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January 18 2018

Commentary by Eoin Treacy

January 18 2018

Commentary by Eoin Treacy

Fed Is Targeting the Wrong Inflation

This article by Danielle DiMartino Booth rhymes with my view that inflation is understated in the official statistics. Here is a section: 

Consumers are increasingly asking: Is this a need or a want? A discernible gap between the rate of price increases for necessities and the one for discretionary purchases is putting the Federal Reserve’s tightening path at risk of veering off course.

Making matters more difficult, the Fed’s preferred inflation gauge does a pitiful job of capturing the quandary facing many households that live paycheck to paycheck. The so- called core PCE is the central bank's go-to inflation metric. It is derived by netting out the necessities of food and energy from personal consumption expenditures. But the core PCE also minimizes the weight of rent and over-emphasizes health care due to Medicaid and Medicare’s inputs.

Classify the following items within the core PCE as necessities and then track them as an aggregate using what we can call the Household Budget Inflation Gauge. Included are food and nonalcoholic beverages, fuels, clothing, housing, utilities, health care, health insurance, homeowners’ insurance, auto insurance, higher education and the phone, utility and internet bills. As of the latest reading, these costs are rising at a 2 percent rate compared with last year.

Now throw all of the rest of the discretionary items into what we can call the Household Wish List Inflation Gauge and you will see that these items’ prices have been rising at a pace of 1.5 percent.

Yet if you insist on comingling these baskets and then throwing out food and energy, you will by flying as blindly as the most dovish members of the Federal Open Market Committee.

Eoin Treacy's view -

The triumph of the subscription model means that there is an increasing number of calls on income that did not exist a decade ago. Only today my iPhone told me I needed to upgrade my iCloud storage. Netflix is now a staple for many households, Amazon Prime has hundreds of millions of subscribers. Microsoft has also successfully transitioned to a subscription model with Office 365. 



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January 18 2018

Commentary by Eoin Treacy

S&P Sees 'Clear Danger' of Default by South Africa's Eskom

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

There is a “clear danger” that South Africa’s state-owned power utility, Eskom Holdings SOC Ltd., could default on its debt, S&P Global Ratings said.

“We are very concerned about liquidity issues,” Konrad Reuss, the managing director of S&P for sub-Saharan Africa, said at an event in Johannesburg Thursday.

Eskom is the biggest recipient of state guarantees at a time when domestic power demand is the lowest in more than 10 years and as South Africa’s finances buckle under lower tax revenue and rising debt. The company needs 20 billion rand ($1.6 billion) of funding by the end of its fiscal year on March 31, the Mail & Guardian newspaper reported last week, citing the utility.

Yields on Eskom’s bonds climbed after the comments, with the rate on dollar debt due in January 2021 rising 54 basis points to 6.37 percent, the highest since Nov. 14, at 1:29 p.m. in Johannesburg.

Finance Minister Malusi Gigaba on Tuesday said Eskom’s state keeps him awake and is his “biggest worry.” He spoke before meeting some of the utility’s lenders on the same day to address the utility’s financial problems.

Goldman Sachs Group Inc. in September said that Eskom was the biggest single risk to the South African economy and that the government needed to replace its management.

Eoin Treacy's view -

The South African economy has endured years of mismanagement under Zuma’s administration with the net result that the national power utility is barely fit for purpose and educational achievement is worse than during the apartheid era for black children. Keeping the lights on is a basic requirement but the prospect of a new administration is bolstering investor opinions about the prospect for improvement. 



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January 18 2018

Commentary by Eoin Treacy

China Posts First Full-Year Pickup Since 2010 on Global Tailwind

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

"There’s still a mountain of debt and major structural challenges to address. But compared to hard-landing fears in early 2016, and expectations of a pronounced slowdown at the start of the year, China’s economy outperformed in 2017."

In a year that began with fears of a trade war with a newly elected Donald Trump, exports turned back into a growth engine for the world’s factory floor. The contribution of net external trade to growth improved by around 0.4 percentage point in real terms last year, “more than fully explaining the pick-up” in GDP growth, said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong.

Reflation was also key to boosting company profits and raising their ability to service debt. The GDP deflator for the full year, a gauge of economy-wide inflation, came in at 4.33 percentage points, while nominal growth accelerated to 11.2 percent. GDP in those terms grew to 82.7 trillion yuan ($12.9 trillion) -- up 8.4 trillion yuan in the year.

"Another Indonesia created in one year!" said Jim O’Neill, former chief economist at Goldman Sachs Group Inc. "The nominal GDP size confirms China has diminished the previous deflation risk and silly comparisons with 1980s Japan were just that, silly."

Eoin Treacy's view -

There is nothing quite like synchronised global economic expansion to flatter the prospects for exporters as demand increases for just about everything. That is helping China to outperform expectations and eases the burden on the economy from the efforts underway to deleverage the shadow banking system which primarily affects unlisted regional lenders. 



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January 18 2018

Commentary by Eoin Treacy

January 18 2018

Commentary by Eoin Treacy

January 18 2018

Commentary by Eoin Treacy

Email of the day on an Australian venue for The Chart Seminar

Are you considering a seminar in Australia 2018/19

Eoin Treacy's view -

Thank you for this inquiry. I would be happy to organize a seminar in Australia this year if there is sufficient interest. I am in discussions at present about participating in a private event in Melbourne in late April so if that goes ahead it would be an opportune time to think about an Australian seminar. 



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January 17 2018

Commentary by Eoin Treacy

Video commentary for January 17th 2018

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area.

Some of the topics covered include: Wall Street rebounds with decline in VIX from intraday highs, bonds weak, commodities steady, continued optimism about the role of tax cuts in boosting earnings, pace of innovation in cryptocurrencies a threat to bitcoin.



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January 17 2018

Commentary by Eoin Treacy

Stocks Jump to Records, Bonds Fall on Tax Benefits

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

Taxes drove much of the gains. Financials were strong after Bank of America Corp. beat estimates and indicated that it could benefit from the U.S. tax overhaul by reducing pressure to cut future costs. And Apple Inc. climbed after saying it will bring hundreds of billions of dollars back to the U.S. from overseas to invest in jobs and facilities.

“We’re all really trying to figure out the real impact off tax reform on some of the major sectors,” said Jamie Cox, a managing partner for Harris Financial Group in Richmond, Virginia. “Financials in particular have been in the news because you’ve seen some weird things with some of their deferred tax assets being reported in earnings. I think a lot of people misunderstood and don’t understand how the deferred tax assets work, and so they’re seeing these massive charges that the banks are taking as a result of tax reform and they can’t see too clearly into the future about how much the impact on tax reform is going to have on their bottom line three quarters from now.”


And

“A lot of the move that we’ve been seeing has been just the beginning,” said John Stoltzfus, chief market strategist at Oppenheimer & Co. “It’s hard to quantify, but we see some evidence of bull market bears as well as skeptics of this bull market finally beginning to capitulate. And when that capitulation starts, it’s a process.”

Eoin Treacy's view -

Buy and the dip strategies have been programmed into algorithmic systems so that every time the VIX index rallies more than 2 points the flow of funds moves back into equities and out of bonds. This is a very short-term example of how risk parity strategies are maneuvering in the current environment. 



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January 17 2018

Commentary by Eoin Treacy

Facebook Investigating Possible Russia Meddling in Brexit

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

The Brexit probe is part of a broader reckoning that Facebook, Twitter Inc. and Google’s YouTube are facing globally, as governments come to grips with the companies’ far-reaching influence on society, as well as vulnerability to manipulation.

Damian Collins, the chairman of the digital, culture, media and sport committee that’s leading the investigation, said social media companies must be more proactive in investigating the misuse of their services rather than wait for prodding from regulators. "They are best placed to investigate activity on their platform," he said.

Twitter, which has until Thursday to offer its own response to U.K. lawmakers, declined to comment.

Also on Wednesday Twitter said it would begin notifying U.S. users who had been exposed to Russia propaganda. In a hearing in Washington, U.S. lawmakers pressed executives from Facebook, Twitter and YouTube to act more aggressively to prevent the spread of terrorist-related content.

Responding to a broadening backlash, Facebook Chief Executive Officer Mark Zuckerberg has vowed to "fix" the social network, and last week made changes to its main news feed to ratchet back posts from businesses and media outlets in favor of those from friends and family.

Eoin Treacy's view -

There are a number of aspects to this story. The first from a British perspective is if Russian tampering in the Brexit vote is proven then it would lend support to those looking to hold another referendum. The basis of course being that the first plebiscite was tainted by propaganda which was also a charge during the campaign. I doubt it would overturn the decision.



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January 17 2018

Commentary by Eoin Treacy

Key calls for 2018

Thank to a subscriber for this report from Oxford Economics, on Australia, which may be of interest. Here is a section:

Although rate normalisation has begun in the US, UK and Canada, we expect the RBA to stay on hold until the end of 2019. The Board are facing near-term weakness in domestic demand and continued sluggish wage growth, which will result in GDP growth undershooting productive potential and core inflation remaining around 2%. Against this backdrop, loose monetary policy is needed to support the economy2, and we expect the cash rate to remain at 1.5%.

The Australian dollar displayed its usual volatility in 2017, starting the year at below US73 cents, then rising and peaking above US81 cents in September, before drifting back to US75 cents in early December. The AUD finished 2017 at US78 cents, driven up in the last few weeks of the year by rises in key commodity prices. Moving through 2018, we expect this position to gently unwind. Iron ore and coal prices are expected to fall, with supply increases from major producers (including Australia) coming together with slower demand growth for both commodities. Coupled with this, our current macroeconomic outlook is significantly below consensus (2.5% v. 2.8%, Consensus Economics December 2017 survey), and we expect market sentiment to move against Australia as the economy underperforms current expectations and it becomes clear that the RBA won’t be raising rates in the near term (in contrast to the US, where we expect to see three rate rises this year). As a result, we expect to see the AUD drift down towards 75 US cents per dollar as we move through 2018. 

Eoin Treacy's view -

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

Australia might be lagging in raising interest rates because of the overhang of consumer debt and high property prices but the 10-year yield is firming from the lower side of a yearlong range. 



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January 17 2018

Commentary by Eoin Treacy

Week in China, Ant problem

Thanks to a subscriber for this article focusing on Chinese overseas acquisitions which may be of interest. Here is a section:

A section from the article is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

Huawei’s deal with AT&T to sell its phones in the USA has also fallen on hard times and suggests the Trump administration is willing to take a tougher line on Chinese overseas acquisitions. The arrest yesterday of a former CIA agent, suspected of leaking the identities of US agents in China, is another branch of what is a continually developing story of competition between two great powers. 



