2017

Commentary by Eoin Treacy

Greenspan Sees No Stock Excess, Warns of Bond Market Bubble

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

“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman, 91, said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

While the consensus of Wall Street forecasters is still for low rates to persist, Greenspan isn’t alone in warning they will break higher quickly as the era of global central-bank monetary accommodation ends. Deutsche Bank AG’s Binky Chadha says real Treasury yields sit far below where actual growth levels suggest they should be. Tom Porcelli, chief U.S. economist at RBC Capital Markets, says it’s only a matter of time before inflationary pressures hit the bond market.

“The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said. “We are moving into a different phase of the economy -- to a stagflation not seen since the 1970s. That is not good for asset prices.”

 

Eoin Treacy's view -

Central bank balance sheets are at levels that were previously unimaginable and nobody knows what the medium to long-term consequences of that are going to be. Generally speaking central banks either tightening too much, or too quickly, is one of the leading causes of crashes, so there is an increased risk of trouble for the simple reason that we are in unchartered monetary territory. 



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August 01 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 1st 2017

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

Since these solid-state batteries can be packed more tightly, more power can be put into the same space occupied by a current lithium-ion battery, significantly boosting a vehicle’s range.  Another advantage of these solid-state batteries is that they can handle higher charging currents safely.  That allows for faster charging times, assuming the remote charging stations are equipped with more powerful charging current equipment.   

According to the patent applications, solid-state batteries are less susceptible to temperature variations than liquid electrolyte batteries, which is a hidden issue for many EVs who suffer lost power and range due to extreme heat and cold.  Additionally, solid-state batteries eliminate the need for many of the safety features of current lithium-ion batteries, which will help boost their relative cost advantage, thereby improving the economics for EVs.   

 

Eoin Treacy's view -

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

The prize for innovation in the battery sector cannot be overstated. Energy storage represents the lynchpin for the evolution of the renewable energy, transportation and utility sectors. The company that can get a better battery with high energy density and faster charging capabilities to market first will quickly gain market share because the cost advantage it will derive will be so acute. 



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August 01 2017

Commentary by Eoin Treacy

August 01 2017

Commentary by Eoin Treacy

Email of the day on genetic editing companies

I am referring to your email on genetic editing. What are the related companies that are worth looking into?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. The discovery of CRISPR-Caa9 genetic editing technology has resulted in the both the pace of innovation accelerating and the cost declining meaningfully. Research into genetic engineering has been ongoing for decades but as understanding has improved and new tools have been invented the breadth of the sector has growth considerably. 



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July 31 2017

Commentary by Eoin Treacy

July 31 2017

Commentary by Eoin Treacy

Divergence between historic P/Es and Estimated P/Es

Eoin Treacy's view -

Following what was an important week for earnings last week and with both Apple and BMW reporting this week I thought it might be instructive to compile a list of companies where there is a wide divergence between the historic P/E and the estimated P/E. When the historic P/E is very high, or non-existent because earnings were negative in the last quarter, but has contracted significantly on the estimated P/E for next year it is generally an indication of improving perceptions of future potential.  



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July 31 2017

Commentary by Eoin Treacy

Tesla's Model 3 Arrives With a Surprise 310-Mile Range

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


Three hundred ten. 

That’s the electric range of a $44,000 version of Tesla’s Model 3, unveiled in its final form Friday night. It’s a jaw-dropping new benchmark for cheap range in an electric car, and it’s just one of several surprises Tesla had in store as it handed over the keys to its first 30 customers. 

Tesla has taken in more than 500,000 deposits at $1,000 a piece, Chief Executive Officer Elon Musk told reporters ahead of the event. This has created a daunting backlog that could take more than a year to fulfil—and that was before Musk took the stage in front of thousands of employees, owners, and reservation-holders to lift the curtain on the
company’s most monumental achievement yet.

“We finally have a great, affordable, electric car—that’s what this day means,” Musk said. “I’m really confident this will be the best car in this price range, hands down. Judge for yourself.”

Eoin Treacy's view -

This graphic from the above article is perhaps the most relevant part of the story. The cost per mile of range continues to trend lower while range is trending higher. The range of 310 miles is making headlines but the cost of $160 per mile for the battery is also a record and more important from the wider spectrum perspective of the growth of the energy storage sector. 



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July 31 2017

Commentary by Eoin Treacy

Top German Automakers Sued in U.S. Over Two-Decade 'Cartel'

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

German’s major automakers were accused in a U.S. lawsuit of acting as a cartel, colluding for nearly two decades to limit the pace of technological advances in their vehicles and stifle competition -- allegations that widen the scope of the latest scandal to hit the nation’s auto industry.

BMW AG, Daimler AG, Volkswagen AG and its Audi and Porsche brands shared competitive information about vehicle technologies with one another from 1996 through at least 2015 in violation of antitrust laws, according to a complaint filed Friday in San Francisco federal court.

"These coordinated actions enabled the manufacturer defendants — the self-named ‘Fünfer-Kreise,’ or Circle of Five — to impose a German automobile premium on consumers premised on superior German engineering, while secretly stunting incentives to innovate," the suit alleges.
The suit, which seeks class-action status on behalf of U.S. drivers, says the companies agreed to limit the development of vehicle systems, including emissions control. The arrangement allegedly led to the development of so-called "defeat devices" used by Volkswagen to cheat on pollution tests.

 

Eoin Treacy's view -

European companies have been having a tough time in the USA, in much the same way that US companies have been subject to fines in Europe. However, there is no getting around the fact that the automotive sector has been lying to consumers for well over a decade and that there was considerable collusion between brands on how to do so. That is not going to play well in US courts, particularly since environmental considerations are so emotive. 



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July 28 2017

Commentary by Eoin Treacy

July 28 2017

Commentary by Eoin Treacy

Is the world really better than ever?

Thanks to a subscriber for this article from The Guardian which may be of interest. Here is a section:

The loose but growing collection of pundits, academics and thinktank operatives who endorse this stubbornly cheerful, handbasket-free account of our situation have occasionally been labelled “the New Optimists”, a name intended to evoke the rebellious scepticism of the New Atheists led by Richard Dawkins, Daniel Dennett and Sam Harris. And from their perspective, our prevailing mood of despair is irrational, and frankly a bit self-indulgent. They argue that it says more about us than it does about how things really are – illustrating a certain tendency toward collective self-flagellation, and an unwillingness to believe in the power of human ingenuity. And that it is best explained as the result of various psychological biases that served a purpose on the prehistoric savannah – but now, in a media-saturated era, constantly mislead us.

