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July 27 2017

Commentary by Eoin Treacy

July 27 2017

Commentary by Eoin Treacy

The House View

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

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

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

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

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

Eoin Treacy's view -

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

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



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July 27 2017

Commentary by Eoin Treacy

Venezuelans Stockpile Food and Water Ahead of Maduro Power Grab

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

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

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

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

 

Eoin Treacy's view -

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



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July 27 2017

Commentary by Eoin Treacy

There They Go Again...Again

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

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

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

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

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

 

Eoin Treacy's view -

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

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



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July 27 2017

Commentary by Eoin Treacy

The Chart Seminar 2017

Eoin Treacy's view -

The Chart Seminar 2017 

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

London November 16th and 17th TBA

If you are interested or would like to suggest a venue please contact Sarah at [email protected]  I would be more than happy to plan a US based seminar this year if we have the critical mass to make it viable .

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



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July 26 2017

Commentary by Eoin Treacy

July 26 2017

Commentary by Eoin Treacy

Impressions from China so far

Eoin Treacy's view -

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

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

 



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July 26 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 26 2017

Commentary by Eoin Treacy

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 26 2017

Commentary by Eoin Treacy

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

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

Eoin Treacy's view -

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

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

And 

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

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

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

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

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

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



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July 25 2017

Commentary by Eoin Treacy

July 25 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 25 2017

Commentary by Eoin Treacy

"Risk versus Reward"

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

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

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

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

Eoin Treacy's view -

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

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



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July 25 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 25 2017

Commentary by Eoin Treacy

Fox and Johnson Launch Coordinated Post-Brexit Trade Push

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

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

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

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

Eoin Treacy's view -

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



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July 24 2017

Commentary by Eoin Treacy

July 24 2017

Commentary by Eoin Treacy

The Great Rotation May Finally Be at Hand

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

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

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

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

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

Eoin Treacy's view -

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



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July 24 2017

Commentary by Eoin Treacy

China's Got a Huge Artificial Intelligence Plan

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

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

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

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

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

Eoin Treacy's view -

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



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July 24 2017

Commentary by Eoin Treacy

Another Golden Age for Corporate Technology

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

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

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

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

 

Eoin Treacy's view -

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



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July 21 2017

Commentary by Eoin Treacy

July 21 2017

Commentary by Eoin Treacy

Market Know-How

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

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

 

Eoin Treacy's view -

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

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



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July 21 2017

Commentary by Eoin Treacy

Bitcoin Soars as Upgrade Backers Hoist Beers to Armistice

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 21 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 20 2017

Commentary by Eoin Treacy

July 20 2017

Commentary by Eoin Treacy

Euro Climbs as Draghi Cites Autumn Decision on Bond Purchases

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 20 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 20 2017

Commentary by Eoin Treacy

Email of the day on genetically modified foods

Hope you’re hale and hearty.

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

I recall you disagreed with my views on GMO science.

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

 

Eoin Treacy's view -

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



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July 19 2017

Commentary by Eoin Treacy

July 19 2017

Commentary by Eoin Treacy

Musings from the Oil Patch July 19th 2017

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

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

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

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

 

Eoin Treacy's view -

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

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



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July 19 2017

Commentary by Eoin Treacy

Asia's Top-Performing Currency Is Missile-Proof

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 19 2017

Commentary by Eoin Treacy

Quarterly Market Commentary: The Investment Case for Real Assets

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 18 2017

Commentary by Eoin Treacy

July 18 2017

Commentary by Eoin Treacy

Australian dollar soars to two-year high on RBA minutes

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

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

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

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

 

Eoin Treacy's view -

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



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July 18 2017

Commentary by Eoin Treacy

Copper price jumps on gangbusters China growth

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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

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

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

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

 



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July 18 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 18 2017

Commentary by Eoin Treacy

July 17 2017

Commentary by Eoin Treacy

July 17 2017

Commentary by Eoin Treacy

Investment Strategy by Jeffrey Saut

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

Since meeting him, Leon and I have exchanged many letters, reports, thoughts, conversations, etc. I received this one from him last week:

Hi, Jeffrey,
I calculate a three week moving average of the Bullish sentiment. Currently, it is abnormally low and [that’s] very bullish. Although long retired, many fund managers in Europe, Asia, and North America still call me and seek my view of the market. I can report to you that worldwide, investors are skeptical and fearful. Most are sitting on a mountain of cash. As you know, that is very bullish. My view remains that this great bull market is only in the early stages of the second leg. The first leg was from October 10, 2008 and ended in May, 2015 which was driven by an easy/accommodative monetary policy. The second leg started in February, 2016 which is always the longest and strongest as it is driven by improving economic conditions (due to the monetary stimulation of the past eight years) and accelerating earnings momentum which is what investors are seeing. As you know, since early last year, I’ve been of the view that investors are witnessing the biggest bull market on record and the end is nowhere near in sight. Also, I felt that when this bull market ends, it will be the wildest and wooliest speculative “blow-off” in history. There has never been so much liquidity created as in this cycle. Also, in my 55 years in this business, from a chart standpoint, I have never seen so many humongous bottoms in so many different industries as in this cycle. Many are 15 years and longer. In the 50s, it was mostly in anything electric/electronic and in the 90s, it was mostly high tech. In this cycle, except for the resource sectors, big bottoms are found everywhere. One of technical prerequisites for a long, sustained bull market is that many stocks must trace and break out of long bases. Putting my money where my mouth is, I own a few of the small and micro caps in the Biotech/Health Care area.

 

Eoin Treacy's view -

The news headlines are awash today with news that the best performing ETF this year is the short VIX Index XIV. This is one of the least volatile periods in the market since the 1990s and has delivered a very consistent chart pattern for the S&P500 which has been trending in a step sequence staircase manner since early January. 



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July 17 2017

Commentary by Eoin Treacy

Mr Grey, Mr Blond and Mr Brexit: battle of the big guns

This article from The Sunday Times over the weekend may be of interest to subscribers. Here is a section:

It is a measure of the prime minister’s weakness that the Davis-Johnson rivalry is not even the most serious row tearing the government apart. Last Tuesday’s cabinet meeting — and a second “political cabinet” that followed it — were the most fractious gathering of May’s top team since she took power a year ago last week.

In both meetings ministers became enraged by the behaviour of Philip Hammond, the chancellor, and what his colleagues regard as his “tin-eared” approach to the election result.

Since June 8 cabinet ministers have been lobbying for the government to end the 1% cap on increases in public sector pay to placate voters sick of austerity who flocked to Jeremy Corbyn’s Labour Party. His insistence on financial discipline despite a fresh onslaught on Tuesday drew a “collective intake of breath” from other cabinet ministers. He singled out train drivers as “ludicrously overpaid”.

The chancellor, who has a reputation for condescending to his colleagues, got into hot water when he sought to suggest that newly automated trains would help stamp out strikes because the overpaid men could be replaced by women.

 

Eoin Treacy's view -

In calling an election Theresa May was perceived by the UK’s astute voters to be attempting a power grab rather than serving the country’s best interests. What does not appear to have gotten much air time is that the results of the election closely mirror the results of the Brexit referendum; with the government securing a narrow majority but not a conclusive landslide victory. 



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July 17 2017

Commentary by Eoin Treacy

Bitcoin Split Risks Increase

This article by Andrew Quentson for Bloomberg may be of interest to subscriber subscribers. Here is a section:

As such, we are likely to have at least two bitcoins on August the 1st, but there may be even more. Bitcoiners, therefore, are strongly advised to not transact on that day until the situation becomes more clear.

Once the chain does split, BitcoinABC will probably be listed in at least one exchange, thus a period of high volatility and perhaps even trading frenzy should be expected as the market passes judgment on the value of the bitcoins.

Eventually, the dust will likely settle with one coin probably gaining some 80% or so of the current bitcoin value, while the minority coin can continue operating in their own network, free to follow their own roadmap and vision.

Which one will be which only the free market can tell us sometime next month as bitcoin finally makes a monumental and probably highly historical decision, at least for this space.

 

Eoin Treacy's view -

Bitcoin was set up so that no more than 21 million coins could ever be mined. More than 16 million have already been created, with the complexity of each successive block growing progressively more expensive to solve.  With bitcoins already priced out to 6 decimal places that limitation has asked legitimate questions about the sustainability of the global market when supply is so limited. That has led to a debate between monetary purists and miners who want to support the value by withholding supply and others who wish to see dynamic supply to allow the market to grow. 



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July 17 2017

Commentary by Eoin Treacy

Sweeping Wildfires Burn Canada's Timber as Lumber Prices Surge

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

Sweeping wildfires across Canada’s British Columbia are threatening timber supplies and sending lumber prices surging.

More than 375 fires have swept across the province, burning forests and forcing sawmills to shut down or evacuate. While the impact on supplies is minimal so far, there are concerns that the blazes will continue to spread amid hot, dry conditions, according to Paul Quinn, an analyst at RBC Capital Markets in Vancouver. Lumber futures on Monday jumped by the exchange limit in Chicago to the highest in more than two months.

“Forests are getting burnt, so that has a supply impact,” Quinn said by telephone. “The worry is they’ll continue to grow and get bigger,” he said, referring to the fires.