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January 17 2018

Commentary by Eoin Treacy

Email of the day on my personal portfolio

Thanks for the info on your personal portfolio. Is it possible to indicate in the first sentence if there has been an update in the text during that day? Thanks very much!

Eoin Treacy's view -

Thank you for this suggestion. So far, every time I have made a change to the portfolio I change the date in the title. In the section below, you can see that the last change I made was on January 16th. Additionally, any change will be found at the top of the section so you do not have to scroll to find it.

 



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January 17 2018

Commentary by Eoin Treacy

Email of the day on long-term themes and investment vehicles

Well done on all the recent market analysis and continuing your thoughtful and insightful analysis as ever. I was wondering if you might be able to provide some thoughts and ideas regarding how to invest is some of the longer-term themes you are running with?

Markets seem to be entering some really interesting phases that you are highlighting, such as the end of QE, coordinated economic expansion which must spell the end of the long-term bond boom that we have seen. Whilst I know you watch and play the markets daily with your futures plays, those of us with non-related "day" jobs need slightly less volatile longer-term ways to play these trends, e.g. perhaps through some ETFs or appropriate equity investments.

Given your knowledge of the markets, I was wondering if you might be able to

1) summarise your key themes right now and

2) propose some suggested means to back these ideas. I think the regular summaries help as not all of us have time to listen to your broadcasts or even read the bulletin every day.

Perhaps this could be a weekly update?

Whilst I like your own personal portfolio updates, your trades tend to be futures so need much more regular management than the type of trades myself and I suspect many other readers may feel more comfortable with.

Hope this makes sense and thanks very much for your consideration.

Eoin Treacy's view -

Thank you for this email and reasonable request. Right now, the Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds.  Here is a brief summary of my view at present. 



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January 16 2018

Commentary by Eoin Treacy

January 16 2018

Commentary by Eoin Treacy

(Un)Steady as She Goes

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

In weighing the two sets of forces that bear upon our clients’ portfolios, we draw the same conclusion now that we have since November 2013when US equities entered the ninth decile of valuations: that clients should remain fully invested in equities and beta-driven assets despite high valuations. We show why we believe US equities are not yet in bubble territory, and are driven instead by underlying earnings and continued economic growth. We also analyze the current low level of inflation volatility and its impact on equity valuation metrics. Finally, we provide our expected returns for 2018 and the next five years, including our tactical asset allocation recommendations, and dispel the persistent myth of mean reversion in equities and fixed income yield levels. We conclude with our key takeaways.

Eoin Treacy's view -

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

I saw a headline this morning that the Dow Jones was more overbought on an RSI reading than at anytime in the last 114 years. That’s quite a record and highlights just how well the market has done since September amid a period of extraordinarily low volatility. 



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January 16 2018

Commentary by Eoin Treacy

Doubling of U.S. Bond Supply Seen as a Threat to Global Rally

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

A “dramatic” increase in U.S. bond supply over the next year risks unhinging global markets from their bullish foundations, warns Torsten Slok at Deutsche Bank AG.

The supply of U.S. government debt will almost double to $1 trillion this year to finance a widening budget deficit as the Federal Reserve whittles down its holdings. Unless new buyers emerge, the overhang could be far-reaching.

“If demand for U.S. fixed income doesn’t double over the coming years then U.S. long rates will move higher, credit spreads will widen, the dollar will fall, and stocks will likely go down as foreigners move out of depreciating U.S. assets,” the chief international economist at the German lender wrote in a note Tuesday. “And this could happen even in a situation where U.S. economic fundamentals remain solid.”

Those fears aren’t shared widely on Wall Street, where spreads on corporate bonds have sunk to 2007 lows and bullish indicators abound. The rally in credit appears relentless, retail demand for bonds is insatiable and tax cuts may reduce corporate borrowing.

Commercial banks, emerging-market reserve managers and pension funds are all set to plug the $1.1 trillion hole in global bond demand left by central banks this year, according to JPMorgan Chase & Co.

Eoin Treacy's view -

The US Treasury has a great deal of debt that matures in 2018 as we approach the 10-year anniversary of the global financial crisis. That is at least part of the reason the Federal Reserve is paring its holdings of debt, with plans to roll-off about half of the total maturing this year. Nevertheless, that still represents over $200 billion, in addition to whatever is required to fund the deficit, that needs to be absorbed by the market this year. 



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January 16 2018

Commentary by Eoin Treacy

Email of the day on India and governance

I'm not sure whether you include 'The Economist' in your regular reading material. If so, you will have noticed that they have recently published several articles critical of India and in particular, critical of the BJP and of Modi. In last week's edition, a lead article plus a 'Briefing' suggested that wealth in India was confined to very few people and to get into the top 1% of earners you only needed an income US$20,000 a year. The articles were critical of infrastructure, of education, of the bureaucracy and of both the pace and direction of reform. They concluded that the Indian economy may be running out of puff and wondered from where it might get its second wind. As a consequence of an Asian-centric background, I have reasonably large weightings in China, India and Japan. I have no intention of reducing exposure to India (nor to China or Japan) but I would be interested in your views on The Economist's assertions particularly given your high regard for Modi and his government. All best.

Eoin Treacy's view -

Thank you for this topical question. Governance is Everything has been a mantra at this service since before I joined David in 2003. However, governance is not a static measurement. It is a relative consideration and the trajectory of governance rather than its absolute value is what we strive to identify. 



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January 15 2018

Commentary by Eoin Treacy

Video commentary for January 15th 2017

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area.

Some of the topics discussed include: Third Psychological Perception Stage of a Bull Market, downside key reversal in China, stock markets susceptible to some consolidation of recent powerful gain, Euro, Pound and precious metals remain firm, Bund yields testing the upper side of a yearlong range.



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January 15 2018

Commentary by Eoin Treacy

Email of the day on Eurozone underperformance

It looks to me that European shares are lagging more and more the US and Far east shares. with this euro/usd head storm instead of headwind Europe will follow the USA a little on the way up but I fear will probably follow the USA every step of the way down when this market eventually starts to correct. I fail to see the reasons for this strong euro. could you please give your expert opinion?

Eoin Treacy's view -

Europe has lagged for much of the decade for a variety of reasons, but the region’s decision to impose a sovereign debt crisis rather than force bankruptcies is among the chief reasons for underperformance. The questions about the sustainability of the Eurozone that the fiscal austerity pledge engendered have been partially averted by the ECB’s massive quantitative easing program but tapering is already underway so growth will need to continue to trend higher if more revolts against the status quo are to be avoided. 



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January 15 2018

Commentary by Eoin Treacy

South African Police Reported to Get Gupta Arrest Warrant

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

 

South Africa’s Hawks police unit has obtained an arrest warrant for at least one of the members of the politically connected Gupta family, City Press reported.

The unit is now waiting for prosecutors at the National Prosecuting Authority to sign the warrants so that the arrests can be made, the Johannesburg-based newspaper reported on its website, citing an official at the Hawks it didn’t name. The official couldn’t say which of the three Gupta brothers -- Ajay, Atul or Rajesh -- would face arrest.

Former Public Protector Thuli Madonsela had ordered an inquiry into allegations that the Guptas may have influenced the appointment of cabinet members in President Jacob Zuma’s administration and received special treatment for a coal business linked to the family and one of the president’s sons.

This was part of Madonsela’s report about state capture, a term used to describe influence over government appointments and the awarding of state contracts.

Zuma and the Guptas have denied wrongdoing.

“We have not applied for an arrest warrant against any member of the Gupta family,” Hawks spokesman Brigadier Hangwani Mulaudzi said by phone from Johannesburg. “We are investigating a number of cases related to the issue of state capture, some of which have passed their stage-one levels, and we are awaiting direction from the National Prosecuting Authority.”

Ajay Gupta didn’t immediately respond to a phone call and text message seeking comment.

Eoin Treacy's view -

Power is always subject to corruption so the strength of a nation’s checks and balances goes a long way towards informing out view of whether governance is improving or deteriorating. South Africa has an independent judiciary. That is not a boast many emerging markets can make and it has been the cornerstone of attempts to combat the deteriorating standards of governance represented by Zuma’s premiership. 



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January 15 2018

Commentary by Eoin Treacy

On Target January 12th 2018

Thanks to Martin Spring for this edition of his report which may be of interest to subscribers. Here is a section on supply:

A section from the full report is posted posted in the Subscriber's Area. 

Eoin Treacy's view -

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

The triumph of the buy and hold strategy is representative of the 2nd psychological perception stage of a bull market. Both share buybacks and passive investing withhold supply from the market which widens the imbalance between supply and demand and contributes to trends becoming more consistent. When this is considered an inevitability rather than a possibility we can conclude the transition in the 3rd psychological perception stage has begun.

 



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January 12 2018

Commentary by Eoin Treacy

January 12 2018

Commentary by Eoin Treacy

BofA Warns Bull Market Capitulation Has Begun as Bears Surrender

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

Here comes another sign that the few remaining bears are finally giving up.

Investment flows going into stock funds worldwide jumped to $24 billion in the week to Jan. 10 - the sixth largest weekly inflows ever - while $13 billion went into corporate and emerging markets bonds, according to strategists at Bank of America Merrill Lynch, who said the data show the market is reaching “maximum bullish” levels.

“Peak positioning on its way, but we expect asset prices to overshoot first,” the strategists led by Michael Hartnett wrote in a note, saying that to get a proper “sell signal,” they still need to see fund managers’ cash levels falling below 4.3 percent in their next monthly survey, as well as further inflows into high-yield bonds, emerging market equities and emerging market debt in the coming weeks.

Among recent signals that stocks are overheating: the proportion of bullish participants in the American Association of Individual Investors hit a seven-year high earlier this month, most major equity benchmarks around the world trade at overbought levels, and the S&P 500 has reached its most expensive level since 2002.

Eoin Treacy's view -

Among many investors there is a realization that we are in the latter stages of an expansion although there is little evidence of top just yet, much less any sign of recession. 



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January 12 2018

Commentary by Eoin Treacy

2018 Navigating Vietnam

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

A section from this report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

Vietnam benefits from its close proximity to China, low labour costs, large young population, trade friendly administration and a desire to progress from being a frontier market to a more conventional investment destination. 



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January 12 2018

Commentary by Eoin Treacy

Pound Jumps to Highest Since Brexit Vote on Hopes of Better Deal

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

 

The pound jumped to the strongest level since the Brexit referendum as Spanish and Dutch finance ministers were said to be working together for a deal that keeps Britain as close to the European Union as possible. Gilts declined.