“Once upon a time, it was of great survival value to be worried about everything that could go wrong,” says Johan Norberg, a Swedish historian and self-declared New Optimist whose book Progress: Ten Reasons to Look Forward to the Future was published just before Trump won the presidency last year. This is what makes bad news especially compelling: in our evolutionary past, it was a very good thing that your attention could be easily seized by negative information, since it might well indicate an imminent risk to your own survival. (The cave-dweller who always assumed there was a lion behind the next rock would usually be wrong – but he’d be much more likely to survive and reproduce than one who always assumed the opposite.) But that was all before newspapers, television and the internet: in these hyper-connected times, our addiction to bad news just leads us to vacuum up depressing or enraging stories from across the globe, whether they threaten us or not, and therefore to conclude that things are much worse than they are.

Really good news, on the other hand, can be a lot harder to spot – partly because it tends to occur gradually. Max Roser, an Oxford economist who spreads the New Optimist gospel via his Twitter feed, pointed out recently that a newspaper could legitimately have run the headline “NUMBER OF PEOPLE IN EXTREME POVERTY FELL BY 137,000 SINCE YESTERDAY” every day for the last 25 years. But none would have done so, because predictable daily events, by definition, aren’t newsworthy. And you’ll rarely see a headline about a bad event that failed to occur. But surely any judicious assessment of our situation ought to take into account all the wars, pandemics and natural disasters that might hypothetically have happened but didn’t?

 

Eoin Treacy's view -

After a wonderful meal of sea bass, mixed greens and tofu in China’s gastronomic capital it’s easy to view the world from a glass half full perspective. It is also worth considering that from an investor’s perspective adopting a cautiously optimistic attitude pays off more often than not. 



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July 28 2017

Commentary by Eoin Treacy

Asia - Enjoying external support

Thanks to a subscriber for this note from Standard Chartered which may be of interest to subscribers. Here is a section:

Asia is enjoying better growth so far this year versus 2016. Of the 11 countries we track in Figure 1, seven registered faster growth in 2017 (based either on Q1 or H1 GDP data). China leads the pack, growing 6.9% in H1 – we now think China may register faster growth in 2017 than 2016; this would be the first time that annual growth has not slowed since 2010. Of the three economies that underperformed versus 2016, India was due to demonetisation, the Philippines was slower versus a high base and Korea’s Q2-2016 growth was boosted by budget front-loading.   

The region is benefiting from a pick-up in external demand. All the economies we track above are enjoying faster export growth. As a whole (excluding China, Indonesia and Vietnam), exports rose 13% y/y in 5M-2017. A caveat is that 32% of the increase went to China. This is reflected in the export broadness index above, which shows a relatively narrow export destination profile for the region so far this year. We expect Asia’s export performance to ease in H2 on the back of growth moderation in China and less favourable price base effects.  
Comparatively, domestic economic activity appears more divergent across the region. Credit growth remains soft in several economies, reflecting still-cautious domestic sentiment. Government-led infrastructure in places such as Indonesia and Thailand will be needed to mitigate soft private investment. 

 

Eoin Treacy's view -

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

There are two ways of looking at the impressive performance of Asia’s stock markets. The first is that it reflects the region’s continued economic outperformance driven by favourable demographics and leverage to global economic expansion. The second is that they do not exist in a bubble and both US interest rates and the Wall Street Leash Effect cannot be ignored. 



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July 28 2017

Commentary by Eoin Treacy

Scientists Just Successfully Edited the First Human Embryo Ever in The U.S.

This article by Jolene Creighton for Futurism may be of interest to subscribers. Here is a section:

According to MIT, the work was led by Shoukhrat Mitalipov, who comes from the Oregon Health and Science University. Although details are scarce at this point, sources familiar with the work assert that the research involved changing the DNA of one-cell embryos using CRISPR gene-editing. Further, Mitalipov is believed to have broken records in two notable ways:

He broke the record on the number of embryos experimented upon.

He is the first researcher to ever conclusively demonstrate that it is possible to safely and efficiently correct defective genes that cause inherited diseases.

It is important to note that none of the embryos were allowed to develop for more than a few days, and that the team never had any intention of implanting them into a womb. However, it seems that this is largely due to ongoing regulatory issues, as opposed to issues with the technology itself.

In the United States, all efforts to turn edited embryos into a baby—to bring the embryo to full term—have been blocked by Congress, which added language to the Department of Health and Human Services funding bill that forbids it from approving any such clinical trials.

Yet, the potential of the CRISPR-Cas9 system as a gene editing technology is undeniable. As previously mentioned, it has seen success in developing possible cancer treatments, in making animals disease-resistant, and it has even shown promise in replacing antibiotics altogether.

 

Eoin Treacy's view -

Removing genetic defects is going to be the first application of gene editing but the technology will not stop there. Changing eye colour, hair colour, skin tone etc are all within the grasp of the technology today. It will probably be another decade before intelligence, temperament or drive can be customised. There are clear ethical considerations for these sorts of enhancements but the discussion is taking place most vocally in North America and Europe. Asia does not have the same moral structure and will be the primary location for genetic experimentation as a result. 



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July 28 2017

Commentary by Eoin Treacy

Email of the day on M2 expanding

Yesterday you commented on the relatively benign  monetary background. I have been watching a levelling off of M2 but notice that in the past fortnight there has been a sudden increase. See attached chart. Your comment on this would be appreciated.
P.S. A link to the St Louis Fed website is https://fred.stlouisfed.org/series/M2

 

Eoin Treacy's view -

Thank you for the Fed chart of M2. You can also find it in the Chart Library with the ticker M2 Index. The fact it is increasing tells us two things. 



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July 27 2017

Commentary by Eoin Treacy

July 27 2017

Commentary by Eoin Treacy

The House View

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

As markets enter into the summer lull, it is useful to take a step back. The global economy is in better shape than it has been in several years. This has allowed other central banks to follow the Fed and gradually start their exit journey, a process that is a historic challenge given the unprecedented level of monetary accommodation. But with inflation still below target, a key part of the normalisation puzzle is still missing. 

Although labour market tightness has not yet fed to wages, and hence to inflation, we expect it will. Core inflation should move higher over the medium-term in the US and Europe, supporting further monetary tightening and a normalisation of yield curves. While no policy change is expected by the Fed on 26-July, an announcement to begin phasing out its balance sheet reinvestment is likely in September and we expect another rate hike in December. As for the ECB, rate hikes are still far off, and we expect the central bank to announce another QE extension and tapering in October. 

Our global macro outlook is little changed this year. We expect growth to rebound from the slowest pace post-crisis in 2016, though relative to consensus we are more positive on the US and more bearish on Japan. In China, we continue to expect a gradual deceleration, but see upside risks to growth in the second half of the year. 