Last week, West Fraser Timber Co. suspended operations at three lumber mills that represent annual production capacity of 800 million board feet of lumber and 270 million square feet of plywood. Norbord Inc., the largest North American producer of oriented strand board used in residential construction, has also suspended production at its mill in 100 Mile House in central B.C.

On the Chicago Mercantile Exchange, lumber futures for September delivery rose by the $10 trading limit to $387.30 per 1,000 board feet at 11:37 a.m. local time. That’s the highest price for a most-active contract since May 9. Aggregate trading for this time is 44 percent above the 100-day average, according to data compiled by Bloomberg.

Cash prices for some grades of lumber rose 7 percent last week, Quinn of RBC said. “We’re at the seasonal peak in construction activity, so anything that reduces supply will create some pricing tension,” Mark Wilde, an analyst at BMO Capital Markets in New York, said in an email.

 

Eoin Treacy's view -

According to this article British Columbia has spent about $80 million in the first few weeks of the fire season compared with $100 million in all of last year. That gives us an idea of how large the issue is and firefighters expect to be fighting conflagrations for the next few months. 



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July 14 2017

Commentary by Eoin Treacy

July 14 2017

Commentary by Eoin Treacy

An email from David

Health: My thanks to subscribers for your thoughtful emails of support and best wishes for a speedy recovery.  I wish I had better news to share with you but here is a brief description of the reality.

My operation on 7th July was considerably more debilitating than I had expected.  Unfortunately my atrial fibrillation returned after a few days and I still have some fluid in my lungs. Consequently my mobility remains extremely limited. Therefore I do not have either the energy or concentration to resume my career at this time. I will focus on rest, recovery and a more holistic treatment of my condition, mainly from a healthier environment in North Devon.

Stock markets: In my opinion stock markets are even more fascinating than ever. A period of uncertainty and fear persists but that is far less dangerous than euphoria. As always there are many medium-term hurdles to be cleared, not least the eventual normalisation of interest rates. The longer-term outlook remains extremely promising, not least for successful technology companies.

Your Fuller, Treacy Money Global Strategy Service: We are very fortunate to have Eoin Treacy with his calm, experienced and forensic study of global stock markets, best observed on price charts. These seldom move in isolation so Eoin also monitors global bonds, currencies and commodities on a similar basis, knowing that sharp moves in these instruments can affect sentiment. Consequently he can see potentially significant changes in relative strength or weakness more quickly than most other observers. This perspective is invaluable, ensuring that Eoin is less distracted by market noise.

Kind regards,

David

Eoin Treacy's view -

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July 14 2017

Commentary by Eoin Treacy

Finally in Writing: U.K. and EU Will Have 'Financial Settlement'

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

“We will work with the EU to determine a fair settlement of the U.K.’s rights and obligations as a departing member state,” Brexit Secretary David Davis said in a statement to Parliament that referred explicitly to the “financial settlement” with the EU. “The government recognizes that the U.K. has obligations to the EU, and the EU obligations to the U.K., that will survive the U.K.’s withdrawal -- and that these need to be resolved.”

Eoin Treacy's view -

The Brexit negotiations have so far been about what the EU demands before they are willing to talk about trade. In agreeing to that format, the UK was already in a weaker position. Agreeing to the demand that there is a bill to pay highlights how the current administration does not wish to risk its trade with the EU but anyone with even a modicum of bargaining acumen knows you have to at least affect the look of someone willing to walk away if you want to achieve the price you want. 



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July 14 2017

Commentary by Eoin Treacy

Email of the day -on investing in batteries

Related to Your comment regarding electric vehicles and batteries: I've been thinking about that same area, and how to invest. I ended up with the conclusion that instead of going for some hyped and bubbly valuations (such as Tesla), try to find something reasonably priced that benefits from the same disruption. A "in a gold rush, best money is made by selling shovels" type of strategy. So, after some digging, I bumped into SGL Carbon in Germany. They have had a tough couple of years, refocusing the group and a rights issue recently. Now the company is largely focused on carbon based (graphite, graphene) parts that go into Lithium batteries. The chart looks like it has bottomed, at least to me. Just something that I wanted to highlight for the collective, perhaps you have found other (and better) shares around this theme? As a disclaimer: I'm already long SGL.

Eoin Treacy's view -

Thank you for this thoughtful email. Carbon fibre companies are increasingly transitioning toward producing graphite with the aim of entering the emerging graphene market. This is a niche market but I agree it has ample scope for growth as the battery sector evolves. 



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July 14 2017

Commentary by Eoin Treacy

Trump's Drug-Pricing Move Isn't a Drug-Pricing Move

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

Hospitals are likely to cry bloody murder over this proposal and argue it will lead to service cuts. You likely won't hear a peep from drugmakers, though. These are very low-margin sales, and pharma firms have complained for years about what they say is abuse of the program and the extension of 340B discounts to patients and hospitals they don't think should be eligible. If the CMS change means more sales go to higher-margin areas of the market, then pharma will profit. This move suggests any future 340B and CMS reforms may be pharma-friendly. And any approach that favors drugmakers over hospitals that serve the poor says a lot about the administration's priorities.  The president's last public attack on drug prices was months ago. Pricing has apparently faded as a policy priority since the campaign. His administration's actions make that even more clear. Changes to 340B were just one reported aspect of a draft executive order on drug pricing that reads more like a pharma wish list than a plan to restrain price growth. 

Eoin Treacy's view -

The election campaign played havoc with emerging biotech stocks in particular as they were singled out by politicians for their high pricing. However, what was lost in the debate is that developing drugs for small numbers of patients is expensive. It is not quite the same thing as hiking prices for long established drugs that are designed to treat common ailments. 



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July 13 2017

Commentary by Eoin Treacy

July 13 2017

Commentary by Eoin Treacy

Q2 2017 Bank Earnings Outlook

Thanks to a subscriber for this article by R. Christopher Whalen for theinstutionalriskanalyst.com. Here is a section on Citigroup:

Finally we come to the least valued US large bank, Citigroup (NYSE:C), which currently trades at 0.80x book on a beta of 1.6.  C has an “A” bank stress index rating from Total Bank Solutions.  Like JPM, C’s business model puts equal emphasis on lending, trading and investing activities, resulting in a lower RAROC at 1% vs a nominal equity return of a bit shy of 7%. 

Keep in mind that C has lower asset returns and higher credit costs than other large banks, begging the question as to whether the Fed should really be allowing the bank to increase payouts to equity investors.  If you look at Page 3 of C’s Y-9 performance report, you’ll see that C’s yield on loans is 2% higher than the large bank peer group, yet the bank has a spread on earning assets half a point lower than other large banks. The Street has C’s revenue down in Q2 2017 but magically up 1.5% for the full year.  Earnings are also expected to be down this quarter, but then will rise an astounding 9.5% for the full year.  Despite the market bump following the release of the stress test results, which will result in returning more capital to investors than C actually earns in profits, like BAC the C common still trades at a discount to book.

Unlike names like JPM, C does not have a significant asset management business and also announced an exit from residential mortgage origination and servicing earlier this year.  This may turn out to be a blessing in disguise.  C is up 58% over the past twelve months vs 13% for the S&P 500, so like JPM we’d say that the risk is on the downside for this much maligned stock.    

Will C hit its revenue and earnings numbers for Q2 2017?  Probably, especially now that they’ve jettisoned the mortgage business.   But the larger question is why does C still exist?  In the wake of the 2008 financial crisis, C has been struggling to redefine itself in a way that makes sense to investors. 

But having sold the asset management business to Morgan Stanley (NYSE:MS) and the mortgage business to New Residential (NYSE:NRZ) and Cenlar FSB, there is not much left besides the consumer lending book and the payments business.  As we’ve noted in previous comments, C’s board ought to consider selling the payments business for a premium price, spin the proceeds to shareholders, then dispose of the other assets for whatever they can get before turning off the lights.

 

Eoin Treacy's view -

Consumer lending and credit cards is not a bad market to be in considering the relative performance of companies like PayPal and Visa relative to traditional banking. With the steady march of online retail and instant gratification consumer credit remains a growth market. 



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July 13 2017

Commentary by Eoin Treacy

Market Darling India Has Issues as Inflation Hits Record Low

This article by Anirban Nag and Archana Chaudhary for Bloomberg may be of interest to subscribers. Here is a section: 

While bond markets are rallying as investors wager the data will trigger a rate cut from the Reserve Bank of India, the figures signal the economy faces hurdles even as the stock market surges to a record, the rupee rallies and the world’s major economies head into an era of higher borrowing costs.
There’s a realistic chance of a 25-basis point rate reduction in August, Indranil Pan, chief economist at IDFC Bank Ltd., said. “It could be a very close call as the RBI is expected to remain cautious of the international rhetoric of tighter monetary policy and unwinding of quantitative easing," Pan said in a note.

Some of the pessimism stems from the fact that is India is still recovering from a cash ban that interrupted employment for millions, forced farmers into fire sales of agricultural produce and bogged down the manufacturing sector. The introduction of a goods and services tax on July 1 only added to the confusion while a glut of bad loans means businesses are not borrowing to invest in Asia’s third-largest economy.

Bank credit to industry contracted in the year to May, while deposits surged following the ban of high-denomination notes in November, leaving the banking system grappling with surplus cash.