Sterling rallied as much as 1.1 percent, the biggest intraday gain since mid-September, as the news rekindled optimism about the U.K. having continued access to Europe’s single market. Still, the rally was greeted with caution even by top sterling bulls, who said a more meaningful development is needed to maintain the currency’s strength.

“We’ll need substance in these reports plus a transition deal and positive U.K. data to keep the pound supported here,” said Viraj Patel, a currency strategist at ING Groep NV. “But it means the pound has taken out a really important resistance area and makes our call for $1.40 all the more likely.”

Eoin Treacy's view -

It has been my contention for months that a negotiated settlement remains the most likely outcome from the Brexit talks. That doesn’t mean it is the best solution or indeed the worst just the most likely. 



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January 12 2018

Commentary by Eoin Treacy

Precious Metals 2018 Forecast Silver

Thanks to a subscriber for this report from ScotiaBank focusing on silver which may be of interest. Here is a section: 

A section from this report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

Silver is often described as high beta gold and is best bought following reaction. The most react of these was in December when it tested the lower side of a more than yearlong range. It is now in the middle of that congestion area with the upper side somewhere in the region of $18.60. 



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January 11 2018

Commentary by Eoin Treacy

Video commentary for January 11th 2018

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Commonality in both equity markets appreciating but also government bond yields looking likely to breakout. oil pauses near $70, gold firms, resources sectors breaking out, Japanese banks extend breakout. 



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January 11 2018

Commentary by Eoin Treacy

Just Markets

It was a pleasure to tune in to this conference call with Jeff Gundlach at DoubleLine and the firm kindly sent along the slides. 

January 11 2018

Commentary by Eoin Treacy

Email of the day on Japan's monetary policy

Happy new year! The BoJ has surprised us! At yesterday's tender, it offered to buy Y190bn of bonds in the 10 - 25 year maturity range, a reduction of Y10bn. It similarly reduced bonds purchased in the 25+year maturity category. Well, this was unexpected and the 10-year yield has risen to around 8bps (!!). The BOJ's target, as we know, is zero. The yen has rallied sharply over the last couple of days. It's worth recalling that at this time last year, the BOJ was purchasing Y190bn of JGBs with 10 to 25 years of maturity left and Y110bn of 25 to 40-year JGBs. Thus, while the BOJ remains extremely accommodative, any change at the margin, however small, will cause a ripple or two. BOJ's action coincided with the stock market looking quite overbought in the short term and USD/Yen finding resistance around 114. All said and done, I can't believe that the BOJ will let bond yields rise too far away from their target.

Eoin Treacy's view -

Thank you for this informative email. Japan is one of the only countries in the world right now running both accommodative monetary and fiscal stimulus. However, let’s not also forget that creating inflation is the primary goal of these operations, hopefully from outsized domestic growth, but any inflation will do to help erode Japan’s massive quantity of debt. 



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January 11 2018

Commentary by Eoin Treacy

Russia Kicks Off Currency Buying Spree With $4.5 Billion Program

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

Russia’s Finance Ministry will buy about $4.5 billion in foreign currency over the next three weeks, increasing purchases after changes aimed at further limiting the economy’s dependence on oil.

The amount of additional budget revenue earned in January from oil and gas is expected at 257.1 billion rubles ($4.5 billion) as a result of higher crude prices, the Finance Ministry said on Wednesday. Under a so-called budget rule, the entire windfall will be spent on buying foreign currency in the domestic market, with daily purchases at 15.1 billion rubles from Jan. 15 to Feb. 1, it said in a statement.

The operations will help insulate the economy from the ups and downs in crude and shield the ruble’s exchange rate from volatility. The government is absorbing all revenue earned when Russia’s Urals export blend is above $40 a barrel, channeling the excess income into its sovereign wealth fund.

Eoin Treacy's view -

The Ruble accelerated to an important low in early 2015 which prompted the central bank to intervene and to push interest rates up to 17%. The collapse in oil prices into the 2016 low saw the currency hit a nadir but the interest rate and oil’s recovery resulted in a major short covering rally. 



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January 11 2018

Commentary by Eoin Treacy

Email of the day China, Currencies, Inflation and Gold

In the video today, you emphasized the significance of recent moves by China regarding its currency and inflation.  These issues were discussed in length in a Mises Institute report which will be of interest to many readers.

Eoin Treacy's view -

Thank you for this interesting article which is representative of monetary conservativism that is a central theme in decrying the loss of purchasing power in fiat currencies since the abandonment of gold as a monetary base. 



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January 10 2018

Commentary by Eoin Treacy

Video commentary for January 10th 2018

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Discussion of China's motivation in upsetting the Treasury market, yen firm, gold steady, oil rallies, stocks steady, industrial resources continue to outperform. Bund and Treasury yields testing the upper side of their respective ranges. 



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January 10 2018

Commentary by Eoin Treacy

Chinese Caution on U.S. Debt Clouds Financing for Trump�s Tax Cut

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

 

At the same time, though, China is so heavily invested in U.S. public debt that it has an interest in keeping the market healthy, said Nathan Sheets, chief economist for PGIM Fixed Income, who served as Treasury undersecretary for international affairs in the administration of former President Barack Obama.

“If China were to do something that created uncertainties in the government securities markets, China is a major foreign holder of U.S. Treasuries, so it’s deeply invested in that market” and wouldn’t want to make any moves that could hurt its own position, Sheets said.

Sheets said the U.S. has withstood similar tests before over the past 15 years. China and Japan are the two largest holders of U.S. Treasuries and each have ramped up purchases due to currency interventions, only to slow down and cause market jitters. China most recently spurred concern in 2015 when it slowed investments. “That leads me to be pretty relaxed about this,” Sheets said. “There’s lots of demand for Treasuries from the U.S. and abroad.”

Nonetheless, China’s position as a major purchaser of Treasuries gives it some leverage to try to shape U.S. responses -- including the Trump administration’s tough talk on trade policy.

Eoin Treacy's view -

Why does China buy so many Treasuries? The simple answer is they need to sanitise the constant inflow of funds from the nation’s myriad exporting businesses lest the Renminbi soar. So, if the Chinese were to stop buying Treasuries, are they about to invest in Bunds at close to zero yields? That seems unlikely so this statement sounds like politicking rather than substantive action. 



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January 10 2018

Commentary by Eoin Treacy

Intel Unveils 'Breakthrough' Quantum Computer

This article by Joel Hruska for Extreme Tech may be of interest to subscribers. Here is a section:

The new system is codenamed Tangle Lake, a reference to an Alaskan lake chain and the tangled state of the electrons themselves. Quantum computers are extremely different from standard (classical) computers, and can tackle problems modern classical machines can’t handle. The reason increasing the number of qubits in the system is important is because it also allows for a significant amount of additional work to be done and for more complex problems to be considered. And according to Intel, the gap between where we are today and where the company thinks we need to be for commercialization of quantum computing is enormous.

“In the quest to deliver a commercially viable quantum computing system, it’s anyone’s game,” said Mike Mayberry, corporate vice president and managing director of Intel Labs. “We expect it will be five to seven years before the industry gets to tackling engineering-scale problems, and it will likely require 1 million or more qubits to achieve commercial relevance.”

Intel is also investigating another type of qubit, spin qubits, to see if they can be implemented in silicon. Spin qubits are much smaller and can potentially be implemented in CMOS and Intel has invented a spin qubit fabrication flow on “300mm process technology.” This is oddly phrased, but seems to indicate Intel is building these chips on its 300mm wafers as opposed to some new process node.

Eoin Treacy's view -

The fallout from the exposure of vulnerabilities in the vast majority of chips currently in computers all over the world is going to necessitate a rethink of how to deliver the best possible processing speeds at an attractive price. For too long the semiconductor business has paid scant attention to the threat of hacking but with the increasing digitization of the global economy it is an issue that can no longer be simply ignored. 



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January 10 2018

Commentary by Eoin Treacy

Year-end Review and Outlook

Thanks to a subscriber for this report from M Partners focusing on the Canadian mining sector. Here is a section:

A section from the full report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

The mining sector went through a painful process of rationalization between 2011 and 2015 which resulted in exploration being cancelled and development of new mines being shelved. A substantial and sustained price rally is generally required to encourage new supply into the market following such an event. After two years of rallies the first signs of interest in developing new supply are now being seen but it will take time for it to come on line. 



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January 10 2018

Commentary by Eoin Treacy

World's No.1 Miner Is Building an EV Hub It Doesn't Want to Keep

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

“The investment in Nickel West makes sense regardless,” said James Eginton, an analyst at Sydney-based Tribeca Investments Partners Pty, a BHP shareholder that’s urged the producer to extend its suite of commodities to tap rising battery demand. Efforts to refocus the business will either boost the value of a sale, or lift the unit’s cashflow if the assets are retained, he said.

BHP began building a nickel sulphate plant at Nickel West in recent weeks and is considering a slate of further expansions to make it the largest source of the material and a hub for other battery ingredients. It’s aiming to sell 90 percent of output into the battery supply chain by about 2021, from less than a third at the end of last year. Global nickel demand could more than double by 2050, fueled in part by rising electric vehicle sales, Bloomberg Intelligence said in a June report.

The world’s biggest mining companies are ratcheting up their response to the booming demand for battery raw materials.

Rio Tinto Group is developing a lithium project in Serbia, while Glencore Plc plans to double production of cobalt and is effectively “a one-stop-shop” for investors seeking exposure to EV gains, Sanford C. Bernstein Ltd. said in a note this month.

Eoin Treacy's view -

A measure of just how technology focused the automotive sector has become is how many CEOs have turned up at the Consumer Electronics Symposium (CES) this year. When I attended two years ago Faraday Futures stole the show but this year Ford and other manufacturers were keen to lay out their electric car ambitions. 



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January 09 2018

Commentary by Eoin Treacy

January 09 2018

Commentary by Eoin Treacy

Email of the day on socially driven inflation

Thanks for your insights as always into the markets.

I didn't fully understand what you meant by 'social media inflation' and wondered whether you could expand on this?

All the best

Eoin Treacy's view -

Thanks for this question which may be of interest to subscribers. I’m pretty sure I said socially driven inflation but in an hour long broadcast I could certainly have been subject to a Freudian slip. The essence of the question is if technology is inherently deflationary and commodity use represents a fraction of its former influence on the economy, what will be responsible for driving a fresh inflationary cycle? 