We are generally constructive on risk assets, expecting material upside to US equities in the next 18 months and positive but more balanced performance in EM. There are signs the dollar has peaked, but we do not expect a material devaluation yet. We are more positive on the euro, seeing upside versus the dollar and sterling. We expect yield curves to normalise gradually, but there is risk of a more sudden upward shift, depending on the path of core inflation.

Eoin Treacy's view -

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

Gradual monetary tightening against a background of improving global growth is about as benign a scenario for markets as one might wish for. It certainly beats the alternative. 



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July 27 2017

Commentary by Eoin Treacy

Venezuelans Stockpile Food and Water Ahead of Maduro Power Grab

This article by Nathan Crooks  and Fabiola Zerpa for Bloomberg may be of interest to subscribers. Here is a section:

Maduro -- who’s presided over an increasingly autocratic regime that has imperiled the country’s six-decade democracy and left the economy and society in shambles -- is showing few signs of backing down despite growing pressure. He’s broadcast a deluge of propaganda supporting the assembly even as outraged opposition leaders called a general strike Wednesday to forestall it. And opposition is international: The Trump administration sanctioned 13 senior Venezuela officials Wednesday, including the interior minister and the national oil company’s vice president for finance. The head of the Organization of American States has called for elections and Spain’s former prime minister is trying to broker a deal.

The Venezuelan president has been vague about goals for the so-called constituyente, although he’s said the body will convene Aug. 3 and sit atop all other branches of government. It alone will determine how long it should stay in power. While some analysts speculated that Maduro called the convention as a negotiating tactic to quell opposition protests and violence that has claimed more than 100 lives, others say Maduro will use the body to delay indefinitely elections he can’t win.

On Wednesday evening, Maduro said in a national address that he rejected the “illegal” U.S. sanctions and that the constituyente would be the country’s “revenge.” He reiterated that the vote would proceed as planned.

 

Eoin Treacy's view -

Governance is Everything has been an adage at this service for decades and the trend is certainly downwards in Venezuela. The only way the regime can be brought to heel is through a defection of the military against Maduro’s rule and, so far, there have been scant signs of that happening. 



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July 27 2017

Commentary by Eoin Treacy

There They Go Again...Again

Thanks to a subscriber for Howard Marks recent memo. Here is a section on Softbank;s Vision Fund: 

Fourth, and perhaps more importantly for my purposes here, I want to spend some time on the fund’s structure. For each 38 cents they put into the fund’s equity, outside investors are required to put 62 cents into preferred units of the fund. On the other hand, Softbank itself invested $28 billion in equity but nothing in preferred. 

That means when the fund reaches $100 billion, Softbank will have put up only 28% of the capital but will own 50% of the equity. Adding in management fees and carried interest, its 28% of the capital may give it 60-70% of the gains. 

Even the private equity industry – with its willingness to take risk – has traditionally shied awa from piling debt on technology companies (although less so lately). Softbank doesn’t hesitate to lever its tech investments. 

The preferred units will pay a 7% annual coupon. Lending money to a tech fund at thata modest rate apparently is part of the price demanded of the LPs for an opportunity to invest in the fund’s equity. I can imagine the sales pitch about how lucky the LPs are to get a chance to provide leverage for this own investment, but doubt I’d be convinced. 

 

Eoin Treacy's view -

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

These look like very favourable terms for Softbank and based on its investments, so far, we can conclude it is not a value investor. If history is any guide the creation of such funds are often better for the manager than the investor. 



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July 26 2017

Commentary by Eoin Treacy

July 26 2017

Commentary by Eoin Treacy

Impressions from China so far

Eoin Treacy's view -

I arrived in Guangzhou on Monday afternoon. It’s my favourite Chinese city, with the kind of warm weather I prefer, arguably the best food in the country, which is no mean feat, and some of its friendliest people. Breakfast down the street, at the traditional dim sum restaurant, is the highlight of my day with ha kao, shaomai and chong fan that are beyond compare. 

China is evolving rapidly and crossed an important Rubicon about a decade ago when the value derived from infrastructure expansion was exceeded by what could be gained from enhancing human capital. The lack of a thriving domestic consumer market was one of the key weaknesses of the Chinese economy that left it exposed to external shocks, such as the credit crisis, which are outside the government’s control. Since then, there has been a considerable effort to boost the size of the domestic economy both by investing in services and developing the online market place. 

 



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July 26 2017

Commentary by Eoin Treacy

Copper Posts Two-Year High, Miners Surge as China Brightens

This article by Mark Burton and Susanne Barton for Bloomberg may be of interest to subscribers. Here it is in full:

Copper posted its highest close in more than two years and shares in producers of the metal rallied amid a weaker dollar and expectations demand will increase in China, the world’s top user of industrial metals.

Copper surged as much as 4.2 percent, leading gains on the London Metal Exchange. Freeport-McMoRan Inc. paced gains by mining stocks as Jefferies LLC recommended buying the biggest publicly traded producer. Caterpillar Inc. is strengthening its forecast for a first annual sales increase in five years after construction demand surged last quarter in China.

Base metals have rallied in the past month as a gauge of the dollar trades around a one-year low, making materials priced in greenbacks more attractive. In addition, economists have become more upbeat about China’s economy and concerns about a tightening of liquidity in the nation have eased.

All main industrial metals climbed Tuesday, while steel and iron ore contracts also advanced as the People’s Bank of China said it will pursue stable monetary policies. The announcement came after economists raised their forecasts for China’s economic output after first-half growth beat estimates.
“The weaker dollar has had quite a positive effect on base metals markets, but we’re seeing some sector-specific elements helping too,” Casper Burgering, senior sector economist at ABN Amro Bank NV, said by phone from Amsterdam. Freer credit availability in China should boost demand in key end-use industries like construction, he said.

Copper for three-month delivery rose 3.3 percent to settle at $6,225 a metric ton by 6:15 p.m. on the LME. That’s the highest since May 2015. Lead, nickel and zinc all gained more than 1.7 percent.

A rebound in China’s construction sector will be particularly beneficial for zinc, which is used to galvanize steel, while nickel has also benefited from signs of a rebound in stainless-steel demand, Burgering said.

Nickel reached the highest in three months after Philippine President Rodrigo Duterte on Monday threatened to impose higher taxes on mining firms unless they take steps to protect the environment, renewing concerns about supply from the world’s top producer of mined nickel.

 

Eoin Treacy's view -

The commodity complex when through a painful process of rationalisation from the 2011 peak and by the beginning of 2016 a lot of the excess capacity in the sector has been eroded. With economic growth picking up the potential for prices to rally remains intact because so many miners have been scarred by the experience of the crash and will be slow to invest in boosting supply. 