Data on Wednesday showed headline consumer price inflation fell to 1.5 percent in the year to June from an annual 2.2 percent a month ago and below forecasts for a 1.6 percent reading. That’s below the RBI’s medium term target of 4 percent and through the bottom of its 2 percent projection for the first-half. Core inflation, which strips out volatile food and fuel items, also slipped below 4 percent.

 

Eoin Treacy's view -

For long suffering investors who forced themselves to accept India’s persistently high inflation, weak currency and lumpy growth, the last year must feel like a blessing. The prospect of RBI rate cuts is gaining credence and that is being reflected in the outperformance of the stock market. 



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July 13 2017

Commentary by Eoin Treacy

Email of the day on rare earth metals

Rare earths are in increasing demand in several fields of high tech.  Lynas Corporation, the world’s biggest rare earths producer outside China, has had a chequered life but under new management appears poised to benefit substantially.  It may be of interest.  A copy of its Quarterly Activities Report taken from the company’s web site ( https://www.lynascorp.com ) is attached.

Needless to say, I am long this stock.

 

Eoin Treacy's view -

Back in 2010 China made sure everyone knew it is in command of the global rare earth metals market, when it restricted supply to Japan, in particular, but also to a number of other importers. The result was a surge in metal prices as supply was constrained and considerable investment in additional supply outside China. 

Lynas was one of the companies that IPOED to secure capital to bring Australian supply to market. It is also one of the few that survived when the market crashed as China reversed course and flooded the market with supply. 

 



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July 13 2017

Commentary by Eoin Treacy

Email of the day on David's recovery and industrial automation:

I hope you are well and that David is recovering / progressing well.

I was just thinking about your theme of cheap local robotic manufacturing and our Brexit.

It another thing to our advantage as we will become less reliant on German and EU manufactured goods. Plus long term, it will effect Germany quite a bit, won't it?

 

Eoin Treacy's view -

Thank you for your well wishes on David’s behalf and this question which may be of interest to subscribers. 

I was in contact with David today and he is recovering following the heart related issues he needed to have ablation for last week. He picked up a secondary infection while in hospital which has put a dampener on his recovery but is home and looking forward to making a full recovery. He is less than impressed by what he calls the "factory farming" nature of the medical system but is otherwise is good spirits. 

 



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July 12 2017

Commentary by Eoin Treacy

July 12 2017

Commentary by Eoin Treacy

Yellen Sees Inflation as Key Uncertainty, Amid Moderate Growth

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

A faster pace of global growth should support U.S. exports, she said, and a recovery in drilling activity should support business investment.

“These developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases,” she said.

Yellen said the central bank’s policy rate “would not have to rise all that much further” to get to a rate that keeps supply and demand in balance in the economy. Eventually, “factors,” which she did not specify, holding down the so-called neutral rate will diminish over time, she said, which supports the Fed’s case for continued rate hikes over the next couple of years.

 

Eoin Treacy's view -

The Fed’s balance sheet stands at $4.4 trillion and it wants to experiment with shrinking it ahead of the planned refinancing of a significant quantity of Treasuries from 2018 through 2021. It’s rather questionable how it can also raise rates while shrinking the balance sheet and Janet Yellen’s testimony today suggests the Fed has reached the same conclusion. 



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July 12 2017

Commentary by Eoin Treacy

Email of the day on the future of electric vehicles

I thought you would be interested in this story from The Times. It’s a UK perspective but made a point about lithium battery technology that hasn’t been much aired. Perhaps because I haven’t heard much about alternative battery technology. I’d be interested in your take on it.

Eoin Treacy's view -

Thank you for this article which I would rate as an example of flawed conventional thinking that doesn’t take account of some pressing needs that are affecting the UK economy today. 



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July 12 2017

Commentary by Eoin Treacy

July 12 2017

Commentary by Eoin Treacy

Pepsi Says It's Facing the Same Trends That Are Battering Retail

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

Retail’s “shifting sands and macro headwinds will make near-term earnings beats challenging” for PepsiCo, Wells Fargo analyst Bonnie Herzog said in a note to clients. Still, PepsiCo gets a large proportion of revenue from snacks, which are easier to sell online than beverages, she said. That means the company is better positioned to adapt than some of its peers.

PepsiCo’s comments were similar to those made by Coca-Cola CEO James Quincey, who told Bloomberg in May that when shoppers skip trips to the local mall and shop online, they also forgo buying Coke at a vending machine or food court. Coca-Cola investors will be watching to see how that may hurt second-quarter results on July 26.

Nooyi’s remarks were “an acknowledgement to the intensifying competitive environment that will likely get more so with Amazon involved,” Bloomberg Intelligence analyst Ken Shea wrote in an email. Still, some consumer products companies will be more vulnerable than others to change, and PepsiCo’s “huge distribution reach and agility arguably make it less vulnerable” to changing shopper behavior than its peers, he said.

 

Eoin Treacy's view -

Amazon Prime Day was the firm’s highest grossing ever, with its discounted Echo speaker being the top seller yesterday. The company sells just about everything and is now offering try-before-you-buy on fashion, same day delivery and investigating how to sell pharmaceuticals and auto parts. It is logical that even companies which reside squarely in the consumer staples sector but also get part of their income from discretionary products would be affected by the demise of the shopping mall. 



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July 11 2017

Commentary by Eoin Treacy

July 11 2017

Commentary by Eoin Treacy

Dimon Says QE Unwind May Be More Disruptive Than You Think

This article by Cindy Roberts may be of interest to subscribers. Here is a section: 

“We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris Tuesday. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”

Central banks led by the U.S. Federal Reserve are preparing to reverse massive asset purchases made after the financial crisis as their economies recover and interest rates rise. The Fed alone has seen its bond portfolio swell to $4.5 trillion, an amount it wants to reduce without roiling longer-term interest rates. Minutes of the Fed’s June 13-14 meeting indicate policy makers want to begin the balance-sheet process this year.

“When that happens of size or substance, it could be a little more disruptive than people think,” Dimon said. “We act like we know exactly how it’s going to happen and we don’t.”

Cumulatively, the Fed, the European Central Bank and the Bank of Japan bulked up their balance sheets to almost $14 trillion. The unwind of such a large amount of assets has the potential to influence a slew of markets, from stocks and bonds to currencies and even real estate.

“That is a very different world you have to operate in, that’s a big change in the tide,” Dimon said. All the main buyers of sovereign debt over the last 10 years -- financial institutions, central banks, foreign exchange managers -- will become net sellers now, he said.

 

Eoin Treacy's view -

These are common sense statements from one of the most important CEOs in the industry and suggests central banks need to be very careful about how they adjust the status quo. That’s particularly true considering the effect quantitative easing has had on asset price inflation which was by design. 



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July 11 2017

Commentary by Eoin Treacy

We need to talk about Brexit

Thanks to a subscriber for this article by Anthony Peters which may be of interest. Here is a section: 

Consensus among many in the UK, and from both sides of the Brexit argument, is that unwinding British membership has nothing to do with political will but that it might yet be brought its knees by the sheer technical challenge. 

I lunched yesterday with a former British diplomat who spent much of his embassy time in the trade department. After a career in the Foreign and Commonwealth Office he is not one to make rash and unconsidered statements although he too is part of a growing group of people in this country that believes Brexit might yet founder when the divorce process becomes simply too complicated to be executed. A patch here, a patch there, the odd bridging agreement and a bucket load of postponements and the withdrawal process could find itself spun on indefinitely. 

Don’t get me wrong; I’m not saying that this is the most probable of outcomes but it is beginning to emerge as a distinct possibility…. not that anybody either close to or actually in government would dare say anything to that effect.

 

Eoin Treacy's view -

The UK government is in something of a bind. It has a reduced majority and Prime Minister May has had to resort to appealing to the good nature of her bitter political rivals in other parties for support to get her through the Brexit negotiations.  More than anything else that displays how weak a hand she is playing after the election. 



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July 11 2017

Commentary by Eoin Treacy

Canadian Home Buyers Losing Steam, and Cash, as Rate Hike Looms

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

The chain of events began in October when the federal government tightened mortgage insurance requirements, and continued into April when the province imposed a 15 percent tax on foreign purchasers. Home sales fell 37 percent in June from a year earlier and prices rose the least since January 2015. Then last week the regulator said it’s considering requiring lenders to stress test uninsured mortgages, which is expected to cool things further.

On top of all this, Governor Stephen Poloz will lift the benchmark overnight rate on Wednesday to 0.75 percent from 0.5 percent, according to 22 of 31 economists in a Bloomberg survey while the rest see no change. The rate could rise to or past 1 percent in a year, a separate survey shows. In anticipation, Canada’s biggest banks are also tightening. Royal Bank of Canada raised its fixed rates for 2-,3-, and 5-year term mortgages by 20 basis points.

An increase of 75 basis points to 100 basis points in the Bank of Canada’s key rate by the end of 2018 would remove 6 percent to 8 percent of buyers from the country’s real estate market if banks fully price it into their loans, according to Will Dunning, chief economist at industry group Mortgage Professionals Canada. A slowdown in property deals may pose a risk to Canada’s growth -- the fastest among Group of Seven countries -- just as the economy seems to be overcoming a slump triggered by a drop in global oil prices.

“Right now people are staying away from buying," Dunning said by phone. "If they stay away over a longer period of time, that could become dangerous, that could become deflationary."