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January 09 2018

Commentary by Eoin Treacy

Email of the day on dividend yields for the Autonomies

January 09 2018

Commentary by Eoin Treacy

Musings from the Oil Patch January 17th 2018

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

A section from the report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

Saudi Arabia is not exactly the most politically secure place in the world right now which is going to have an influence on the valuation of Saudi Aramco. Exxon Mobil is the company that tends to get the most accommodative treatment from investors because of its long history of dividend increases and good governance. The big question for Saudi Arabia, regardless of reserves, is what kind of discount the market will demand for accepting the governance risk attached to the company. That is especially true with the UK having had to alter disclosure rules in its efforts to secure the IPO. 



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January 09 2018

Commentary by Eoin Treacy

Email of the day on exaggerated risks

A very happy new year to you and David. I just watched this TED Talk from October and found it important enough to share. I've passed it on to friends and family because I believe the message is even more important today. As most equity markets seem to be accelerating to the upside, don't you think the downside risks become more pronounced? Would like your thoughts on the talk -  All the best!

Eoin Treacy's view -

Happy New Year and thank you for this question which is an important consideration as the cycle matures. 



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January 08 2018

Commentary by Eoin Treacy

January 08 2018

Commentary by Eoin Treacy

A deep-dive into demographics; healthy demand ahead

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

A section from the full report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

China’s property market represents a potent source of potential trouble at some point in the future. However, it has not stopped going up, and until it does the layers of leverage that constitute every bull market will not be exposed. 



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January 08 2018

Commentary by Eoin Treacy

$900M Australian rare earths mine given state approval

This article by Andrew Topf for Mining.com may be of interest to subscribers. Here is a section:

The company is also looking at a joint venture with OCI Company Ltd. to build a separation plant in South Korea.

According to Arafura the Nolans Bore rare earths-phosphate deposit is "one of the largest and most intensively explored deposits of its kind in the world." The deposit contains a JORC-compliant mineral resource of 56 million tonnes at an average grade of 2.6% TREO that extends to 215 metres below the surface. Two-thirds of the contained rare earths are in the measured and indicated category.

Arafura estimates the project would create an investment of about $900 million in Central Australia, as well as 250 to 300 permanent jobs.

An environmental approval from the Australian government and a final approval from the state government still need to be obtained.

The mine could supply up to 10% of world demand for neodymium and praseodymium, used in the manufacture of magnets for wind turbines, and electric vehicles.

Eoin Treacy's view -

Rare earth metals represent vital parts of the evolving technology sector and not least for renewable energy, batteries, defence and computing. Since China dominates the sector and has already demonstrated it is willing to use its position as both a geopolitical and economic tool, there are solid arguments for developing more varied sources of supply. 



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January 08 2018

Commentary by Eoin Treacy

Tesla shares jump after Morgan Stanley raises price forecast

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

Shares of Tesla jumped Tuesday after Morgan Stanley's Adam Jonas, a widely-followed analyst on Wall Street, raised his 12-month price forecast on the electric vehicle maker.

General Motors recently announced plans to roll out a line of 20 all-electric vehicles over the next six years. Ambitious plans like these from traditional automakers have raised fears about more competition ahead for Elon Musk's company, but Jonas said Tesla's existing infrastructure "footprint" will be a "key differentiator" over the coming years, further boosting the stock.

"Infrastructure (of lack thereof) is the 'elephant in the room' of the EV revolution," wrote Jonas in a note late Monday. "Compared to other OEMs (Original Equipment Manufacturer), Tesla has made the biggest proprietary investment in superchargers and destination chargers globally. In most communities, we believe this infrastructure is larger than it needs to be in preparation for the expansion of the serviceable and charge-thirsty fleet. Other OEMs will closely watch how consumers react to this infrastructure."

Eoin Treacy's view -

Hardware is hard. GoPro is in search of a savior and Fitbit is languishing. Both rely on OEM manufacturers to produce their products while Tesla has broken the mold for new hardware companies by building manufacturing capacity from scratch. It helps that the company is building big ticket items like cars instead of trinkets but still manufacturing is fraught with complexity. 



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January 08 2018

Commentary by Eoin Treacy

May's Cabinet Reshuffle Goes Horribly Wrong

This article by Kitty Donaldson and Tim Ross for Bloomberg may be of interest to subscribers. Here is a section:

Following a breakthrough in Brexit negotiations late last year, May starts 2018 in a stronger position than she has enjoyed any time since her disastrous general election performance, which saw the Tories lose their Parliamentary majority.

Even so, as Brexit continues to dominate British politics, May must strike a delicate balance by maintaining equal numbers of euroskeptics alongside those advocating for close ties to the European Union.

Brandon campaigned against the U.K. leaving the EU, subsequently accepting the result of the 2016 referendum.

Meanwhile, we analyzed what the unexpected departure of the experienced James Brokenshire as Northern Ireland secretary could mean for Brexit given that the border issue is one of the trickiest in negotiations. Read about it here.

Eoin Treacy's view -

The nature of coalitions is they offer outsized influence to small parties who subsequently fail to achieve the majority of their aims despite the lift power gives to their profile. The Liberal Democrats in the UK and the Labour Party in Ireland are both good examples of the dangers of power for small parties. 



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January 05 2018

Commentary by Eoin Treacy

January 05 2018

Commentary by Eoin Treacy

Brevan Howard's Hedge Fund Suffers Biggest Annual Loss in 2017

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

Brevan Howard Asset Management’s flagship macro hedge fund lost 5.4 percent last year, recording its worst annual performance since starting in 2003, according to an investor letter.

The Brevan Howard Master Fund, which managed $5.5 billion at the end of November, was flat last month, the letter showed. The full-year loss reverses the money pool’s 3 percent gain in 2016. A spokesman for the Jersey-based investment firm run by billionaire Alan Howard declined to comment.

Some of the largest hedge funds betting on economic trends in developed markets continued their poor performance in 2017 as a lack of volatility and central-bank interventions made it difficult for them to make money. Macro hedge funds returned an average of 3.8 percent on an asset-weighted basis during the first 11 months of last year, making them the worst-performing strategy of the year, according to Hedge Fund Research Inc.

Eoin Treacy's view -

This additional article highlights how Crispin Odey’s fund lost 20% last year. The lack of volatility means that long/short strategies under perform. Hedging strategies deter for performance when they expire worthless. In fact, anything other than a leveraged momentum strategy would have been unlikely to outperform the primary indices last year. An alternative would have been to be highly concentrated on the FAANG stocks but that is not what hedged fund clients pay such high fees for.



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January 05 2018

Commentary by Eoin Treacy

Cobalt price bulls' worst fears may just have been confirmed

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

“Because there is only one lithium ion per one cobalt, that limits of how much charge can be stored. What’s worse is that current batteries in your cell phone or laptop typically only use half of the lithium in the cathode.”

The [Northwestern] fully rechargeable battery starts with four lithium ions, instead of one. The current reaction can reversibly exploit one of these lithium ions, significantly increasing the capacity beyond today’s batteries. But the potential to cycle all four back and forth by using both iron and oxygen to drive the reaction is tantalizing.

“Four lithium ions for each metal — that would change everything,” Wolverton said. “That means that your phone could last eight times longer or your car could drive eight times farther. If battery-powered cars can compete with or exceed gasoline-powered cars in terms of range and cost, that will change the world.”

Eoin Treacy's view -

Cobalt is both expensive and rare so it is not the best candidate for use in mass market applications; particularly where there is significant room to scale such as in electric vehicles. Therefore, a race is underway to get an alternative chemistry up and running which can replace cobalt. Lithium iron oxide is one of a number of candidates vying for attention so are solid state batteries and zinc oxide batteries.



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January 05 2018

Commentary by Eoin Treacy

World-Beating Currency Has RenCap Double-Checking Its Math

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

Colombia’s currency is the world’s top performer in the early days of 2018, and Renaissance Capital is forecasting more gains ahead for what it sees as one of the best bets in emerging markets.

The peso has rallied 3 percent this month following a lackluster 2017 that left it almost unchanged and toward the bottom of the pack for developing-nation currencies. It closed at 2,887 per dollar Thursday, its strongest level since May, amid gains in oil, the country’s biggest export. The peso slipped 0.4 percent Friday to 2,899 per dollar as of 9:28 a.m. in New York.

Even so it’s almost 40 percent undervalued in a real effective exchange rate model, according to Charles Robertson, the global chief economist at RenCap in London, who said the dramatic difference had him double-checking his worksheets.

Eoin Treacy's view -

The Colombian Peso almost halved in value between the middle of 2014 and early 2016 as the value of the legitimate commodities it exports collapsed in value. The continued strength in oil prices coupled with synchronized global economic expansion suggests the outlook for Latin America’s commodity producers is improving. 



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January 05 2018

Commentary by Eoin Treacy

Email of the day on investing in a Japanese recovery

Re Japan, you discussed previously how one might get exposure to the Japanese financial sector. One obvious candidate would be the NYSE quoted ADRs in Nomura. In the past the Topix Securities Index has moved in line with the Japanese Banks Index. My question is do you think that times have changed so much that a stock like Nomura is no longer a good geared play on the Nikkei?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Japanese banks have been laboring under the low interest rate regime for what must feel like forever but the introduction of simultaneous monetary and fiscal stimulus during a period of synchronized global economic expansion has the potential to kick start inflation not least because of labour shortages. 



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January 04 2018

Commentary by Eoin Treacy

Video commentary for January 4th 2018

January 04 2018

Commentary by Eoin Treacy

Bracing Yourself for a Possible Near-Term Melt-Up

Thanks to a subscriber for this report by Jeremy Grantham which may be of interest. Here is a section:
 

January 04 2018

Commentary by Eoin Treacy

Intel, Microsoft Deal With Widespread Computer-Chip Weakness

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

News of the weakness, found last year and reported Tuesday by The Register technology blog, weighed on shares of Intel, the biggest semiconductor maker, while boosting rivals including Advanced Micro Devices Inc. Intel’s silence for most of Wednesday added to investors’ unease.

Late in the day, Intel, Microsoft, Google and other tech bellwethers issued statements aimed at reassuring customers and shareholders. Intel said its chips weren’t the only ones affected and predicted no material effect on its business, while Microsoft, the largest software maker, said it released a security update to protect users of devices running Intel and other chips. Google, which said the issue affects Intel, AMD and ARM Holdings Plc chips, noted that it updated most of its systems and products with protections from attack. Amazon.com Inc., whose AWS is No. 1 in cloud computing, said most of its affected servers have already been secured.