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July 26 2017

Commentary by Eoin Treacy

As VIX Plumbs Depths of Torpor, Betting on Its Future Gets Brisk

This article by Elena Popina and Lu Wang for Bloomberg may be of interest to subscribers. Here is a section:

“The market is being overly optimistic, and the doldrums of summer could have driven the volatility to current levels,”
Katie Stockton, managing director and chief technical strategist at BTIG LLC, said by phone.

Yet a low VIX also means cheap options prices, leading to more bets. More than 551,000 VIX calls changed hands each day on average this month, almost three times more than puts. The last time options volume was close to being this busy in July was just before a market rout that sent the index to an almost four- year high in August 2015 on concerns that China’s economic growth was slowing. It took the VIX about a year to erase its gains.
On the S&P 500, hedging costs appear particularly low. One- month implied volatility on the measure has been below realized price swings for most of the time since mid-May. In July, it reached its lowest level since October relative to historical volatility.

“When options prices are low, options traders will step in to own them,” Amy Wu Silverman, managing director and equity derivatives strategist at RBC Capital Markets LLC, said by phone from New York. “The risk-reward is so attractive, they can’t miss it. It’s like you go to Las Vegas and you play the odds. Now that the options are so cheap you have even better odds.”

 

Eoin Treacy's view -

The trend of lower rally highs in the volatility of both bonds and equities is a significant input when quantitative strategies calculate the size of their positions. It allows them to have larger position sizes and to buy the dips with more confidence which has been a contributory factor in the consistency of the stock market this year. 



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July 26 2017

Commentary by Eoin Treacy

Email of the day on MIFID II and its impact on how research is priced

Came across this article... I love subscribing to FT Money. Do you have thoughts on the traditional / new model? Article below 

Eoin Treacy's view -

Thank you for your support, kind words and this article which as you point out represents a significant change for the research business and particularly in Europe. Here is a section:

2. What’s changing?
European regulators’ rewrite of their financial rule book known as MiFID II comes into force in January 2018. Among its changes, it says the buffet of services attached to trading now must be bought and sold as individual pieces.

And 

4. What will the new system look like?
Active negotiations are going on between brokers and the asset managers and hedge funds who are their clients. Alliance Bernstein LP has quoted smaller firms about $150,000 a year for two or more fund managers to access reports and other services. Nomura Holdings Inc. has proposed charging as much as 120,000 euros ($137,000) a year for access to favorite analysts in an all-inclusive "premium offering." That’s the same price as Credit Agricole SA’s most expensive package. Money managers have been quoted $50,000 for a basic package from JPMorgan Chase & Co.’s fixed-income analysts; Deutsche Bank AG and Commerzbank AG have pitched a metered, “pay as you go” approach for some investors. 
In the U.K., regulators said they will allow trial periods during which fund managers can receive research for free for up to three months.

5. Are fund managers going to pay?
Yes. The question is how much. Across the industry, asset managers are taking a hard look at the quality of stock and bond research they receive to determine what is worth paying for. Firms such as Woodford Investment Management, M&G Investments and Jupiter Fund Management Plc are among those that plan to pay for research out of their own profits, while other fund managers intend to continue to pass costs on to their investors in a more transparent way than in the past.

Investment research is as multi-faceted discipline that has a number of idiosyncrasies. For example, the perception of value is often as much about the quality of the calls as it is about the manner in which they are delivered and the personality of who is making them. 

There is likely going to be an increasingly wide gulf between the kinds of reports which are written. On the one hand, there will be purely factual reporting which are already being written by machines, on the other there will be thought pieces and what is for all intents and purposes editorial. 
One of the primary issues analysts have with saying what they think is career risk. I believe this is one of the least appreciated factors within the financial markets and is the primary benefit of independent research. I don’t see anything in the new regulations that interferes with the built-in motivation to tell people what they want to hear. After-all one of the oldest adages in the financial industry is that the greatest sin is to be wrong on your own. 

FullerTreacyMoney does not benefit to any measurable extent from soft dollar agreements with banks. We don’t charge enough for that, so the imposition of the MIFID II regulations do not represent a threat to our business model. On the other hand, they do represent an opportunity because the cost of generating investment research will be more transparent which creates a more level playing field. 

Nevertheless, I believe it would be rather naïve to think investors will move en masse away from the providers of research they find value in currently. The challenge as always is ensuring our brand gets in front of as many eyes as possible and in that regard our subscribers have always been our greatest resource. Please invite a friend into our community.



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July 25 2017

Commentary by Eoin Treacy

July 25 2017

Commentary by Eoin Treacy

LedgerX gets U.S. approval for derivatives on digital currencies

This article from Reuters by Gertrude Chavez-Dreyfuss for Bloomberg may be of interest to subscribers. Here is a section:

The U.S. Commodity Futures Commission said on Monday it has granted New York-based LedgerX, a bitcoin options exchange, the first license to clear and settle derivative contracts for digital currencies.

The license authorizes LedgerX to provide clearing services for fully collateralized digital currency swaps. LedgerX, which was also granted a license to operate as a swap execution facility early this month, initially plans to clear bitcoin options, the CFTC said in a statement.

The CFTC, however, also clarified in its statement that the approval of LedgerX's license "does not constitute or imply a commission endorsement of the use of digital currency generally, or bitcoin specifically."

With the settlement and clearing license, participants in the LedgerX trading platform will be able to hedge bitcoin and other digital currencies using exchange-traded and centrally cleared option contracts. Initially, LedgerX expects to list one- to six-month options contracts for bitcoin. Other digital currency contracts such as ethereum (ETH) options are expected to follow.

Eoin Treacy's view -

You may remember back on March 10th when the Winklevoss twins failed to have an ETF approved for bitcoin on the basis that it was not regulated and it did not have the transparency of other asset classes. That decision held back the price for two weeks.



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July 25 2017

Commentary by Eoin Treacy

"Risk versus Reward"

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

In one such repartee, the advisor asked me to talk to her client who continues to sit on mountains of cash and refuses to invest.  His reasons were the same ones we always hear at events, so I related the points as to why we think this secular bull market will continue for years, but it was all to no avail.  My parting shot to the advisor and her client was, “Call me and tell me when he decides to buy stocks, because then I will become a seller”, which got a big laugh from both of them.

“Risk versus Reward,” what an interesting topic and one that is extensively covered in Ben Graham’s book The Intelligent Investor.  The operative quote from that book is this, “The essence of portfolio management is the management of risks, not the management of returns.”  Dr. Graham closes that thought by saying, “All good portfolio management begins and ends with this premise.”  Yet managing risk is one of the hardest things to get investors to do, and that is the sad reason many participants remain scared of stocks, because they didn’t manage the risk back at the beginning of 2008.  Recall, there was a warning signal sounded by Dow Theory with the “sell signal” of November 21, 2007, just like the Dow Theory “sell signal” of September 23, 1999, but I digress.