 

Eoin Treacy's view -

Canada avoided the worst ravages of the credit crisis because its banks were not exposed to subprime loans, its domestic housing market was not as overbought in 2007 as the USA’s and commodity prices staged an impressive rebound. The near bankruptcy of Home Capital, only avoided by a last-minute investment by Warren Buffett, was a warning shot for the financial system that is now dealing with elevated real estate pricing in both Vancouver and Toronto. 



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July 11 2017

Commentary by Eoin Treacy

Lithium-rich countries risk missing the boat on electric batteries boom

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

As Tesla Motors begins to build the world’s largest lithium-ion battery in Australia and other vehicle makers such as Volvo get on board the electric vehicles train, concerns are rising over the environmental footprint of mining that and other materials used in car batteries, as well as their eventual disposal.

According to analysts at UBS, by 2025 the market will need 12 times the battery capacity currently available. At the same time, only 5% of lithium-ion batteries get recycled, versus more than 90% of those used in conventional vehicles, reports Financial Times:

“One of the challenges of making battery recycling economically viable is the quantity of battery material that is needed to keep utilisation rates of recycling facilities sufficiently high,” say analysts at Morgan Stanley. “The risk, therefore, is there may not be the necessary infrastructure in place in time for the first significant wave of EV batteries to reach end of life.”

Demand for the commodity has been rising as of late, which in turn has caused prices to more than double in the past 18 months.

The need for the metal is expected to triple by 2025, but not all the countries rich in lithium are taking advantage of the boom. At the same time, new actors are emerging worldwide.

 

Eoin Treacy's view -

This article carries a number of interesting graphics on which countries have the largest lithium reserves and which are the largest producers. With demand for the metal expected to multiply over the next decade a supply inelasticity meets rising demand growth model is in place at least until the necessary infrastructure to produce and recycle the metal has been built which could take another few years. 



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July 10 2017

Commentary by Eoin Treacy

July 10 2017

Commentary by Eoin Treacy

US Equities: Unwinding the Yellen Leveraged Buyout

Thanks to a subscriber for this article by R. Christopher Whalen for theinstitutionalriskanalyst.com which may be of interest. Here is a section: 

So our message to the folks in Jackson Hole this week is that the end of the Fed’s reckless experiment in social engineering via QE and near-zero interest rates will end in tears.  “Momentum” stocks like TSLA, to paraphrase our friend Dani Hughes on CNBC last week, will adjust and the mother of all rotations into bonds and defensive stocks will ensue.  We must wonder aloud if Chair Yellen and her colleagues on the FOMC fully understand what they have done to the US equity markets.

The notion that five years of market manipulation by the FOMC (and other central banks, to be fair) can end happily seems rather childish, especially when you consider that the other great accomplishment by the Fed during this period is a massive increase in public and private debt. Once the hopeful souls who’ve driven bellwethers such as TSLA and AMZN into the stratosphere realize that the debt driven game of stock repurchases really is over, then we’ll see a panic rotation back into fixed income and defensive stocks.

The period from QE 1 in 2012 represents one of the most reckless episodes in the history of the US central bank, a period where the FOMC essentially encouraged a partial LBO of the US equity markets. The key question for the FOMC and investors seems to be this: How much new equity issuance can the markets support if public companies eventually need to reduce debt and rotate out of the LBO trade constructed by Yellen & Co?
 
Corporate credit spreads are the key indicator to watch, both in terms of the economy and the financial markets.  It’s a game of financial musical chairs. Ray Dalio, Janet Yellen and all of us are dancing.  When does the music stop?    

 

Eoin Treacy's view -

Massive monetary accommodation where interest rates have been driven to unprecedented low levels has resulted in a boom in financial engineering. Issuing new debt when it is so cheap is a no brainer when it can be used to reduce total debt servicing costs and to buy back relatively expensive equity. 



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July 10 2017

Commentary by Eoin Treacy

A Trader So Secret They're Only Known by a Number Just Made Over $200 Million in One Month

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

“One of its more important features is that you don’t have identities tied to this,” said Spencer Bogart, head of research at venture firm Blockchain Capital. “This financial privacy is an important characteristic.”

Ether, the second-most-popular cryptocurrency after bitcoin, is used to pay for applications or programs that run on the Ethereum blockchain, a secured list of transactions that can be shared. That allows for the use of “smart contracts,” or pieces of computer code that make the terms of such agreements operate automatically. The blockchain has the potential to reshape business and finance by enabling immediate settlements of activities such as bank transfers and securities trades.

JPMorgan Chase & Co., BP Plc, Microsoft Corp. and ING Groep NV are among those experimenting with it. The current value of all the ether held, $23 billion, means dozens of electronic wallets have accrued nine-figure positions. Many of them could be held by individuals, according to a Bloomberg analysis. Individuals can hold multiple wallets.

 

Eoin Treacy's view -

Interest in cryptocurrencies has surged this year with stories, such as this one, of riches made almost overnight attracting legions of private investors into the market. The immutability of bitcoin and the anonymity of holding its, the ability to transfer currency across borders without government interference and the fact supply is limited are all aspects of the market which appeal to investors. However, it is the smart contracts aspect of the cryptocurrency market that represents where it can grow and which lends it utilitarian value. 



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July 10 2017

Commentary by Eoin Treacy

Trading Halts, Confusion From India to Indonesia on Manic Monday

This article by Santanu Chakraborty, Ameya Karve and Yudith Ho for Bloomberg may be of interest to subscribers. Here is a section: 

Ashish Shah, head of equities at Mumbai-based A.C. Choksi Share Brokers Pvt., said his firm placed orders for AU Small Finance Bank Ltd. on its first day of trading. As of 3:15 p.m. local time, he was still waiting to find out if his firm owned the stock, which rose 51 percent on its debut.

“We punched in the trades and they are still pending, and we don’t know whether we got the shares,” said Shah. “Will they be scrapped, reversed or executed? The bourse could have done a better job at communicating as clarity reduces chaos.”

The NSE handles about twice the stock volume of rival BSE Ltd. and controls about 80 percent of India’s derivatives market, which is among the world’s largest. The exchange company, which has filed for an initial public offering, has been embroiled in a probe into whether it allowed preferential access to some high-frequency traders. BSE saw its volume almost double over previous days, data compiled by Bloomberg show.

“NSE deeply apologizes for the glitch,” it said in an emailed statement. “The matter is being examined by the internal technical team and external vendors, to analyze and identify the cause which led to the issue and to suggest solutions to prevent recurrence.” A Securities and Exchange Board of India spokesman declined to comment on the developments.

 

Eoin Treacy's view -

Trading halts as a result of glitchy software are not quite the same things as runs on prices due to panicky selling but are nonetheless an inconvenience and a symptom of how reliant the global market is on computers. 



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July 07 2017

Commentary by Eoin Treacy

July 07 2017

Commentary by Eoin Treacy

The Silver Flash Crash: What Might Have Been at Work

This article by Matthew Ashley for investing.com highlights the surprise at today’s intraday volatility in silver. Here is a section:

One slightly more plausible suggestion has been a sudden liquidity drain that sparked a bout of panic selling. Indeed, markets have been fairly thin over the 4th of July holiday period which could have compounded fears that silver was becoming illiquid in the wake of JP Morgan’s recent acquisitions. This being said, the extent to which JP Morgan has ‘rigged’ silver markets is constantly challenged and courts seem to be unable to agree on if the institution is breaking antitrust legislation.

Stop loss orders have also been fingered as a cause for the sudden rout for all the usual reasons. Specifically, the hitting of numerous stop loss orders in rapid succession could have easily amplified the effects of a sell-off – even if they probably didn’t trigger the downtrend in the first place. Moreover, given that many traders may have been out of action due to the holiday’s in the US, it’s quite reasonable to expect more ‘set and forget’ trades to have been placed than is typical. This would have left the metal more exposed to this type of risk than we would usually expect.

 

Eoin Treacy's view -

Silver is prone to volatility not least because it is a substantially thinner market than gold which is why we so often refer to it as “high beta gold”. The price fell by almost $2 around midnight UK time when markets are thin before rebounding to almost unchanged. It then traded laterally in an inert manner until an hour before the US open when it traded down from $16 to $15.50 before stabilizing again. That represents substantial volatility but the question is what now?



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July 07 2017

Commentary by Eoin Treacy

Breakfast with Dave

Thanks to a subscriber for David Rosenberg’s report for Gluskin Sheff dated yesterday. Here is a section:

The Fed seems to have rose-colored glasses on regarding this experiment ahead in terms of even gradually unwinding the balance sheet and the impact on the same financial markets that are deemed at least those around the table (presumably the one with Bloomberg terminal) to be excessively exuberant. And at the same time, the view on the economic outlook seems quite rosy, then again, the central bank has overestimated economic growth consistently for the past seven years. Old habits die hard.

But there are some at the Fed that share our views on many items. Here were a few new wrinkles:
“Contacts at some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies…”

Reports regarding housing construction from District contacts were mixed.”

District contacts reported that automobile sales had slowed recently; some contacts expected sales to slow further, while others believed that sales were leveling out”

So here we have soft capex, soft housing and soft autos. But yet the consensus view is that the economy is doing just fine. A case of cognitive dissonance?