Eoin Treacy's view -

Every other month we have news of just how porous the devices we rely on for just about everything are to exposing our personal information. This is a significant challenge for the IT sector in all its forms. The argument for increasing reliance on the internet, cloud and Internet of Everything is completely dependent on security, lest the devices we employ be used against us. This represents a cost which both in terms of speed and convenience but potentially also money for consumers and represents a challenge for corporations to keep under control.



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January 04 2018

Commentary by Eoin Treacy

Supersonic. Hypersonic Is the U.S. Military's New Speed

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


 

Boeing Co.’s XS-1 (Experimental Spaceplane), which the company dubs “Phantom Express,” got a green light this week by the Defense Advanced Research Projects Agency, or Darpa. The XS-1 is designed to quickly lift satellites as heavy as 3,000 pounds into orbit for $5 million or less, launching from the ground, deploying a small upper-stage module, and then landing like a traditional airplane—the key to reuse and lower operating expense. Darpa also has a separate program aimed at launching 100-pound satellites for less than $1 million per launch, using conventional aircraft.

“The XS-1 would be neither a traditional airplane nor a conventional launch vehicle but rather a combination of the two, with the goal of lowering launch costs by a factor of ten and replacing today’s frustratingly long wait time with launch on demand,” Jess Spoonable, a Darpa program manager, said in a May 24 statement.

Eoin Treacy's view -

It has long occurred to me that the stealth bomber had its maiden flight in the late 1980s, but only entered service years later. Then I think about how different the original iPhone is from what I carry around. 



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January 04 2018

Commentary by Eoin Treacy

Trump Administration Taking Step That Could Threaten Marijuana Legalization Movement

This article by Charlie Savage and Jack Healy for the New York Times may be of interest to subscribers. Here is a section: 

The Trump administration on Thursday will free federal prosecutors to more aggressively enforce marijuana laws, effectively threatening to undermine the legalization movement that has spread to six states, most recently California.

The Justice Department is expected to rescind an Obama-era policy of discouraging federal prosecutors from bringing charges of marijuana-related crimes in states that had legalized sales of the drug.

It was not immediately clear whether the administration intends to carry out a federal crackdown on marijuana dispensaries, or is merely rattling its saber.

The Associated Press first reported the announcement, and a government official familiar with the matter confirmed that the change would be announced later on Thursday.

Eoin Treacy's view -

This announcement acted as a catalyst for profit taking on cannabis related shares today as it introduces an additional risk to the market. Nevertheless, it also highlights the potential for a confrontation between the states and the Federal government about what is and is not permissible and who has sway over what can be consumed. Until the situation is resolved the potential for volatility is non-trivial. 



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January 03 2018

Commentary by Eoin Treacy

January 03 2018

Commentary by Eoin Treacy

Email of the day on investing in emerging technology themes for a UK investor:

New Year greetings to you and David and all FT members. About a year ago on the site there was a presentation on the new technological revolution, given by Mr. David Brown. It covered AI, robotics, cyber security, biotechnology, healthcare and the like. It was all wonderful stuff, but how do I deal in the shares and ETF's mentioned? I'm with Barclays - an ISA and spread betting account - and they have little coverage of these areas.

Eoin Treacy's view -

Happy New Year to you and to everyone in the Collective of subscribers Thanks for this question which is sure to be of interest to other subscribers. This article from the Telegraph dated 2014 explains how to invest in overseas shares through your ISA. Here is a section:

A crucial question: can you put your overseas stocks in your Isa or pension? HM Revenue & Customs' rules forbid foreign currency in an Isa, so you have to use the costlier, sterling conversion approach to buy foreign shares in your Isa, converting back to pounds when you sell. The Isa accounts operated by Hargreaves and TD allow foreign stocks to be held in this way.

Disappointingly, Barclays' systems do not allow any overseas stocks to be held within an Isa.

With self-invested pensions, or Sipps, you can hold and trade in foreign currencies. So you can have part of your Sipp denominated in dollars if your broker (such as TD) offers the facility. Hargreaves Lansdown doesn't offer the service and Barclays, again poor in this respect, doesn't allow any overseas stocks within its pension accounts.



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January 03 2018

Commentary by Eoin Treacy

January 03 2018

Commentary by Eoin Treacy

Trump's Tax Cuts

This article by LohKC on the FTAlphaville blog represents an interesting interpretation of motivations behind focusing on GDP versus GNI and may be of interest to subscribers. Here is a section:

We can see immediately that more production means a larger GDP and that more production requires more workers, ceteris paribus (that is setting aside other considerations that can affect employment such as automation, productivity etc.). Most of the workers in any country would be its nationals. So usually a country’s desire to raise its GDP has a lot to do with the wish to create more employment for its people. But I would argue that Japan’s situation is quite different.

Japan’s labour force is shrinking. It has been shrinking at the rate of 0.4% in the past decade and by all accounts the rate of decline will rise in the coming years. So unsurprisingly Japan’s unemployment rate is very low. Unemployment rate has fallen below 3% recently, which makes Japan’s unemployment rate among the lowest in the world. True, Japan still has a large source of untapped labour; women’s participation in the job market is very low. And that is a pressing issue but it is not really relevant to this discussion. Perhaps I might write about women’s participation in the job market one day but for now, regarding whether moving some manufacturing to the US isn’t such a bad idea, suffice to say that Japanese manufacturers are facing difficulties filling job vacancies in Japan because of Japan’s shrinking labour force and ultra low unemployment rate.

Japan’s challenge today is not about reducing unemployment. Japan’s challenges today are about coping with the social costs of and economic headwind from an aging population and a shrinking labour force. 

So we see that the raison d’être for GDP is no longer that compelling for Japan. Japan should aim to maximise its gross national income (GNI) instead.

Eoin Treacy's view -

Japan is a case study for how other countries with substantial national assets, globally oriented manufacturing centres, aging populations and threatening deflation can cope and prosper.
 



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January 03 2018

Commentary by Eoin Treacy

Commodities Roiled as Arctic Blast Takes Hold

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

Prices for the heating fuel rose to the highest in a month as the U.S. burned the most natural gas ever on Monday, breaking a record set during the so-called polar vortex that blanketed the nation’s eastern half with arctic air in 2014, Bloomberg News reports. America consumed 143 billion cubic feet of gas as temperatures dipped to all-time lows on New Year’s Day, topping the previous high of 142 billion from four years ago, data from PointLogic Energy show. Ice in the Hudson River delayed fuel-barge deliveries, as the government warned of a home heating-fuel shortage from the East Coast to Texas. Natural gas prices have jumped 19 percent from a 10-month low on Dec. 21. U.S. retail diesel prices averaged $2.87 a gallon on New Year’s Day, the most since June 2015, according to AAA.
 

Eoin Treacy's view -

I drove up to Big Bear Lake Tuesday afternoon and there is no sign of the cold wracking other parts of the USA. Talk around town is much more about global warming and the shortening season because of the lack of snow. We took ski lessons this morning which is responsible for the late posting of Comment of the Day and the Subscriber’s audio for which I apologise.  



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January 02 2018

Commentary by Eoin Treacy

January 02 2018

Commentary by Eoin Treacy

Euro Tests Three-Year High as End-of-Stimulus Fear Batters Bonds

This article by John Ainger and Samuel Potter for Bloomberg may be of interest to subscribers. Here is a section:

The currency jumped, sapping stocks, and bonds slid as a slew of data signaled a potential uptick in inflation in the euro area, after manufacturing growth accelerated to a record in December. The numbers followed comments at the weekend from European Central Bank policy maker Benoit Coeure, who said that unless inflation disappointed there’s a “reasonable chance” the central bank’s extension of QE in October could be the final one.

While Coeure didn’t mention the exchange rate, his comments were a boon for euro bulls and coincided with a period of ongoing dollar weakness. The common currency’s strength is translating into a painful start to the year for Europe’s export-heavy stock markets, while bonds have picked up where 2017 left off, with benchmark German bund yields rising to the highest since October.

“The ECB suggestion that bond buying will not be extended is likely behind the recent push higher in the euro,” said Neil Jones, head of currency sales at Mizuho Bank Ltd. in London. “My sense is the euro will extend beyond its three-year high in the next two weeks.”

Eoin Treacy's view -

If I had to pick one market to watch on a daily basis in 2018 it is German Bunds. Germany has benefitted enormously from the ECB’s bond buying program and has enjoyed borrowing costs that were previously unimaginable. With negative yields on bonds out to seven-year maturities there is significant scope for re-rating when the ECB eventually exits its program. 



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January 02 2018

Commentary by Eoin Treacy

Email of the day on the big picture and biotech

Happy and prosperous New Year to you and David and all the staff at “Fuller Tracey Money”.

I compliment you on the outstanding “Year-end Big Picture” video.  Your assessment of the interaction between the social, political and financial considerations is particularly insightful and gives me, and all your readers, a firm base on which to plan our investing for 2018.  Towards the end of the video you discussed the inter-relationship between AI and big data.  You said health care and biotech sectors would be major beneficiaries of these developments. 

Only today I read a comprehensive “Seeking Alpha” biotech sector report which may be of interest to readers.

Eoin Treacy's view -

Thank you for your kind words and I’m delighted you enjoyed the yearend video. At The Chart Seminar, I spend a good deal of time on the first day talking about the dangers of myopia when looking at markets. This is even more important when we have open positions that we monitor on a daily basis. It is too easy to focus only on what we own and to fall into the temptation of thinking we understand everything about them because we are looking at them every day. That is why when analysing any market, we recommend starting with as much data as you can get your hands on. A long-term chart tells us instantly whether we are in a secular bull or bear market. My resolution in 2018 is spend more time focusing on long-term charts.

 



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January 02 2018

Commentary by Eoin Treacy

Recreational pot puts medicinal marijuana on the backburner just as demand explodes

This article by Geoff Zochodne for the Financial Post may be of interest to subscribers. Here is a section:

But PwC said in a report earlier this year that some industry stakeholders felt the federal government’s “tight timeframe” for recreational legalization would lead to a lack of consultation and the potential to miss the opportunity to right the medical regime.

“Because decision-makers will have so little time for regulatory development, the focus will be exclusively on recreational cannabis, to the detriment of changes that may be required for medical cannabis,” PwC warned, adding that changes to the medical regime could be as far away as three years as a result.

One outstanding problem is that doctors may still be hesitant to prescribe cannabis to their patients, creating a bottleneck in the system for both patients and producers.

Eoin Treacy's view -

2018 will see Canada become the first G7 nation to adopt recreational cannabis laws. That will subsequently represent significant challenges for the medical cannabis sector which will is dependent on prescription reimbursements from the national health system. 