As stated, there is little doubt in our minds that the secular bull market is alive and well with years left to run, but most do not believe it because only a few of us have ever seen a secular “bull market”.  Indeed, like our example of the advisor and her client who think our conclusions are reductio ad absurdum, so they scorn the concept that stocks have years left to rally.  Unfortunately, many folks have felt that way for the last eight years and remain underinvested.  Also unfortunately, many participants are more concerned with the short/intermediate-term directionality of the equity markets than the long-term, net-worth-changing implication of a secular bull market.  To respond to those concerns, our intermediate-term model continues to flash bullish readings, while our short-term model suggests there is still the potential for some downside consternations this week.  We think if that weakness arrives, it should be bought.

Eoin Treacy's view -

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

I wrote yesterday about the potential for a rotation out of bonds and into equities but the quantity of cash on the side lines is something I hear a lot of institutional money managers talking about. Corporations have been active purchasers of stocks for almost the entire duration of this bull market to date and the weighted average cost of capital continues to support the decision to increase debt in order to buy back shares. 



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July 25 2017

Commentary by Eoin Treacy

Hong Kong Stocks Advance to Two-Year High Amid Mainland Inflows

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

Inflows from the mainland have helped Hong Kong’s benchmark equity gauge climb 22 percent this year to outperform most global peers. Onshore shares have largely been left behind amid concerns about rising funding costs, corporate governance issues, liquidity pressures and tougher regulatory oversight.

Chinese investors have bought about 35 billion yuan ($5.18 billion) worth of Hong Kong stocks in July as of Friday, surpassing June’s total monthly net purchases according to Bloomberg calculations.

“Mainland investors are buying Hong Kong stocks to diversify their portfolios and hedge risks, thanks to the weak performance of mainland equities, especially the ones listed in Shenzhen," said Banny Lam, managing director and head of research at CEB International Investment Corp.

The ChiNext, cowed by an official battle against speculators, is on the verge of becoming cheaper than the Nasdaq Composite Index for the first time on record. Its valuation based on reported earnings is now at 36.2, compared with 34.3 for the Nasdaq, leaving the narrowest gap since the Chinese board started in 2010.

Eoin Treacy's view -

The upcoming Party Congress slated for September or October represents a pivotal transition for the Chinese administration. This event is more important than any in at least the last fifteen years because so many members of the Politburo and Standing Committee have reached retirement age. It represents a key opportunity to cement power for the existing team by appointing their own people into key positions of power they could occupy for the next decade. 



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July 25 2017

Commentary by Eoin Treacy

Fox and Johnson Launch Coordinated Post-Brexit Trade Push

This article by Simon Kennedy and Andrew Mayeda for Bloomberg may be of interest to subscribers. Here is a section:

Trade Secretary Liam Fox acknowledged it will be a stretch for Britain to negotiate a new trading relationship with the European Union by the time of their 2019 divorce in another sign that the U.K. government will seek a post-Brexit transitional period.

"There’s a growing consensus amongst the cabinet that we will leave the European Union, but we will have a transition and implementation phase,” Fox said on Monday during a trip to Washington. "It would be nice to think we could get a full trade agreement by the time we get to March 2019, but that would be an optimistic view of recent free-trade agreements.”

Prime Minister Theresa May’s government once maintained a trade pact would be possible by the time Brexit happens despite doubts within the EU and warnings it took Canada and the bloc seven years to negotiate a less ambitious agreement than the one she is seeking. Her failure to maintain a parliamentary majority in last month’s election and increasing calls from business to avoid a "cliff edge" are now forcing the government to rally behind a transitional period.

Eoin Treacy's view -

Once the decision was made to avoid a sharp break with the EU, the process of negotiating the exit is going to be akin to unwinding the Gordian knot. It is going to take a considerable amount of time and will eventually require some major decisions to be taken to break logjams in the negotiations. The very process of agreeing to the EU’s technocratic lexicon for the negotiation process already ensured the ordeal will take 



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July 24 2017

Commentary by Eoin Treacy

July 24 2017

Commentary by Eoin Treacy

The Great Rotation May Finally Be at Hand

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

George Pearce’s, a macro strategist with Bespoke Investment Group LLC, said: “Higher risk-adjusted returns for stocks should draw inflows, and we know from our work that Americans are relatively unexposed to the market.”

Companies have been the main buyer of U.S. equities since the post-crisis low, while households and institutions have divested, according to Credit Suisse. The outperformance of bonds since the financial crisis, risk aversion and regulations unfriendly to equities have helped create a preference for fixed income.

Global bond funds -- which include government and high-yield obligations -- have seen $1.3 trillion of net inflows since 2009, while stocks have taken in less than half of that at $600 billion, according to Jefferies Group LLC, citing EPFR Global data, which reflect holdings among mutual and exchange-traded funds. 

In the first half of the year, bond funds took in $204 billion while stocks saw $167 billion of inflows. A $107 billion injection into fixed-income in the second quarter was the highest on record going back to 2002, Jefferies said. This happened despite fears of higher global yields.
 

Eoin Treacy's view -

The size of the bond market is multiples the size of the equity market. Bonds are held in pension funds because they are supposed to offer stability, yield and some diversification from the perception of higher risk attached to stocks. Right now, the US 10-year Treasury yield is around 1.23% and the S&P500 yields 1.98% which is not a very wide spread. 



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July 24 2017

Commentary by Eoin Treacy

China's Got a Huge Artificial Intelligence Plan

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

"The positive economic ripples could be pretty substantial," said Kevin Lau, a senior economist at Standard Chartered Bank in Hong Kong. “The simple fact that China is embracing AI and having explicit targets for its development over the next decade is certainly positive for the continued upgrading of the manufacturing sector and overall economic transformation."

Chinese AI-related stocks advanced Friday. CSG Smart Science & Technology Co. climbed as much as 9.3 percent in Shenzhen before closing 3.1 percent higher, while intelligent management software developer Mesnac Co. surged 9.8 percent after hitting the 10 percent daily limit in earlier trading.

AI will have a significant influence on society and the international community, according to an opinion piece by East China University of Political Science and Law professor Gao Qiqi published Wednesday in the People’s Daily, the flagship newspaper of the Communist Party.

PwC found that the world’s second-biggest economy stands to gain more than any other from AI because of the high proportion of output derived from manufacturing.

Eoin Treacy's view -

China is in a race to automate before everyone else so that it can hold onto as much of the world’s manufacturing capacity as it can. That has meant it is the world’s largest market for industrial robots and virtually ensures it will have its own automation products in the market within the decade. 