 

Eoin Treacy's view -

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

You have Ray Dalio saying, keeping dancing but stay close to the door, regarding the equity market. Jeff Gundlach says the run-up in yields is only beginning. David Rosenberg says deflation is here to stay. The problem for investors is that they all make cogent arguments and it is difficult to divine just where we are and what is likely to happen next. Let’s just stick to the charts. 



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July 07 2017

Commentary by Eoin Treacy

Musings from The Oil Patch July 6th 2017

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

While U.S. production grew slightly in 1978, and then remained stable until 1983 before once again growing. The emergence of the North Sea as a significant new oil supply basin (UK and Norway) as well as Mexico’s offshore oil success demonstrated the power the sustained higher oil prices had on creating new supplies. The impact of new supplies contributed to OPEC’s collapse.

At the same time oil supply outside of OPEC started growing, oil consumption in the developed world (OECD) fell, which is demonstrated by the United States and Europe consumption curves in Exhibit 13. Those two regions are the key part of the OECD. Non-OECD consumption continued growing. As the chart shows, the demand reduction was significant, and was key to crippling OPEC’s pricing power as was the growth in new oil supplies.

As we look at the factors helping to reshape today’s oil market, environmental pressures, especially the potential impact of electric vehicles, coupled with the impact on oil demand growth that will come in response to efforts by countries to decarbonize their economies, can be considered the equivalent of the 1970s oil price shock to global oil demand. Demand will continue to grow for the foreseeable future, but the annual rate of growth is likely to continue to slow until it eventually goes negative. Lower demand is coming at the same time oil companies are reducing well breakeven prices insuring more supplies in the future. These improved E&P economics is broadly similar in impact to the opening of new oil supply basins that occurred in the 1970s and 1980s. Just as the opening of new supply basins had a long-term impact, the reduced well breakeven prices will also have a long lasting impact. We can argue about how long the impact will last, but it is likely to last much longer than we expect.

History does not repeat, but it does rhyme, as suggested in the famous quote. In our view, the current oil industry downturn is rhyming more with the 1982-1986 cycle than with the 2008-2011 one. If that is true, then the industry may be looking at an extended period of low oil prices just as the industry experienced following the 1981 oil price peak. That span extended for 18 years as oil prices averaged below $45 a barrel, or the very long-term average of inflation adjusted oil prices, with the brief exceptions of the First Gulf War and 9/11. BP plc CEO (BP-NYSE) Robert Dudley’s comments in early 2015 that the industry needed to learn to live in a “lower for longer” environment seem to be proving accurate. That means the oil industry must continue adjusting its cost structure. The oil companies will need to keep their staffing lean, employ the best drilling and completion technologies available, and manage their balance sheets appropriately to succeed in the future. This environment doesn’t mean that there is no future for the oil industry. It means that corporate strategies must constantly be reassessed within a broader energy industry panorama subject to external pressures that will only grow in the future.

 

Eoin Treacy's view -

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

“The cure for high prices is high prices” has been an adage in the commodity prices for decades and is no less true of oil prices. After almost a decade of high prices a great deal of additional supply has been brought to market. However, the advent of new technology which has allowed previously inaccessible reserves to be accessed, namely shale oil and gas, and the subsequent success in reducing the cost of extraction continue to represent gamechangers for the sector. That is before we begin to talk about the emerging trend of refracking; where wells that are past their peak output can be revitalized at a substantially lower cost.  



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July 07 2017

Commentary by Eoin Treacy

Email of the day on North Korea's ICBM:

North Korea's recent launch WAS intercontinental by virtue of it reaching appx 1,000-mile apogee (height, elevation). That 1,000-mile height translates into many thousands of miles laterally. 
NASA Engineer, Retired

 

Eoin Treacy's view -

Thank you for this confirmation. Empathy is a useful tool in both looking at how markets might respond to different situations but also to geopolitics. I wonder at what the fly on the wall must hear at National Security briefings in the White House. 

North Korea has nuclear weapons and an ICBM, it is debatable whether Iran’s nuclear ambitions have been blunted, meanwhile China is growing increasingly strident about its border claims both in the South China Sea and with India, while cyberwarfare tools developed by the NSA have been leaked into the general hacking community with the number of civilian targets proliferating by the day. 

 



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July 07 2017

Commentary by Eoin Treacy

Find Out If Your Job Will Be Automated

This infographic by Mark Whitehouse and Mira Rojanasakul may be of interest to subscribers. Here is a section: 

Eoin Treacy's view -

What the future of automation will be and how quickly it all happens is a guess but the trend is clear. From my perspective, the good news is that analysts, financial managers et al are at the left-hand side of the automation spectrum but the more troubling point is that there are a good many jobs that employ large numbers of people which are at risk from automation. That means we are going to need to come up with a lot more different kinds of work for people, especially those with little education, to do. 



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July 06 2017

Commentary by Eoin Treacy

July 06 2017

Commentary by Eoin Treacy

Gundlach Says Bond Wipeout Just Beginning as Bulls Rush for Exit

This article by Edward Bolingbroke, Liz Capo McCormick and John Gittelsohn for Bloomberg may be of interest to subscribers. Here is a section:

With a Federal Reserve seemingly committed to raising interest rates a third time this year and speculation the European Central Bank could announce a tapering of bond purchases by the end of the year, the fundamentals aren’t encouraging. As yields are now approaching key technical marks that could trigger a fresh flush out of long-end bulls, the risk is building that Treasury yields go even higher.

Ten-year Treasury yields are on course to move “toward 3 percent” this year, Gundlach said in an emailed response to questions. There has “been no justification for the divergent policies in the U.S. versus Europe given economic fundamentals,” he said - a point he has made previously.

A 10-year yield at 3 percent would put Treasuries in “definitive” bear market territory, Gundlach added. The yield traded as high as 2.39 percent Thursday, just ahead of a key retracement level at 2.42 percent, coinciding with the May high.

“People this year had been buying long-dated Treasuries and other sovereigns as the hedge to their equity portfolios and that’s why this unwind is so ugly,” said Peter Tchir, head of macro strategy at Brean Capital LLC. “They are losing money on both the equity and debt side now, and are bailing out of their long-dated Treasuries.”

 

Eoin Treacy's view -

The risk parity trade, which has been among the most favoured by macro traders over the last couple of years, where volatility in equities is counterbalanced by equal but opposite positions in bond volatility, is coming under pressure. 

So far, the movements in equities have been relatively minor while the sell-off in the long bond has only been underway since last week. However, these types of trades are at risk both from bonds and equities moving in the same direction and upticks in volatility that are not easily hedged. 

 



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July 06 2017

Commentary by Eoin Treacy

Investment Principles & Checklists

Thanks to a subscriber for this heavyweight 148-page compendium of investment maxims from such luminaries as Charlie Munger and Seth Klarman among others. Here is a section from Howard Marks:

What is the pie worth? 
How will it be split up among claimants? 
How long will it take? 
It is never over – the cycle continues; investors must understand the cyclical nature of markets and the economy 
No good or bad investments – just bad timing and bad prices 
Shortness of memory is an amazing feature of financial markets 
Tenets of Oaktree Capital Management 

1. The primacy of risk control 
Superior investment performance is not our primary goal, but rather superior performance with less-than-commensurate risk. Above average gains in good times are not proof of a manager's skill; it takes superior performance in bad times to prove that those good-time gains were earned through skill, not simply the acceptance of above average risk. Thus, rather than merely searching for prospective profits, we place the highest priority on preventing losses. It is our overriding belief that, especially in the opportunistic markets in which we work, "if we avoid the losers, the winners will take care of themselves." 

Eoin Treacy's view -

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

Saying “buy low, sell high” is simple to say but a lot more difficult in practice. While each of these famous investors has their own individual take on how best to achieve investment goals there, but there are a number of topics just about all of them cover. 



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July 06 2017

Commentary by Eoin Treacy

Email of the day on Japanese Bank funds

Hello Eoin! Thank you for all your hard work for us! You highlighted the Japanese Banks a few Days ago! Is there a Japanese Banks ETF or a closed end Bank fund, that you know of. Best regards. (an FM since 1988).

Eoin Treacy's view -

Thank you for your long support and this question which may also be of interest to other subscribers. There are two Japanese listed ETFs focusing exclusively on Japanese banks but I’m afraid I do not know of any others listed elsewhere whether ETFs or closed-end funds. 

The two Japanese ETFs are the Daiwa Topix Bank ETF (1615 JP) and the Nomura Topix Banks ETF (1612 JP).  

 



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July 06 2017

Commentary by Eoin Treacy

Emerging Markets Face SATT Problem to Rival Nasdaq's FAANG Woes

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

The Asian group is becoming more expensive, especially on a price-to-book-value basis, with a 77 percent premium to the wider index -- a 15-year high, Dennis said. That’s double the long-term average premium of 38 percent, he said.

Pictet Asset Management Ltd.’s Luca Paolini is also worried that a correction is coming after the MSCI Emerging Markets index’s surge. The gauge beat both the Nasdaq 100 and the MSCI All-World Index in the first half.

“If global equities do indeed witness a correction in the coming weeks, there are grounds to expect that emerging-market stocks’ outperformance will come to an end,” Paolini, London-based chief strategist with Pictet, wrote in a report.

Paolini downgraded Pictet’s view on technology stocks to single positive from double, as earnings momentum appeared to peak in May. He also suggested reducing holdings of emerging-market equities given the outsize technology exposure of the region relative to developed markets.