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December 29 2017

Commentary by Eoin Treacy

December 29 2017

Commentary by Eoin Treacy

Who Wins, Who Loses From MiFID II Shakeup?: QuickTake Scorecard

This article by Suzy Waite, Sarah Jones and Trista Kelley for Bloomberg may be of interest to subscribers. Here is a section:

Losers

RESEARCH ANALYSTS. Those that aren’t ranked in the top three or four in their sector could be axed from trading floors.

McKinsey & Co. expects banks to cut about $1.2 billion of spending in the area. INVESTOR RETURNS? Fewer analysts means less research, which means some fund managers may have to shrink the universe of companies they invest in. Missed opportunities could potentially limit returns, while less oversight could impact decision-making. 

BOUTIQUE INVESTMENT BANKS. Independent research firms will see new competition once banks roll out their new offerings. MiFID II may also trigger a price war in execution, which could see bulge-bracket investment banks drive boutiques out of equities trading.

STOCK EXCHANGES. Bourses such as Euronext NV and Deutsche Boerse AG could also lose out. Even if regulators close the pricing loophole that currently give SIs an advantage, bank-run platforms may still be more attractive as banks roll out increasingly competitive stock-trading options, such as low execution prices and larger “risk trades” to lure business.   

SMALL-TO-MEDIUM-SIZED ENTERPRISES. Smaller companies are expected to see less coverage from research analysts, potentially reducing their shareholder base. That could make it hard for investors to price the shares and make stocks more illiquid. London-based Toscafund Asset Management, which invests in U.K. small caps, wrote a letter to 30 such companies urging them to pay for research on their own stocks.

Eoin Treacy's view -

MIFID II comes into effect in the New Year and will represent a considerable challenge for large numbers of people in the financial sector but most especially those in the small to mid-sized sector that benefitted from soft dollar arrangements with their clients. The effect of the rule changes is akin to taxing benefits in kind and will result in fewer analysts covering companies and a narrowing in the breadth of opinion available to institutional investors. This article from the Financial Times dated September 15th includes a number of helpful graphics on who is likely to be most affected. 



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December 29 2017

Commentary by Eoin Treacy

Goldman Takes One-Time $5 Billion Hit From New U.S. Tax Law

This article by Neil Callanan and Michael J Moore for Bloomberg may be of interest to subscribers. Here is a section:

The old tax regime allowed companies to defer U.S. taxes until they brought back earnings held abroad. Under the new law, U.S. companies’ overseas income held as cash would be subject to a 15.5 percent rate, while non-cash holdings would face an 8 percent rate. Companies can make the payments in eight annual installments.

Goldman Sachs, which gets more than 40 percent of its revenue outside the U.S., had $31.2 billion in earnings reinvested abroad as of the end of 2016, according to a regulatory filing.

Companies have to account for the tax changes in the period in which they were enacted. That’s left corporate accounting departments scrambling after President Donald Trump signed the bill into law last week.

Eoin Treacy's view -

The end of the US tax year has individuals in high tax states scrambling to get a head start on next year’s taxes in an effort to lock in the more attractive deductions they have right now. At the same time the corporate sector is weighing how much of an effect the change to overseas income tax treatment represents. 

I compiled a list on Bloomberg of the companies that derive all of their income from the USA on the basis that they will be among the greatest beneficiaries of the changes to the tax code. Here is are some of the more interesting charts:



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December 29 2017

Commentary by Eoin Treacy

The Three Body Problem

This article by Ben Hunt for Salient Partners may be of interest to subscribers. Here is a section:

It’s not just that we endure large basis risks here in the Hollow Market, unmanageable for many. It’s not just that all of our old signposts and moorings for navigating markets aren’t working very well. It’s not just difficult to identify predictive/derivative patterns in today’s markets. There is a non-trivial chance that structural changes in our social worlds of politics and markets have made it impossible to identify predictive/derivative patterns. THIS is basis uncertainty, and it’s as problematic for humans facing markets that don’t make sense as it is for bees facing weather patterns that don’t make sense.

Well, that’s just crazy talk, Ben. What do you mean that it might be impossible to identify predictive/derivative patterns? What do you mean that basis might not exist at all? Of course there’s a pattern to markets and everything else. Of course spring follows winter.

Nope. This is the Three-Body Problem.

Or rather, the Three-Body Problem is a famous example of a system which has no derivative pattern with any predictive power, no applicable algorithm that a human (or a bee) could discover to adapt successfully and turn basis uncertainty into basis risk. In the lingo, there is no “general closed-form solution” to the Three-Body Problem. (It’s also the title of the best science fiction book I’ve read in the past 20 years, by Cixin Liu. Truly a masterpiece. Life and perspective-changing, in fact, both in its depiction of China and its depiction of the game theory of civilization

Eoin Treacy's view -

The Three-Body problem and basis uncertainty is a fresh explanation of the concept some commentators refer to as a paradigm shift. In other words, we are so conditioned by the prevailing market conditions that it is almost impossible to imagine what the world would be like without the disinflation which has prevailed since the early 1980s. At a talk in 2015 Jeff Gundlach referred to this problem in terms of summer insects which have no experience of, and therefore cannot imagine, winter. 



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December 29 2017

Commentary by Eoin Treacy

Chinese Consumers Now Rule the World. Get Used to It

This article by Tracy Chen may be of interest to subscribers. Here is a section: 

According to the latest official data, China’s final consumption accounted for 63.4 percent of gross domestic product (Chart 2). Household consumption experienced exponential growth and climbed to $4.5 trillion (Chart 3). Retails sales have been growing at healthy pace of about 10 percent. Spending on Singles’ Day this year (Nov. 11), is impressive, registering $25 billion, almost double U.S. Black Friday online sales of $14 billion (Chart 4).

Eoin Treacy's view -

I have mentioned on multiple occasions how much of a transformation has occurred in China over the last few years where customer service has evolved out of nowhere. Our trip to Guangzhou in July provided a number of examples of this. We used ele.me to order a fruit platter. When the person at the store saw that the delivery address was a hotel they called and asked if we would like the fruit chopped because we probably wouldn’t have a knife in our room and at no additional charge. When Mrs. Treacy was buying a phone, my girls were playing on grab machines a little way off. They were getting frustrated by their unrelenting failure to win a toy so one of the girls from the phone store came over to show them how to pick the right machine so they could win. 



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December 28 2017

Commentary by Eoin Treacy

December 28 2017

Commentary by Eoin Treacy

Billionaire Ambani Bails Out Brother by Buying Wireless Assets

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

Billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. agreed to acquire spectrum, mobile-phone towers and fiber assets of his brother Anil Ambani’s Reliance Communications Ltd. helping the younger sibling cut debt at the embattled wireless carrier, the two companies said in separate exchange filings.

Reliance Jio emerged the highest bidder for assets and the sale is expected to be closed in a phased manner between January and March 2018, according to a statement from RCom on Thursday.

The companies didn’t disclose a value for the transaction. The deal will include a cash payment and transfer of deferred spectrum installment payable to India’s Department of Telecommunication.

Mumbai-based RCom is seeking to cut total borrowings by $6 billion by March. RCom posted its first annual loss last March after Jio stormed into the market by offering free calls and data. That escalated a price war that has forced consolidation in the sector. RCom this week said it expects to get about 250 billion rupees ($3.9 billion) from the sale of its spectrum across four frequencies, its optical fiber network, and its more than 40,000 telecom towers. Entire proceeds will be used for repayment of RCom’s debt.

Reliance Jio is only paying for good quality assets that will enhance its depth of network, especially in rural areas, and raise data usage capacity, Shobhit Khare, a co-founder at Inertia Wealth Creators LLP, said via phone.

Eoin Treacy's view -

Reliance Industries spent a great deal of time developing a 4G network (Jio) and is now reaping the benefits. Reliance Communications, by selling its mobile assets, is essentially exiting the mobile telecommunications business. This article from livemint.com details where management see the company focusing next:

RCom will essentially be transformed from a business-to-consumer (B2C) into a business-to-business (B2B) entity, which will provide submarine cable systems that will deliver the latest sub-sea cable technology to meet growing cloud infrastructure and data capacity demand from global enterprises and over-the-top, or OTT, service providers.

Ambani said the new RCom will be valued at Rs15,000 crore. The business, he said in a presentation, will be based on a capex-light model and will generate sustainable cash flows, with 50% of revenue and 60% of operating profit coming from outside of India.



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December 28 2017

Commentary by Eoin Treacy

Italy's Gentiloni Says Election Campaign Is 'Imminent'

This article by John Follain, Lorenzo Totaro and Chiara Albanese for Bloomberg may be of interest to subscribers. Here is a section:

The euro zone’s third-biggest economy, whose recovery is trailing most of its peers, risks a hung parliament after the ballot. Opinion polls show the anti-establishment Five Star Movement, which wants a consultative referendum on abandoning the euro if European Union treaties aren’t renegotiated, leading Gentiloni’s Democratic Party and groups in a possible center- right coalition that would include former Premier Silvio Berlusconi’s Forza Italia.

But neither Five Star, the Democrats headed by former Prime Minister Matteo Renzi, nor the center-right bloc would win a parliamentary majority, according to the surveys. A possible “grand coalition” of the Democrats and Forza Italia would not have a majority either.

“It’s virtually certain that we won’t have a clear majority,” said Sergio Fabbrini, director of the school of government at Luiss University in Rome. “The talks to verify whether a new majority can be formed could last until the summer. In Germany, the talks have dragged on for ages, and in Italy we may end up with about twice as many parties in parliament as in Germany.”

Eoin Treacy's view -

Political sclerosis is nothing new for Italy. With little chance of a clear winner from elections, the country will continue to be rule taker rather than a leader in the discussions about how the EU can be reformed, which Macron wants to get started. 



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December 28 2017

Commentary by Eoin Treacy

South Korea to impose new curbs on cryptocurrency trading

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

“The government had warned several times that virtual coins cannot play a role as actual currency and could result in high losses due to excessive volatility,” the government said in a statement.

It noted that trading prices of most virtual currencies were much higher on South Korean exchanges than they were on exchanges in other countries, although it did not provide specific examples.

The steps will include a ban on opening anonymous cryptocurrency accounts and new legislation to allow regulators to close virtual coin exchanges if needed, a measure recommended by the justice ministry, the statement said.

South Korea had previously announced its plan to tax capital gains from cryptocurrency trading to tackle what it sees as the risk of excessive speculation.