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July 24 2017

Commentary by Eoin Treacy

Another Golden Age for Corporate Technology

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

Even consumer companies are trying to make businesses foot at least some of their bills. Instacart is figuring out ways to make money from large food brands such as Red Bull, and not only from consumers reluctant to pay delivery fees. Airbnb and Uber want more bookings from people traveling on the corporate dime.

Some of this strategy is about squeezing revenue from as many sources as possible. But it also highlights the limits of tech products and services just for individuals. We the people are penny-pinching jerks. Businesses watch their bottom lines, too, but they are often willing to pay for software and gadgets that give them an edge.

That's why Intel, Oracle, International Business Machines and the early internet were built on sales to governments, spies, big corporations and others that wanted cutting-edge stuff and had the budgets to support its development. It feels a little like that again now. I think I'll stream some Pink Floyd.

 

Eoin Treacy's view -

One area where there is an urgent need for additional corporate investment is in the delivery of 5G networks. That is if the full potential of the internet of things, connected devices, software as a service and especially autonomous vehicles are to be fulfilled. There is a great deal of media commentary about all of these sectors but the cold hard reality is that they cannot run on close to their potential on current networks. 



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July 21 2017

Commentary by Eoin Treacy

July 21 2017

Commentary by Eoin Treacy

Market Know-How

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

We see increasing evidence of economic synchronization across both advanced and emerging markets. Global growth data suggests the expansion could continue for another couple of years.

 

Eoin Treacy's view -

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

It has been quite some time since the wider investment community has dared to hope that a new period of synchronised global economic expansion is underway but it is looking increasingly likely as Europe emerges from years of contraction, China’s and India’s growth surprises on the upside and the recovery in commodity prices, outside of oil, boosts the fortunes of producers. However, the increasing commonality of global stock markets has been evidence of this trend for much of the last year. 



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July 21 2017

Commentary by Eoin Treacy

Bitcoin Soars as Upgrade Backers Hoist Beers to Armistice

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

SegWit2x is essentially a compromise between two main competing camps. One proposed a direct approach, seeking to increase the block size. The other, a group of developers known collectively as Core, pushed for a long-term solution by moving some data outside of the main network, a scheme called SegWit that had been resisted by miners because it also could diminish their influence. In the end, the miners agreed to adopt SegWit, but also increase the block size to 2 megabytes.

The upgrade isn’t final. The BIP91 lock-in has a grace period of about two days, during which miners will prepare to activate the software. It will then take about two weeks for SegWit to be fully adopted. Developers still warn about potential hacker attacks that could disrupt the process.

Then, three months from now, the community will face another challenge when some of the world’s biggest miners move to adopt the second phase of the proposal, the doubling of the block size. Still, many in the community agrees that the hard part is over, with prices seen stabilizing and strengthening.

“We do believe it will continue, now that we’ve gotten over this hump,” said Ryan Rabaglia, head trader at digital-trading company Octagon Strategy in Hong Kong.

 

Eoin Treacy's view -

For a globally traded asset the inability to ever mint more than 21 million coins seems like an arbitrarily tight constraint. Among the factors that represented medium-term challenges for bitcoin include the fact more than 16 million have already minted. The difficulty of minting each new coin becomes progressively more difficult so the supply issue was an inhibiting factor growth. Alternative coins such as Ethereum already possess a built-in ability to expand supply in an orderly manner. All of these factors were putting pressure on the bitcoin community to react. Their response appears measured and looks like they will succeed in avoiding a hard fork event. 



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July 21 2017

Commentary by Eoin Treacy

Letter to the Editor of the New York Times from Sunrun's CEO

I thought this letter by Lynn Jurich may be of interest to subscribers. Here it is in full:

“After Rapid Growth, Rooftop Solar Programs Dim Under Pressure From Utility Lobbyists” (news article, July 9) got it right that traditional utilities are fighting to undercut competition and customer choice by targeting state solar policies, “particularly net metering, which credits solar customers for the electricity they generate but do not use and send back to the grid.”

Rooftop solar growth, however, is inevitable. More than one million consumers across the country are already powering their homes with rooftop solar. By 2022, residential solar capacity will more than triple, according to GTM Research estimates.

The utility lobby is intentionally distracting regulators from focusing on the real threat to affordable energy: billions of dollars of grid expansion proposals with virtually guaranteed profits and requests to subsidize nuclear plants. Rooftop solar competition forces utilities to control their costs.

Policy leaders who dig into the facts know that rooftop solar, plus home batteries for solar storage, will modernize our grid, provide more affordable clean power to everyone and create more American jobs.

 

Eoin Treacy's view -

The combative tone of this letter to the editors highlights the fact that the battle between utilities and solar companies is far from over. If we distil the arguments down to their core. Utilities have a vested interest in preserving their near monopoly on supply of electricity and the grid on which it travels. Solar companies want to create as large a market for their products as possible and rooftops are an important part of their growth strategy. To that end they have developed innovative pricing models and relied on sharing the grid so electricity can be sold. 



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July 20 2017

Commentary by Eoin Treacy

July 20 2017

Commentary by Eoin Treacy

Euro Climbs as Draghi Cites Autumn Decision on Bond Purchases

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

The common currency broke through $1.16 after Draghi said at a press conference that the euro’s recent re-pricing has received “some attention” without specifically saying he was concerned about its strength. Bonds rose, led by Italy, which has been a key beneficiary of the bank’s asset-buying.
“Draghi had a chance to talk the euro down and he didn’t,”

Athanasios Vamvakidis, a strategist at Bank of America Merrill Lynch, said in emailed comments.
The euro advanced 1 percent to $1.1635 as of 4:00 p.m. in London, after reaching $1.1658, the highest since August 2015.

The currency has advanced more than 10 percent this year, partly on speculation that a tapering of bond purchases is drawing closer.

The euro earlier declined as the Governing Council repeated that it expects borrowing costs to stay at present levels for an extended period of time and that it is prepared to increase the size or duration of the asset-purchase program should the economy take a turn for the worse.

Spanish and Italian bonds outperformed, with yields falling around seven basis points, as they won a summer respite from any ECB discussion on curbing bond-buying. The ECB has favored buying Italian securities in recent months as it combats a shortage in the euro region’s sovereign debt.
“Draghi seemed to try and downplay the anticipation for September and suggested they may try to drag this decision out,”

Richard Kelly, Toronto-Dominion’s head of global strategy in London, said in emailed comments. “He also made pretty clear that there is little appetite for any significant tapering at this stage.”