 

Eoin Treacy's view -

With some of the heat coming out of high momentum trades, that have driven performance this year, the potential for traders to look for additional sources of mean reversion trades has increased. There Is no denying that a number of Asian technology shares have been more than keeping pace with their US counterparts so they are at equal risk of mean reversion. 



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July 06 2017

Commentary by Eoin Treacy

Email of the day - on how to find instruments in the Chart Library.

July 05 2017

Commentary by Eoin Treacy

July 05 2017

Commentary by Eoin Treacy

Fed Officials Divided on When to Begin Balance-Sheet Unwind

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

“Several preferred to announce a start to the process within a couple of months,” the minutes of the June 13-14 meeting released on Wednesday in Washington showed. “Some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.”

U.S. central bankers in June raised the benchmark lending rate for a second time this year to a range of 1 percent to 1.25 percent, while describing monetary policy as “accommodative” in their statement. They reiterated their support for continued gradual rate increases, according to the minutes.

Fed officials updated their balance-sheet policy in the gathering, laying out a path of gradual reductions with caps. The central bank wants to start winding down the $4.5 trillion bond portfolio without roiling longer-term interest rates, while gradually raising the policy rate. The minutes indicated that the committee wants to begin the balance-sheet process this year.

 

Eoin Treacy's view -

Here is a link to the full text of the Fed’s Minutes. 

The only example we have of withdrawing liquidity following a bout of quantitative easing is from the ECB between 2012 and 2014 when they took €1 trillion out of circulation. That resulted in deflationary pressures picking up and forced a change of emphasis in Frankfurt which has subsequently seen the size of the balance sheet more than double. Against that background it is hardly surprising there is some disagreement about how to proceed within the Fed and the consensus, as Janet Yellen stated last month, would be to proceed slowly.

 



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July 05 2017

Commentary by Eoin Treacy

Oil Tumbles as Russia Is Said to Oppose Deeper Production Curbs

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

Russia "pretty much threw cold water" on rumors of additional cuts, said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. The American Petroleum Institute is due to issue weekly U.S. inventory numbers Wednesday afternoon.

Oil and gas companies’ shares were down across the board. Bloomberg Intelligence’s index of independent exploration and production companies fell as much as 4.4 percent. Baker Hughes plunged 34 percent on its first day of trading as a unit of General Electric Co.

While crude prices surged last week, futures are down 15 percent for the year amid concerns that rising global supply will offset the output cuts from the Organization of Petroleum Exporting Countries and its partners. Libya and Nigeria, which are exempt from the agreement, accounted for half of the group’s production boost last month, according to data compiled by Bloomberg.

"Now we’ll see if this rally was based on loose expectations that there could’ve been some agreement or additional cuts, or if it was a rally on short-covering," Mizuho’s Yawger said.

 

Eoin Treacy's view -

Oil prices have been confined to a volatile range over the last 12 months with a distinct downward bias since January. The price might have rallied for eight consecutive sessions but there has been a distinct absence of clear upward dynamics similar to those posted in August and November while the large tail on the candle that marked the May low was also a clearly bullish development. 



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July 05 2017

Commentary by Eoin Treacy

China Clamps Down on Webcasting by Weibo and Other Media Firms

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

On Thursday night, the State Administration of Press, Publication, Radio, Film and Television ordered services including Weibo to stop broadcasting what it said was negative commentary in violation of government regulations. While the regulator didn’t say in its one-line statement what precise actions should or would be taken, it was enough to send Weibo’s stock sliding 6.1 percent in New York on Thursday. Sina, which controls the company, slid almost 5 percent.

The regulatory ban, the latest in a series of attempts to curb content on the internet, could disrupt a revival for Weibo that’s now underway. The messaging service turned to video streaming over the past year to rejuvenate growth and has since reignited user interest, pushing its monthly audience to 340 million people -- surpassing Twitter’s -- and its market value above $16 billion. Chairman Charles Chao is now focused on expanding Weibo into areas including news aggregation and live video streaming.

Weibo, AcFun and Ifeng.com are “broadcasting large amounts of programming that don’t meet national standards and which propagate negative opinions on public affairs,” the national broadcasting regulator said in a statement posted on its website. “We’re taking measures to halt the programs and begin rectification.”

 

Eoin Treacy's view -

China’s “Great Firewall” is no laughing matter with VPNs, that previously allowed people to access outside content, being issued closure orders on an increasingly regular basis. Online streaming is very difficult to censor and as a result is being sanctioned not least because this is a politically volatile period ahead of the Party Congress in the autumn. 



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July 05 2017

Commentary by Eoin Treacy

O'Reilly Automotive plunges after sales miss and warning of 'weak consumer demand'

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

O'Reilly Automotive plunged by as much as 16% in early trading on Wednesday after the company announced second-quarter sales results that were weaker than it had expected. 

Sales at its auto-parts stores open for at least one year rose 1.7% in the second quarter, O'Reilly said in a release on Wednesday. That was improved from Q1 but weaker than its guidance of 3%-5% growth.

"We faced a more challenging sales environment than we expected for the remainder of the quarter," after April, O'Reilly CEO Greg Henslee said, "due to what we believe were continued headwinds from a second consecutive mild winter and overall weak consumer demand." 

"The comparable store sales shortfall will also have a consequent impact on our operating profitability," Henslee added. 

Car sales in the US slowed in the first half of this year following seven straight years of record-setting volumes. Although sales have softened, continued employment growth suggests that consumer purchases of the big-ticket items may remain healthy. 

Auto sales in June rose at a seasonally adjusted annual rate of 16.51 million, Autodata said on Monday, down 13.2% year-on-year. 

 

Eoin Treacy's view -

Automotive parts retailers are being squeezed both by declining auto sales and the rise of electric vehicles which do not need nearly as many parts to be replaced. That represents a secular headwind until they retool to offer the kinds of products drivers of cars less likely to breakdown require, like new batteries. 

From the perspective of The Chart Seminar O’Reilly Automotive represents a wonderful teaching example. It posted one of the most impressively consistent uptrends from its 2009 lows but the large reaction at the end of 2015 represented a loss of consistency. It subsequently was able to regroup and move to a new high, but that move was not sustained and the decline that followed contributed to the rolling over characteristic. 

We often see previously consistent trends lose that consistency at the penultimate high. The initial sharp drawdown cautions buyers that the imbalance between supply and demand that drove the advance could be changing. Meanwhile there are still enough new buyers coming into the market to drive the price a little higher but not enough to sustain the advance any longer. The massive reaction against the prevailing trend often gives way to a volatile ranging phase as some people argue nothing has changed and buy while others argue that the share has gone up a lot already and has stopped doing so and sell. 

The longer the range continues the greater the possibility it will constitute a top. In this case the Typ-3 top (ranging, time and size) was completed with the move below $250 in May (Also see Comment of the Day on April 4th 2017) It is now accelerating lower.  

 



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July 04 2017

Commentary by Eoin Treacy

July 04 2017

Commentary by Eoin Treacy

Energy Stat: Is "Fake News" Driving Down Oil Prices?...

Thanks to a subscriber for this report from Raymond James which takes a bullish opinion on oil prices. Here is a section:

Myth #2: U.S. shale production growth is going to flood the market at $35/bbl.
The fear of massive U.S. oil supply growth at oil “breakeven” prices of $35-40 per bbl is the other panic button that most investors (and many sell-siders) have been happy to push over the past few months. Yes, there are many U.S. horizontal (especially Permian) operators that can make solid incremental well returns at $35-40 per barrel if and only if they do not include any costs other than the drilling and completion costs of that next well. The problem with this type of analysis is twofold: 1) It is definitely not capturing the fullcycle returns where companies must include lifting, overhead, interest expenses, and other sunk costs. On a full cycle basis, very few U.S. E&P companies are actually generating positive returns at oil prices below $50/bbl, and 2) There is simply not enough cash being generated by U.S. E&P companies at oil prices below $50 to justify current drilling and completion activity and some of the U.S. supply growth forecasts that are now starting to appear. In fact, at current oil prices (of around $45/bbl) we estimate that the U.S. E&P industry as a whole will outspend cash flow generated by a whopping 50% this year! That amount of outspend is simply unsustainable and means the unfettered U.S. oil supply growth assumptions in a sub-$50 oil world are highly, highly unlikely.

We would also point out two other important points on this emerging U.S. supply growth panic. First, we have historically had one of the most aggressive (and accurate) U.S. oil supply growth models on the Street. Despite this, our global oil supply demand equation still suggests a meaningfully undersupplied oil market for the remainder of this year. In fact, if we go back to the beginning of this year (six months ago), our 2018 U.S. oil supply growth estimate of 1.3 million bpd was high on the Street and at least 500,000 bpd above consensus estimates at the time. Note that our current U.S. supply estimate is actually down about 500,000 bpd from our estimate a year and a half ago (early 2016) because of downward revisions in U.S. industry cash flows and emerging oil service equipment bottlenecks. In our opinion, forecasts of 2018 U.S. supply growth of 2.5 million bpd at oil prices below $50/bbl are simply not doing the math. Secondly, the longer-term fear of too much U.S. supply growth at $50/bbl ignores the fact that there is another~30 million bpd of OPEC and ~50 million bpd of non-OPEC supply (across a variety of geographies, both short-cycle and long-lead-time) that will likely be declining in a few years. Solely considering U.S. supply growth would be a “one hand clapping” approach: that is to say, it gives an exaggerated impression of how much global supply is actually growing. In 2017, for example, at least three significant nonOPEC producers – China, Mexico, Colombia – are posting sizable declines. Several others – Russia, Norway, Argentina – are flattish. Longer term, 2018 is shaping up to be the cyclical trough year for global long-lead-time project startups (down close to 50% versus 2016 levels) meaning non-U.S. oil supply growth will likely come under significant pressure in 2019 and beyond.