Eoin Treacy's view -

South Korea, Japan and China have been among the hottest markets for Bitcoin. For a bubble to continue to expand it relies on the ability of progressively more people to participate in the advance. Anything that inhibits the flow of capital to feed the bubble is a potentially damaging headwind. 



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December 28 2017

Commentary by Eoin Treacy

Email of the day on hosting for the Subscriber's Video

Dec. 22 video/audio was posted on YouTube. Surely this isn't right as anyone can access it without needing a subscription?

Eoin Treacy's view -

Thank you for your concern and this question which will be of interest to subscribers. In many respects Vimeo and YouTube are exactly the same. However, they differ in one important aspect; cost. YouTube allows me to post my videos as unlisted and maintaining the archive is free. This means they do not appear in the search engines and are anonymous to anyone who does not have the URL. I only post that URL in Comment of the Day so therefore it is only available to subscribers.

I was forced to explore additional options because Vimeo are insisting that I move to a higher rate plan even though I am nowhere near hitting the limits on my current one.

 



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December 27 2017

Commentary by Eoin Treacy

December 27 2017

Commentary by Eoin Treacy

Copper Rallies to Three-Year High as China Plant Halts Aid Bulls

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

Copper’s latest leg up follows news that Jiangxi Copper Co., China’s largest producer, had been ordered to stop output for at least a week before a further assessment based on local pollution levels. Earlier in the month, the No. 2 smelter, Tongling Nonferrous Metals Group, was asked to make similar cuts.

Jiangxi Copper gained 3.4 percent in Hong Kong and Tongling Nonferrous added 0.7 percent in Shenzhen to the highest close since Nov. 9.

“Copper stocks are rising as investors are bullish on copper prices amid an improving demand outlook from the U.S. and Europe in particular,” Yang Kunhe, an analyst with Pacific Securities Ltd., said by phone from Beijing. “The production cuts are temporary. A one-week halt won’t cause too big a problem for Jiangxi Copper. Smelters can also adjust by moving forward their annual maintenance.”

This quarter, Codelco said the company’s projections showed a sustained increase in deficits and “we don’t have any reason -- that we know of -- for closing them in the future.” The International Copper Study Group said the global deficit was 181,000 tons in the first nine months of 2017.

Eoin Treacy's view -

We are almost two full years into a recovery in metal prices which is being fueled on the demand side by a return to synchronized global economic expansion and on the supply side by a reluctance to invest following what was a major bust between the 2011 and early 2016. That is contributing to the relative strength of the mining sector not least since it is still trading at a discount to the wider market on a valuations basis. 



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December 27 2017

Commentary by Eoin Treacy

Brazilian miner Vale says entering new era of big dividends

This article from Reuters appeared in mining.com. Here is a section: 

Vale is entering a period in which it plans to pay out big dividends, Chief Executive Officer Fabio Schvartsman said on Friday at an event commemorating the Brazilian miner's inclusion in the Sao Paulo stock exchange's strictest listing market segment.

"Now is the era of the Vale dividends. Vale will become a big payer of dividends if everything goes well," Schvartsman said, reiterating that a new dividend plan would be released in March, without stating an amount.

In April Vale paid out 0.905 reais per share.

Vale shareholders, he said, supported the company in tough times when metal prices were low and now is "Vale's time to pay it back."

Eoin Treacy's view -

Nothing says a mining company is reluctant to invest in new supply like committing to paying out fat dividends. The company went through a painful rationalization between 2011 and early 2016 when the dividend was slashed from $1.75 to less than 5¢. The commitment to increase the payout is designed at attracting dividend investors and to try and create confidence in management’s commitment to creating value. 



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December 27 2017

Commentary by Eoin Treacy

Traders Bent on Bludgeoning Dollar Ignore Bond Market Signals

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

“This year we can make a very clear case that the Fed has been raising rates and the ECB has been adding to quantitative easing and the interest rate differentials favor the U.S.,” said Alessio de Longis, a New York-based money manager at OppenheimerFunds Inc., which oversees more than $246 billion in assets under management globally. “Nonetheless the euro has appreciated. The relationship between currencies and interest rate differentials has been very weak.”

Still, investors toiling to meet return targets in an era where the pool of bonds with sub-zero yields is $8.5 trillion, according to Bloomberg Barclays Global Indexes, may eventually decide the extra 250 basis points they can get from Treasuries is enough of an enticement to buy dollar assets.

For now, fundamentals are exerting a bigger pull. After a decade being stuck in low gear trying to keep deflation at bay, the euro zone is poised for its strongest annual expansion in a decade.

“The euro has been following a re-rating of sentiment around the European continent, positive sentiment around the European political and growth environment,” de Longis said.

Eoin Treacy's view -

Markets are discounting mechanisms so it doesn’t make a great deal of sense to look at current interest rate differentials to give us a clue to how currencies might perform against one another. Instead it is better to look at the difference between 2-year yields in different jurisdictions to offer some perspective on rate expectations. 



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December 22 2017

Commentary by Eoin Treacy

December 22 2017

Commentary by Eoin Treacy

When Will the ECB Pull Its Trillions From the Markets?

This article by Jana Randow, Jeremy Scott Diamond and Hayley Warren for Bloomberg from a month ago is equally relevant today and piqued by interest. Here is a section: 

After three years of asset purchases, negative interest rates and cheap loans, the European Central Bank is finally confident that it has beaten the risk of deflation in the euro area. Now it’s time to start thinking about how to unwind those extraordinary measures.

It won’t be simple. The ECB’s mandate is to keep inflation just below 2 percent, but to judge its progress it looks at a range of key economic and market indicators.

In the first step toward the exit, policy makers decided to reduce monthly asset purchases by half starting in January and extend it for at least another nine months.

Eoin Treacy's view -

The Federal Reserve is now shrinking its balance sheet, albeit slowly. The Bank of Canada has raised rates, the Bank of England reversed an interest rate cut while the ECB is tapering, China is holding at neutral policy on aggregate while Japan is the only major economy still engaged in monetary and fiscal stimulus. It is reasonable to say that synchronized global economic expansions is one the way to replacing synchronized global monetary expansion. 



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December 22 2017

Commentary by Eoin Treacy

Email of the day on an update from Sydney

I have had to attend several business meetings with senior executives in Sydney over the last few months.   The meetings cover senior executive remuneration.  

The City is almost uniformly buoyant and confident.   The Bankers are understandably more cautious and almost certainly earning less.   I was surprised by the benefits the innovation and start-up guys can earn - big numbers.    Despite all this the ASX is climbing that wall of worry.   This does feel more late cycle behaviour.   However, what I think confuses the economic outlook is that the Australian economy is definitely going through profound change. 

Thank you for all your good work. 

Eoin Treacy's view -

Thank you for this illuminating insight and composing this service is greatly enabled by the contribution of so many highly informed subscribers. Your email highlights the transition of interest away from the financial sector and towards information technology over the past decade. After every crash the epicentre of risk takes a long time to recovery while capital and investor interest migrate to the “new thing”. 



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December 22 2017

Commentary by Eoin Treacy

Email of the day on Japanese banks and REITs

Just read your piece on Japanese financials

What is the issue with Tokyo listed stocks? There are no restrictions for non-Japanese investors to buy local stocks, at least from the perspective of a European investor.

Why do you mention only ADR and GDR? (btw. German listed GDR have often very poor liquidity)

Btw: Wisdom Tree used to have a hedged ETF on Financials: WisdomTree Japan Hedged Financials Fund (DXJF) but I don’t know if it is still actively traded

Finally: Do Japanese REITs also belong to this category of possible beneficiaries from rising J-yields like banks in your opinion?  The iShares Japan REIT ETF trades under ticker 1476 JP

Eoin Treacy's view -

Thank you for this email which others may find of interest. I’ve been writing about Japanese banks since the summer but certainly with more frequency over the last month and I posted a more detailed review of Japanese Banks and REITs on December 8th



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December 22 2017

Commentary by Eoin Treacy

Bitcoin Tumbles More than 25% as Sharks "Beginning to Circle"

This article by Samuel Potter and Eddie van der Walt for Bloomberg may be of interest to subscribers. Here is a section:

Bitcoin dropped to as low as $10,776. It last traded below $10, 000 on Dec. 1, when the U.S. Commodity Futures Trading Commission agreed to allow trading in bitcoin futures. For the week, the decline is as much as 39 percent. That follows gains of 13 percent, 44 percent and 32 percent in the prior three weeks.

The losses represent a major test for the cryptocurrency industry and the blockchain technology that underpins it, which have rapidly entered the mainstream in recent weeks. Bears cast doubt on the value of the virtual assets, with UBS Group AG this week calling bitcoin the “biggest speculative bubble in history.” Bulls argue the technology is a game changer for the world of investment and finance. Both will be closely watching the outcome of the current selloff.

Eoin Treacy's view -

If the history of bubbles tells us anything it is that the pace of innovation occurs largely independently of the price action. Crowds tend to overshoot in both directions and the merits or otherwise of blockchain technology, as a way of streamlining transactions and verifying contracts, are separate from the vicissitudes of token price action.



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December 22 2017

Commentary by Eoin Treacy

December 21 2017

Commentary by Eoin Treacy

Video commentary for December 21st 2017

December 21 2017

Commentary by Eoin Treacy

Switzerland Says the EU Is Trying to Weaken Its Financial Center

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

“Switzerland fulfills the conditions for recognition of stock market equivalence every bit as much as the other third countries that have been granted indefinite recognition,”

Leuthard said at a press conference in Bern on Thursday. “The government has the impression that this decision by the European Union is intended to weaken Switzerland’s financial sector.”

The European Commission, the EU’s executive arm, on Thursday formally adopted the decision finding Switzerland’s regulations sufficient to allow EU market participants to continue trading on Swiss exchanges for a year, after markets trading directive MiFID II comes into force on Jan. 3. The Commission said that given the amount of cross border stock trading with Switzerland, the ramifications of the decision were greater than in the case of the U.S., Hong Kong and Australia.

Switzerland’s financial sector contributed 9.1 percent to economic output last year, a higher share than in the U.K. or Germany. The city of Zurich -- home of UBS Group AG and Credit Suisse Group AG -- is the highest ranked financial center in continental Europe, according to the Global Financial Centers Index.

The Swiss government said it doubts the EU’s decision is legal and that it was beginning work immediately to shore up the stock exchange and financial industry. The Finance Ministry has until the end of January to come up with detailed proposals, including abolishing stamp duty on securities transactions, Leuthard said.

Eoin Treacy's view -

The EU is a major global economic grouping that does not have a significant financial centre. After Brexit, London will join Zurich outside the currency union. That represents quite a challenge for the Eurozone because it will be left without a major financial hub. 