 

Eoin Treacy's view -

Mario Draghi may have attempted to leave his options open but the market is increasingly of the opinion the ECB is closer to tapering than it might like to admit. That has contributed to the Euro’s strength over the last month. 



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July 20 2017

Commentary by Eoin Treacy

Here's Why Yellen's Fed Cares About America's Opioid Epidemic

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

An estimated 2.7 million adults over the age of 26 were misusing painkillers as of 2015, while another 236,000 currently used heroin, based on test Substance Abuse and Mental Health Administration data. While opioid abusers account for a tiny sliver in a workforce of 160 million, they probably make up a great share of the 7 million who are unemployed.

“Our district is the epicenter of this crisis,” said Kyle Fee, regional community development advisor at the Cleveland Fed, which hosted a policy conference in June that included a panel specifically dedicated to opioids. “It was a good way for us to dip our toe into this topic,” he said.

Most economic research on the effects of the opioid crisis comes from academia, rather than Fed researchers, and it shows a two-way relationship between the drugs and the U.S. economy.
Labor Opportunities

Poor labor market opportunities for America’s working and middle class seem to have helped fuel opioid addiction. In turn, pill and heroin use can worsen employment chances for addicts, and can lead to criminal records that dim applicants’ prospects for years to come.

“I do think it is related to declining labor force participation among prime-age workers,” Yellen told Senators last week, when asked about the crisis. “I don’t know if it’s causal or if it’s a symptom of long-running economic maladies that have affected these communities and particularly affected workers who have seen their job opportunities decline.”

 

Eoin Treacy's view -

This chart showing the diverging paths of male and female prime-age labour force participation should give just about everyone pause. It raises a much bigger question. What are people who are not academically predisposed supposed to do as the jobs they previously depended on are automated away?



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July 20 2017

Commentary by Eoin Treacy

Email of the day on genetically modified foods

Hope you’re hale and hearty.

You will recall we had a brief chat on GMO foods at lunch during the recent Chart Seminar in Singapore. 

I recall you disagreed with my views on GMO science.

Here is a video on the subject. It is very much science based. Hope you can spare some time off your busy schedule to watch it. I think you will appreciate it.

 

Eoin Treacy's view -

Thank you for this email and I have been ruminating on that conversation since April. Few topics get people more riled up than politics, religion, abortion, climate change and genetically modified foods. There are strong beliefs held by protagonists on both sides of the argument and I reached out to David Brown who I thought might have a scientist’s perspective on the question: 



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July 19 2017

Commentary by Eoin Treacy

July 19 2017

Commentary by Eoin Treacy

Musings from the Oil Patch July 19th 2017

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

The latest topic of interest in the oil and gas business is the lack of new discoveries given the cutback in capital investment in keeping with Mr. Dudley’s “capital diet.”  What does this mean for the industry’s future?  The International Energy Agency (IEA) has sounded the alarm over sharply higher oil prices in the 2020-2022 time frame due to a lack of industry capital spending.  With capital spending cut by 25% in 2015 and by another 26% in 2016, prospects are increasing for a growing gap in the future output trajectory for oil.  Current expectations call for a modest increase in capital spending during 2017, but that increase could prove overly optimistic should oil prices fail to recover in the second half.   

The IEA warned in its Oil 2017 report of a possible imbalance between demand and supply growth, leading to the smallest global spare production capacity surplus in 14 years by 2022.  That conclusion is based on demand growth for 2016-2022 of 7.3 million barrels per day (mmb/d), which exceeds the projected supply growth of under 6 mmb/d.  A possible relief valve might be the growth in U.S. shale output.  As Dr. Fatih Birol, the IEA’s executive director put it: “We are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go.”  He went on to say, “But this is no time for complacency.  We don’t see a peak in oil demand any time soon.  And unless investments globally rebound sharply, a new period of price volatility looms on the horizon.”

The supply shortage view seems to be gaining traction among oil and gas industry professionals.  Halliburton Company’s (HAL-NYSE) Mark Richard, senior vice president of global business development and marketing, told the World Petroleum Congress that “You’ll see some kind of spike in the price of oil, maybe somewhere around 2020, 2021."  This fits with Bernstein Research’s latest oil price downgrade.  The firm now sees oil prices exhibiting a U-shape cyclical pattern: after having declined from over $80 a barrel in 2014, they traded in the $40s for 2015-2016, and will now be flat at $50 for 2017-2018 before slowly climbing back to $70 by 2021.   

 

Eoin Treacy's view -

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

Synchronised global economic expansion is generally positive for energy consumption and most particularly in emerging markets where the bulk of energy demand growth is expected to originate. How quickly battery technology advances to quell range and charging time questions is likely to represent a significant a key arbiter for whether bullish forecasts come to fruition over the next five years. 



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July 19 2017

Commentary by Eoin Treacy

Asia's Top-Performing Currency Is Missile-Proof

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

One major draw for the won is a strengthening in global trade that’s benefited South Korean exporters, along with regional neighbor Taiwan, which has also seen its currency appreciate this year. South Korea’s current-account surplus is projected by the International Monetary Fund to exceed 6 percent of its gross domestic product this year and the next two years.

“Ironically, the ones that are appreciating are the low yielders,” Soon said. South Korean 10-year government bonds yield 2.26 percent, a little less than that of U.S. Treasuries. By contrast, Malaysian debt yields 3.96 percent and India’s notes 6.45 percent.

Rapprochement Policy
President Moon Jae-in has spurred foreign investor interest after taking office in May on a platform of reducing the influence of the chaebol and seeking a diplomatic rapprochement with its belligerent, missile-firing neighbor to the north. South Korea’s stocks and bonds attracted a net $4.6 billion so far in July, reversing the outflows seen earlier this month.

The won hardly blinked after North Korea said on July 4 it fired an intercontinental ballistic missile for the first time. Moon is currently following on campaign pledges to pursue dialogue with Kim Jong Un by proposing some military and humanitarian exchanges.

Export-oriented economies like South Korea as well as Taiwan are benefiting from an upturn in the global technology sector that’s still “has got some legs to it,” Jonathan Cavenagh, head of emerging Asia currency strategy at JPMorgan Chase & Co. in Singapore, said in a Bloomberg Television interview with Betty Liu and Yvonne Man, last week.

 

Eoin Treacy's view -

The original Asian Tigers, Taiwan, South Korea, Singapore and Hong Kong has been largely somnambulant for the last few years but have been exhibiting renewed signs of investor interest this year. From a chartist’s perspective, when indices complete lengthy ranges, not least when those ranges are decades long, it is time to pay closer attention. 