 

 

Eoin Treacy's view -

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

I think it’s fair to say that a lot of unconventional supply becomes uneconomic around $45 but starts making money anywhere above $55 so the big question is the extent to which producers hedged their exposure when prices were north of $55 at the beginning of the year. That is likely to be key variable in whether they are making money in the current environment. 



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July 04 2017

Commentary by Eoin Treacy

Australia Defies Hawkish Talk as Lowe Frets Over Household Debt

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

Lowe again pointed to the mixed nature of the nation’s labor market -- a key indicator. While the last three monthly reports have shown strong hiring gains and unemployment has dropped to 5.5 percent from 5.9 percent, under-employment remains high. There’s still plenty of slack in the labor market and this is the epicenter of any turnaround on wages -- which are increasing at the slowest pace on record.

The central bank said wage growth is likely to remain low for a while yet. Core inflation remains below the central bank’s 2 percent to 3 percent target and is only forecast to “increase gradually” as the economy strengthens. As an aside, the RBA dropped its reference to an economic growth forecast of 3 percent and said the recent slowing in gross domestic product partly reflected temporary factors, like weather, but not all of it.

“The RBA has explicitly chosen not to adopt a more hawkish tone,” said Sally Auld, head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co. “Ultimately, a more hawkish central bank requires the distribution of risks around both growth and inflation to have improved, such that the current setting of financial conditions is no longer appropriate. Our sense is that this is not yet the case in Australia.”

 

Eoin Treacy's view -

The Australian Dollar has been ranging mostly below 77¢ since early 2016 and pulled back against today to confirm near-term resistance at that level. Household debt is more than a minor issue for the RBA and with commodity prices still relatively low they are going to be cautious about raising interest rates in a country where floating rate mortgages predominate. 



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July 04 2017

Commentary by Eoin Treacy

Kim Seeks to Exploit U.S.-China Tensions With Missile Claims

This article by Andy Sharp, David Tweed and Ting Shi for Bloomberg may be of interest to subscribers. Here is a section: 

Trump turned to Twitter after news of the launch, before North Korea’s claim the missile was an ICBM. He wrote: "Perhaps China will put a heavy move on North Korea and end this nonsense once and for all!” In response, China Foreign Ministry spokesman Geng Shuang said Beijing had been "indispensable" in pressuring Kim.

Reclusive North Korea has for decades relied on its weapons programs as a deterrent to outsiders. Kim is also no different from his father and grandfather -- both leaders before him -- in using his military clout as a bedrock for his internal power.

Encouraging a personality cult around the Kim dynasty helps him keep a grip on generals at home and foster public obedience.

North Korea has called its weapons program a "precious sword of justice” against invaders. It has drawn comparisons with former dictatorships in Iraq and Libya, arguing that Saddam Hussein and Muammar Gaddafi fell because they gave up on developing nuclear arms.

The regime has also used provocations to secure concessions from neighbors in the form of aid. China, the main economic lifeline of North Korea, has been reluctant to press too hard in case it leads to the collapse of the regime and chaos on its border.

 

Eoin Treacy's view -

How do you make waves on the international geopolitical stage when you have a non- interventionist foreign policy? The easy answer is to have a quasi-vassal state do it for you. North Korea would not exist if it was not for China or to put it another way, North Korea only exists because of China’s desire to have a ring to buffer states around its border. 



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July 03 2017

Commentary by Eoin Treacy

July 03 2017

Commentary by Eoin Treacy

Manufacturing Pickup Signals Boost to U.S. Economic Growth

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

Faster growth in orders and production in the final month of the quarter indicates solid demand that, together with rising exports, shows manufacturing is on solid footing. The ISM’s pulse of employment in the industry also indicates the government’s measure of factory payrolls, released as part of the Labor Department’s jobs report on Friday, will rebound in June after declining a month earlier.

The expansion was broad based, with 15 of 18 industries surveyed by the purchasing managers’ group posting growth in June. They included machinery, transportation equipment, computer and electronic products, and petroleum and coal products. The three reporting contractions were apparel, textile mills and primary metals.

The 2.9-point monthly gain in the ISM index, which was the largest jump since early 2013, is also notable as it comes amid fading expectations that the government will deliver a fiscal boost, via tax reform and infrastructure spending, in the near future.

Official’s View
“Everything was strong,” Timothy Fiore, chairman of the ISM factory survey committee, said on a conference call. Unless supply-chain constraints arise, “there’s really no reason” why the robust pace of manufacturing can’t continue, he said. At the same time, manufacturers are awaiting more clarity on potential policy changes such as taxes, regulations and tariffs on imported materials including steel, Fiore said.

 

Eoin Treacy's view -

Purchasing managers index figures for a number of countries came out today with positive figures for the USA, China, Europe and Japan all helping to confirm we are in a period of synchronised global economic expansion. With that view gaining increasing credibility it is acting as a catalyst for rotation in the wider stock market as we head into the second half of the year. 



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July 03 2017

Commentary by Eoin Treacy

Email of the day on the potential for Irexit:

Did you see this?

If you add also the EU's move to tax harmonisation which would damage Ireland's competitive advantage then an eventual Irexit does not seem outlandish.

 

Eoin Treacy's view -

Thank you for this article which may be of interest to other subscribers. This link to a similar article in the Irish Times contains more quotes from the original report and concludes that a recent poll suggests 88% of Irish favour remaining in the EU. 

Ireland joined the EEC because the UK was doing so. The UK is Ireland’s largest trading partner by far and agriculture continues to represent a significant employment sector both directly and indirectly. Despite the size of Ireland’s coastline, Irish fisheries are a much more important sector for Spain than they ever have been for Ireland. 

 



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July 03 2017

Commentary by Eoin Treacy

Floods Slow Ivory Coast Cocoa Harvest Amid Worries About Rot

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

Heavy rains in Ivory Coast’s cocoa-growing areas are slowing the harvesting and sales of beans and farmers say they’re worried about black-pod disease rotting their crops.

Roads to plantations in the southwestern area of Meagui have been cut off after rivers overflowed and farmers can’t access their crops, which means they don’t know how the flowers and pods on the trees are developing, according to local grower Dongo Koffi.

“Everything is stopped at the moment,” he said by phone. “The sales have slowed down because we can’t harvest. Some farmers have some stocks of beans with them but they can’t sell them, because the roads aren’t accessible.”

While it’s still unclear whether Ivory Coast output will be materially affected, any losses due to the heavier-than-usual rainy season in the world’s top cocoa producer may help ease some pressure on prices, which have dropped by more than a third in the past 12 months amid expectations for a global surplus. The country, which is currently harvesting the smaller of two annual crops, is expected to produce a record amount this year.

 

Eoin Treacy's view -

Cocoa is trading in contango throughout the futures curve but doesn’t change the reality that cocoa needs both abundant rain in the growing season and dry weather once harvested to allow the pods to dry. That kind of variability in growing and maturing conditions is why cocoa is only grown in a relatively small number of equatorial countries with well-defined wet and dry seasons. 



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June 30 2017

Commentary by Eoin Treacy

June 30 2017

Commentary by Eoin Treacy

We are Witnessing the Development of a 'Perfect Storm'

Thanks to a subscriber for this interview of Bob Rodriguez which may be of interest. Here is a section:

Thus, since 2007, indexing or passive activities have risen from approximately 7% to 9% of total managed assets to almost 40%. As you shift assets from active managers to passive managers, they buy an index. The index is capital weighed, which means more and more money is going into fewer and fewer stocks.

We’ve seen this act before. If you didn’t own the nifty 50 stocks in the early 1970s, you underperformed and, thus, money continued to go into them. If you were a growth stock manager in 1998-1999 and you were not buying “net” stocks, you underperformed and were fired. More and more money went into fewer and fewer stocks. Today you have a similar case with the FANG stocks. More and more money is being deployed into a narrower and narrower area. In each case, this trend did not end well.

When the markets finally do break, as they always have historically, ETFs and index funds will be destabilizing influences, because fear will enter the marketplace. A higher percentage of assets will be in indexed funds and ETFs. Investors will hit the “sell” button. All you have to ask is two words, “To whom?” To whom do I sell? Index funds and ETFs don’t carry any cash reserves. The active managers have been diminished in size, and most of them aren’t carrying high levels of liquidity for fear of business risk.

We are witnessing the development of a “perfect storm.”

 

Eoin Treacy's view -

Will ETFs contribute to the next major stock market decline? How could they not? They represent a significant proportion both of daily traded volume and act as repositories for substantial inventories of stock.  In tandem with the prevalence of automated trading systems we already have evidence of dislocations in the spate of flash crashes we have largely become inured to. 