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December 21 2017

Commentary by Eoin Treacy

Canadian Dollar and Yields Jump as Inflation Spurs Hike Bets

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

“This data is strong across the board and will support the aggressive pricing for BOC tightening,” said Alvise Marino, a foreign-exchange strategist at Credit Suisse Securities in New York. “We remain fundamentally bullish on the loonie, as per our three-month forecast of C$1.25 against the U.S. dollar, but I must confess I am a little surprised at how fast we are approaching that level, given the highly asymmetric nature of the potential outcomes” from next month’s Nafta negotiation round, he said.

The loonie strengthened as much as 1.1 percent to C$1.2700 per dollar and was at C$1.2711 as of 1:05 p.m. in Toronto, having blasted past its 50-day moving average of C$1.2748. The currency extended its year-to-date gain to 5.7 percent, on track for its best annual performance since 2009. The yield on the country’s two-year note advanced five basis points to 1.68 percent on Thursday.

The greenback-loonie pair could easily slip back to slightly above C$1.26 in the next week or so and could make one last push higher after the January BOC meeting because talk of a hike then looks premature, said Shaun Osborne, chief foreign- exchange strategist at Bank of Nova Scotia. But in his view a BOC hike in March or April looks “quite possible,” the U.S.

Eoin Treacy's view -

The Canadian Dollar accelerated to its early 2016 low before bouncing along with the commodity sector. It gave up about half the advance over the balance of 2016 and into 2017, before rallying powerfully again to break back above the trend mean and post a new recovery high. It is now firming from the region of the trend mean and a sustained move below 78¢ would be required to question medium-term scope for additional upside. 



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December 21 2017

Commentary by Eoin Treacy

Financial Markets in 2018: The Times They Are A Changing

Thanks to a subscriber for this article by Pamela Rosenau for Forbes which may be of interest. Here is a section: 

As correlations among stocks and other assets classes break down, there will be a significant divergence in the performance of “quality” assets versus “junk” assets.  A prudent money manager should be prepared for this market shift by focusing on shorter duration assets, which goes for both credit and equities.  I expect longer duration equities, such as growth stocks with lower near-term earnings to underperform more value oriented stocks such as consumer staples, telecom, and energy sectors, on which I have focused.  Today’s market appears to be the inverse image to the early 1980s.  Back then, investors were misled into hiding out in cash as stocks were perceived as too expensive in a high interest rate environment.  Today, very few hold cash as stocks appear cheap relative to low bond yields.  This is a backward looking strategy derived from a relative value argument that is no longer operable.  I suggest more than a little risk aversion, as I have maintained, would be prudent in times like this.  As I have often said -- preserving capital is paramount, not winning friends. 

Eoin Treacy's view -

Money has been pouring into ETFs over the last couple of years which is a testament to the success of the low fee argument, against a background where the success of momentum strategies has reduced the allure of stock picking. The success of the ETF business has contributed to the consistency of the trends evident on the primary Wall Street indices and the low volatility condition that has prevailed over the last six months in particular. 



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December 21 2017

Commentary by Eoin Treacy

BOJ Maintains Stimulus as Inflation Lags Behind Growth

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

Governor Haruhiko Kuroda said at a press briefing that the central bank didn’t need to reconsider its current policy framework. 

His comments last month on the "reversal rate” theory stoked speculation about an earlier policy exit. The theory posits that monetary stimulus could end up hurting commercial banks’ profitability, making them less likely to lend. 

Kuroda said Thursday that financial intermediation hasn’t been impaired in Japan and that talk about the theory doesn’t indicate any need for policy change. The yen weakened following the comments and traded at 113.57 per dollar at 5:12 p.m. in Tokyo.

"Just because I brought up this academic analysis, reversal rate, doesn’t mean at all that we need to review or change the yield curve control we’ve adopted since September last year,”

Eoin Treacy's view -

Japan is one of the only major economies running both easy fiscal and monetary policy right now and that is contributing to asset price inflation if not the kind of inflation the central bank measures. In fact, we have learned from QE programs elsewhere that asset price inflation is what to expect from monetary accommodation on the scale employed by central banks at present. 



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December 20 2017

Commentary by Eoin Treacy

December 20 2017

Commentary by Eoin Treacy

FedEx Good News Gets Even Better With Big-League Tax Cut

This article by Brooke Sutherland may be of interest to subscribers. Here is a section:

Intriguingly, FedEx also gave a third guidance range that reflects the effect of the tax cut Republicans are trying to pass. It's one of the few companies I've seen try to parse the legislation's earnings impact, and the benefits are major: the tax bill would add an estimated $4.40 to $5.50 to FedEx's fiscal 2018 adjusted EPS. To put that in context, that's an extra $1.3 billion in earnings at the midpoint of the range, based on the company's shares outstanding as calculated by Bloomberg.  

That FedEx of all companies would start running the numbers before the tax bill has even become law isn't surprising. CEO Fred Smith is a major fundraiser for Republicans and earlier this year was pitching his own version of tax reform. The biggest reason for the 2018 boost is the revaluation of net deferred tax liabilities, according to the company. FedEx, which gets the vast majority of its revenue from the U.S. even after the TNT deal, paid an effective tax rate of 34.6 percent in 2017 and had been expecting a levy of between 32 percent and 35 percent for 2018, per its annual filing. The latest version of the tax bill targets a corporate rate of just 21 percent.

Eoin Treacy's view -

The stock market has been pricing in the impact of tax cuts for much of the last year amid optimism about the influence the cut in corporate taxes would have, primarily for domestically oriented businesses. FedEx generates two thirds of its revenue from the USA and therefore will see a significant benefit from the cut to corporate tax rates. 



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December 20 2017

Commentary by Eoin Treacy

European Metals & Mining - 2018 Outlook

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

A section from the report is posted in the Subscriber's Area.

Eoin Treacy's view -

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

The excesses in the global steel sector, primary driven by overcapacity in China, are well documented. Right now, the risk represented by that headwind are being outweighed by synchronized global growth. Meanwhile significant investment is flowing into capacity growth for the resources required to supply battery manufacturing. 



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December 20 2017

Commentary by Eoin Treacy

BlackBerry's turnaround is complete

This article by Paul R. La Monica for CNN may be of interest to subscribers. Here is a section:

And BlackBerry may be just getting started. In an interview with CNNMoney on Wednesday morning, Chen said he wants the company to partner with even more auto companies, particularly the suppliers.

The goal? "We want to make BlackBerry ubiquitous in the auto sector," Chen said. To that end, Chen is even going to the North American International Auto Show in Detroit in January for the first time and will deliver a keynote address there.

Chen said the company will also keep focusing on cybersecurity products for big businesses and governments too. The stock enjoyed a pop earlier this year after the WannaCry ransomware attack as investors realized BlackBerry's security biz could benefit.

Eoin Treacy's view -

Regardless of what one’s view is on the potential growth of autonomous vehicles or electric vehicles the easy conclusion is that our cars are going to have more of a tech focus. Everything from navigation to entertainments systems to sensors require an onboard computer, operating system and, increasingly, a router. 



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December 20 2017

Commentary by Eoin Treacy

Return of the Winklevii

Thanks to a subscriber for this deeply insightful note by Daniel Oliver at Myrmikan Capital which may be of interest. Here is a section:

A section from the report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

Back in 2005 a subscriber from Malta attended The Chart Seminar and asked to look at his domestic market which was in the throes of an historic bull run. The acceleration was obvious and the group readily identified it as a Type-1 trend ending. 



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December 20 2017

Commentary by Eoin Treacy

Email of the day on David's recovery

David seems to be totally off the radar. I am curious to know how he is travelling with his health

I wish you and family a very merry Xmas and a healthy and bountiful year ahead.

Eoin Treacy's view -

Thank you and to other subscribers for your inquiries. David has been off the radar for the last few weeks because he has been moving home, with a view to spending more time at his bucolic pasture-surrounded home in Devon. The last time I spoke with him he was in good spirits, much improved from his condition in the summer and was walking a couple of miles a day. He was concentrating on getting just the right mix of medications to manage his heart condition



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December 19 2017

Commentary by Eoin Treacy

December 19 2017

Commentary by Eoin Treacy

Musings From the Oil Patch December 18th 2017

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

A section from this report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

Autonomous vehicles represent as much of a gamechanger for the energy sector as unconventional oil and gas did a decade ago. No one knows whether it will be 2030 or 2040 when they become ubiquitous but the important point about artificial intelligence is that it only needs to learn a lesson once. It might take millions of lines of code and an equal number of pictures to teach a computer a lesson but the work only needs to be done once. By contrast, every human needs to learn to drive on an individual basis and the Pareto Principle dictates that most of us are not particularly good at it. 



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December 19 2017

Commentary by Eoin Treacy

ECB's Weidmann Predicts Wage Gains as He Seeks QE End-Date

This article by Jana Randow and Paul Gordon for Bloomberg may be of interest to subscribers. Here is a section:

European Central Bank policy maker Jens Weidmann reiterated his call for a definite end-date for the institution’s bond-buying program, a refrain that looks likely to gain traction among his colleagues next year.

Saying that domestic price pressures should strengthen as wage growth improves, he said they are “therefore on track toward our definition of price stability.”

While policy makers meeting last week reaffirmed their commitment to buy debt until September “or beyond,” officials including at least half the six-member Executive Board have signaled they’re willing to rein in expectations for another extension. The euro area is currently undergoing the broadest economic expansion in its history, and the ECB this month upgraded its growth forecasts for the bloc.

“A faster conclusion of net asset purchases and a clearly communicated end date would have been reasonable,” Weidmann, who also heads Germany’s Bundesbank, told reporters in Frankfurt late Monday.

Despite the upturn, the ECB remains well short of its inflation goal of just under 2 percent -- and Germany is a prime example of the conundrum. There, record-low unemployment and economic growth above its long-term potential has still failed to generate much in the way of wage growth. Weidmann said he’s confident that will soon change.

“We don’t get involved in wage bargaining and respect the independence of bargaining partners. But we expect that the increased capacity utilization and regionally appearing bottlenecks in some labor markets will lead to somewhat higher wage pressure,” he said. “That’s a projection, not a recommendation.’’

Eoin Treacy's view -

It’s considered toeing the party line for a German central banker to talk about curtailing quantitative easing and raising interest rates. However, there is no denying that the European economy is benefitting both from the ECB’s purchase program and the return to synchronized global growth. A partial counter to that argument is Europe has some of the oldest average populations in the world which represents a challenge for stoking inflationary pressures. 



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