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July 19 2017

Commentary by Eoin Treacy

Quarterly Market Commentary: The Investment Case for Real Assets

Thanks to Peter Van Dessel for example of his firm Abbington Investment Group, LLC’s letter which may be of interest to subscribers. Here is a section:

Chart 13, below, provides an indication of the price risks involved in a commodity such as Wheat. Using a log scale visual, we can see that Wheat is remarkably cheap when compared to its longer-term inflation-adjusted price history. We understand the reasons for today’s lower price range: the far higher productivity that comes from mechanisation, agronomy, the use of pesticides etc.; but to an impartially-minded statistician, and using the data that supports Chart 13, a five-fold increase in Wheat prices would represent no more than a mean reversion event.

Although a spike in the price of Wheat on such a scale may seem unlikely, the risk of it happening is real and the potential consequences are severe.

The following is a list of potential outcomes that would accompany a broader range of commodity price rises (Ref. Department of Agricultural and Resource Economics, University of California, U.S. Department of Agriculture, Goldman Sachs):

Unequivocally negative consequences for urban dwellers
Lower real incomes
Rising wage pressures
Lower income groups will be more negatively effected
Lower consumer confidence
Higher risk of stagflation
Social and political instability

Understandably, the secondary effect of these outcomes on overbought and over-leveraged  financial markets would be significant. So too would the flow of investments from financial assets to real assets.

With the continued backdrop of low interest rates and the current high levels of money supply, the risk of significant flows of investment from large financial markets, such as fixed income, to the far smaller, inflation-sensitive, commodity complex is substantial. If such an event were to happen, the recent 30% move higher in Wheat prices will prove to have been an early indicator of a broader trend.

 

Eoin Treacy's view -

Quantitative easing was designed to inflate asset prices and it has been highly successful. Central bank balance sheets are at unprecedented high levels while stock and bond markets have surged. Against that background it is difficult to find objectively cheap assets. 



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July 18 2017

Commentary by Eoin Treacy

July 18 2017

Commentary by Eoin Treacy

Australian dollar soars to two-year high on RBA minutes

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

The currency staged a remarkable rally following the release of the RBA's minutes in which the board stuck with its "glass half-full" view of the local economy, repeatedly underlining the "positives" in the outlook. But it also surprised by discussing the level of an appropriate neutral interest rate, which could be seen as a sign the central bank is mulling a rate rise.

Officials revealed that they now believe a cash rate of 3.5 per cent - well above today's 1.5 per cent - would be a rate level that neither stimulates the economy nor holds it back.

In reaction, the Aussie dollar jumped more than 1 US cent to as high as US79.04¢, its highest level since May 2015, after rallying 3 per cent last week.

 

Eoin Treacy's view -

The RBA is unlikely to be in a hurry to raise rates but the recent bout of strength in the Australian Dollar raises questions for Australian investors. Are they better staying at home or investing abroad? During the commodity boom, and up to the Australian dollar’s peak in 2011, it paid to stay at home. The strength of the currency meant achieving a favourable return overseas was challenging to say the least. 



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July 18 2017

Commentary by Eoin Treacy

Copper price jumps on gangbusters China growth

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

Copper futures trading on the Comex market in New York jumped on Monday on renewed optimism about economic strength in top commodity consumer China.

Copper for delivery in September jumped to a high of 2.7375 a pound (just over $6,000 a tonne) in lunchtime trade, up 1.7% on the day to the highest level since end-March. LME copper's 2017 year to date gains in percentage terms are now within shouting distance of 10%.

Commodity-intensive sectors continue to expand at a faster rate than the broader measure of industrial production

The economy of China, responsible for nearly half the world's consumption of copper, expanded at an annual rate of 6.9% in the second quarter against expectations of a slight decline and at a quicker pace than Beijing's own target of 6.5% growth for 2017.

In seasonally-adjusted quarter on quarter terms, growth was even more significant, picking up from 1.3% to 1.7%. If the trend continues, this year would be the first time since 2010 that the Chinese economy grew faster than the year before.

Industrial production data for June released today also pointed to a significant improvement. Growth in industrial output picked up from 6.5% year on year to 7.6% led by greater electricity and steel production. Bloomberg consensus forecasts pointed to no acceleration for Chinese industrial output.

 

Eoin Treacy's view -

China has a major political transition coming up in September or October. Xi Jinping has not yet anointed a new successor probably because so many positions are opening up in the Standing Committee and the Politburo, and he has a vested interest in stacking them with his own appointees. 
The ousting of Sun Zhengcai, a current Politburo member, from Chongqing over the weekend supports the view Xi is angling towards the kind of control Zhang Zemin had over the political apparatus which persisted long after he was in the top position. 

Talk of containing “grey rhinos” or in Donald Rumsfeld speak “known knowns” can also be viewed as an attempt to ensure Xi’s legacy. Here is a section from an article discussing the issue from Bloomberg: 

"The message from the leadership last weekend was very clear -- financial stability is now regarded as an important element of national security," said Raymond Yeung, the Hong Kong-based chief economist at Australia & New Zealand Banking Group Ltd.

An editorial in the Communist Party’s People Daily newspaper on Monday pointed to the seriousness of the campaign, warning of potential "grey rhinos" -- a variation on the black swan events popularized during the global financial crisis, with the difference that the danger from a charging rhino is more immediate and the animals are less rare.

 



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July 18 2017

Commentary by Eoin Treacy

What If Big Oil's Bet on Gas Is Wrong?

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

Driving the shift has been a sharp decline in the cost of building new renewable power –- which, unlike generating electricity from coal or gas, is almost free to run after the initial capital investment has been made.

“Wind and solar are just getting too cheap, too fast" for gas to play a transitional role, said Seb Henbest, lead author of the BNEF report.

The consultant estimates that onshore wind and solar power are already competitive with coal and gas in Germany, and that within five years they will be cheaper to build than new coal and gas plants in China, the U.S. and India. By the late 2020s, it will start to even be cheaper to build new onshore wind and solar power than run existing coal and gas plants.

The trends that are undercutting optimism about the global gas outlook are already playing out in Europe. Natural gas demand remains well below a 2010 peak, as greater energy efficiency, rapid adoption of renewables and resilient coal consumption cut into its market share.

The IEA does not see European gas demand returning to its 2010 high. In its base case scenario, European gas demand would be at the same level in 2040 as in 2020.

 

Eoin Treacy's view -

Since the majority of globally traded natural gas is tied to long-term contracts producers have some security in the investments they made. However, a decade of high oil prices created the perception of long-term outsized profits and the reality is likely to be more modest. The extent to which coal will survive as a fuel stock against increasingly high regulatory barriers as well as innovation in storage solutions are likely to be key determinants in the success of what have been massive investments in natural gas which has contributed significantly to global supply. 



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July 18 2017

Commentary by Eoin Treacy