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June 30 2017

Commentary by Eoin Treacy

The economic origins of the populist surge

Thanks to a subscriber for this article by Martin Wolf for the Financial Times which may be of interest. Here is a section:

The four most adversely affected of these economies in the long term were (in order) Italy, Spain, the UK and US. Post-crisis, the most adversely affected were Spain, the US, Italy and the UK. Germany was the least affected by the crisis, with Canada and Japan close to it.

It is not surprising, then, that Canada, Germany and Japan have been largely immune to the post-crisis surge in populism, while the US, UK, Italy and Spain have been less so, though the latter two have contained it relatively successfully.

Thus the rise of populism is understandable. But it is also dangerous, often even for its supporters. As a recent report from the European Economic Advisory Group notes, populism may lead to grossly irresponsible policies. The impact of Hugo Chávez on Venezuela is a sobering example. At worst, it may destroy independent institutions, undermine civil peace, promote xenophobia and lead to dictatorship. Stable democracy is incompatible with a belief that fellow citizens are “enemies of the people”. We must recognise and address the anger that causes populism. But populism is an enemy of good government and even of democracy.

 

Eoin Treacy's view -

Mrs. Treacy was at the endocrinologist for a check-up this week, everything was fine but he made a comment which really stuck with me. He said too many people want to treat the number rather than the patient. It occurs to me that central banks tend to do the same thing. 



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June 30 2017

Commentary by Eoin Treacy

China Is About to Bury Elon Musk in Batteries

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

Roughly 55 percent of global lithium-ion battery production is already based in China, compared with 10 percent in the U.S. By 2021, China’s share is forecast to grow to 65 percent, according to Bloomberg New Energy Finance.

“This is about industrial policy. The Chinese government sees lithium-ion batteries as a hugely important industry in the 2020s and beyond,” Bloomberg New Energy Finance analyst Colin McKerracher said.

In all, global battery-making capacity is forecast to more than double by 2021 to 273 gigawatt-hours, up from about 103 gigawatt-hours today. That’s a huge opportunity, and China doesn’t want to miss it.

“The Gigafactory announced three years ago sparked a global battery arms race,” said Simon Moores, a managing director at Benchmark Mineral Intelligence. “China is making a big push.” 
But don’t count Tesla out. The company, based in Palo Alto, California, plans to announce locations for up to four new factories by the end of 2017. (It’s exploring at least one site in Shanghai.) And there are few, if any, individual Chinese battery companies that can match the scale of Tesla’s production toe to toe.   

 

Eoin Treacy's view -

China went from pretty much nowhere to become the dominant force in solar cell manufacturing in a relatively short time because of unwavering government support and could easily achieve the same feat in batteries. That is quite apart from similar objectives being pursued in South Korea and Japan. 



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June 30 2017

Commentary by Eoin Treacy

Australia Could Raise Rates Eight Times in Two Years: Ex-RBA Board Member

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

“The bigger the household debt, the more impact a quarter percentage point increase in the policy rate will have on household spending,” he said. “In the Australian case, it is certainly possible that high household home mortgage debt will crimp consumer spending if the policy rate returned to what was once considered a relatively low long-term rate.”

Still, Edwards noted that interest paid on Australian mortgages is much less than it was six years ago: while debt has increased, interest rates have fallen a lot. Payments are now 7 percent of disposable income compared with 9.5 percent in 2011, and 11 percent at the peak of the RBA tightening cycle before the 2008 financial crisis, he said.

Moreover, if the standard variable mortgage rate peaked at around 7 percent, that would still be nearly one percentage point below the 2011 level, and two-and-a-half percentage points below the 2008 peak, he said.

“The pace of tightening will anyway be governed by the strength of the economy,” Edwards said. “If household spending weakness, if the long expected firming of non-mining business investment is further delayed, if the Australian dollar strengthens, if employment growth is persistently weak, then the trajectory of rate rises will be less steep and the pace less rapid.”

 

Eoin Treacy's view -

Australian government bond yields bounced this week in a dynamic manner to signal a low of at least near-term significance. A sustained move below 2.3% would now be required to question potential for additional higher to lateral ranging. With RBA short-term rates at an historic low of 1.5% since July last year the potential for the rate to be close to low suggests yields have likely bottomed. 



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June 30 2017

Commentary by Eoin Treacy

Email of the day on Pascal Morin's new book

The summary of the back cover can be translated as: 

"Confessions of a liberal (nearly) repentant

The subprime debacle exposed the weaknesses of the European construction, the failure of the single currency, the excessive financialization of capitalism and the impoverishment of the middle classes and the lower classes. The rise of populism is the consequence. Europe has no other choice but its re-founding, in a geopolitical environment designed by the Americans, the Chinese and the Russians, of which it is gradually excluded. The financial position of France is so precarious that the recovery will necessarily be difficult, but essential to rebuild Europe. The year 2017 is starting a key decade for Europe: it will mark the renewal and reconquest, or the vassalization and the disappearance in the forgetfulness of history. 

This essay is an excellent tool of reflection written without taboos and with height of view; It is also a cry of alarm ... (Bernard Attali)"

http://livre.fnac.com/a10779112/Pascal-Morin-Des-subprimes-au-populisme#int=S:Derniers articles consultés|Droit|NonApplicable|10779112|BL1|L1

https://www.amazon.fr/subprimes-au-populisme-Pascal-Morin/dp/2358152218/ref=sr_1_1?ie=UTF8&qid=1498401666&sr=8-1&keywords=des+subprimes+au+populisme

http://www.editions-glyphe.com/wp-content/uploads/2017/06/Subprimes_BdC.pdf

 

Eoin Treacy's view -

Pascal Morin has been an acquaintance of mine since I was the Bloomberg account manager for Dexia Bank in Luxembourg back in 2001. He was the smart guy in the corner office all the private bankers went to when they had a question and has been working with Iain Little and Bruce Albrecht for much of the last decade. I look forward to reading the English translation of his work when it comes out. 



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June 29 2017

Commentary by Eoin Treacy

June 29 2017

Commentary by Eoin Treacy

Nasdaq Unhinged From Everything as Volatility Fits Won't End

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

“Everyone talks about the VIX, but there are undercurrents of significant volatility in the market,” Joe Sowin, head of global equity trading at Highland Capital Management LP, said by phone. “There’s a lot more volatility in tech this month and that’s in part due to stretched P/Es, positioning and breadth that isn’t good.”

The VIX wasn’t its usual docile self, either, on Thursday. The measure jumped 3.5 points to 13.56, the highest since mid- May. Losses in consumer and health-care stocks sent the S&P 500 down 1.1 percent to 2,412.05.

Other measures of tech turbulence tell a similar story. The CBOE NDX Volatility Index has averaged 15.1 in June and has repeatedly touched levels this month that represent its biggest gap to S&P 500 implied volatility, or the VIX, since the financial crisis.

Excess volatility in technology megacaps is partly a function of how fast they have run up. While the S&P 500 has tripled since markets bottomed in March 2009, gains in the Nasdaq 100 are approaching fivefold. After rising as much as 21 percent this year, valuations in the gauge sit 30 percent above their bull market average.

As was the case on June 9 when tech shares dropped 2.7 percent, the biggest laggards in the group Thursday were semiconductor stocks. KLA-Tencor Corp., Advanced Micro Devices, and Applied Materials Inc. weighed the most, with losses of more than 4 percent.

To Peter Cecchini, senior managing director at Cantor Fitzgerald in New York, that could mean that investors are second-guessing expectations for economic growth.

“A lot of these names are cyclical tech -- when you’re looking at economic slowdowns the semiconductors always get whacked first,” he said by phone. “Look at the durable goods data, it was a mess. Maybe these cyclical names are telling us something.”

 

Eoin Treacy's view -

There has been a major disconnect between volatility on the S&P 500 and the Nasdaq-100 over the last three months with the former holding at abnormally low levels while the latter has been trending higher. 



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June 29 2017

Commentary by Eoin Treacy

Macro Morsels on bank buybacks

Thanks to a subscriber for this report from Maybank which may be of interest to subscribers. Here is a section on bank responses to the relaxing of controls following the Fed’s stress tests:

American Express Plans 9% Dividend Hike, $4.4b Share Buyback 
Bank of America to Buy Back Up to $12b in Shares, Raise Dividend 
Citi Plans Up to $15.6b Buyback, Dividend Boost to 32c/Share 
Morgan Stanley Authorizes $5b Buyback; Lifts Dividend 25% 
Fifth Third to Boost Dividend, Buy Back Up to $1.16b Shares 
Huntington Bancshares Sets $308m Buyback, Boosts Dividend 
KeyCorp Sets $800m Buyback, Raises Qtr. Div to 10.5c from 9.5c 
Regions Financial Plans Up to $1.47b Buyback, Higher Dividend 
SunTrust to Boost Div to 40c; Sets Up to $1.32b Buyback 
State Street Sets $1.4b Buyback, Boosts Dividen

 

Eoin Treacy's view -

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

Banks have been constrained in how they can reward their shareholders because they were forced to rebuild capital, withhold even more to allow for future disasters and repay government bailouts. The fact they have almost universally passed the Fed’s latest stress tests suggests the monetary authorities are satisfied the sector has recovered enough that it can now be allowed greater leeway to exercise they balance sheets in favour of investors. 



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June 29 2017

Commentary by Eoin Treacy