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July 13 2018

Commentary by Eoin Treacy

July 13 2018

Commentary by Eoin Treacy

Global Crude Oil Supply-demand

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

The IEA forecasts that US crude oil production will increase 1,720,000bbl/day in 2018 and 1,190,000bbl/day in 2019. In the Permian region, which has been driving growth in output, the lack of pipeline capacity is likely to persist until 2019. Because of this, Midland oil prices are some USD14/bbl lower than the WTI price. With issues including rising production costs and a lack of engineers, too, we think US shale oil output is unlikely to substantially exceed current forecasts even if tightening supply-demand causes oil prices to rise. See our 11 July 2018 Global research report US crude oil output - Sharp slowdown in pace of increase in 2019.  We estimate that US production forecasts are predicated on WTI price assumptions of USD55-60/bbl for 2018 and USD60-65/bbl for 2019. We estimate WTI of around USD70-75/bbl were the aforementioned short supply to be made up with increased output in the US.

Eoin Treacy's view -

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

The USA’s onshore production of oil and gas continues to surge, fuelled by access to cheap credit. If we cast our minds back to 2015, private equity firms had amassed massive sums to invest in energy and that has helped to fuel the surge in US supply over the intervening period.



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July 13 2018

Commentary by Eoin Treacy

The "Big Bang" of Alzheimer's: Breakthrough study uncovers genesis of the disease

This article by Rich hardy for New Atlas may be of interest to subscribers. Here is a section:

Much modern Alzheimer's research concentrates on a specific protein called amyloid beta, and the clumping of that protein is suspected as being the primary pathological cause of the disease's symptoms. But, after a long series of clinical trial failures in drugs designed to target those amyloid beta plaques, some scientists are turning their research attentions elsewhere.

This new research focuses on a different protein, called tau. These tau proteins have been found to form abnormal clumps in the brain, called neurofibrillary tangles, which can accumulate and kill neurons. Some researchers hypothesize that this is actually the primary causative source of Alzheimer's disease.

Until now it was not known how, or when, these tau proteins began to accumulate into tangles in the brain. It was previously believed that isolated tau proteins didn't have a distinctly harmful shape until they began to aggregate with other tau proteins. But the new research has revealed that a toxic tau protein actually presents itself as misfolded, exposing parts that are usually folded inside, before it begins to aggregate. It is these exposed parts of the protein that enable aggregation, forming the larger toxic tangles.

"We think of this as the 'Big Bang' of tau pathology," says Diamond. "This is a way of peering to the very beginning of the disease process. It moves us backward to a very discreet point where we see the appearance of the first molecular change that leads to neurodegeneration in Alzheimer's."

Eoin Treacy's view -

Alzheimer’s is one of the only major killers that has no form of treatment. It represents a massive tax on the productive capacity of every family afflicted since the burden for care usually falls on the spouse and children before expensive care is called for. The slow but inevitable decline the disease entails means the cost of care rises inexorably often for more than a decade before fatality.



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July 13 2018

Commentary by Eoin Treacy

Climate Gentrification: A 21st Century Problem

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

The study finds considerable evidence of climate gentrification, and for the elevation hypothesis in particular. Properties at high elevations have experienced rising values, while those at lower elevations have declined in value. In fact, elevation had a positive effect on price appreciation in more than three-quarters of the properties and 24 of the 25 separate jurisdictions the authors examined. The study also found support for a secondary hypothesis, the “nuisance hypothesis,” which posits that price appreciation in lower-elevation places had not kept up with higher-elevation places since approximately 2000 due to nuisance flooding.

Generally speaking, the areas that had the strongest regression coefficients—that is, the places where elevation best predicted the change in real estate prices — are all along the coast and at the highest risk of flooding. They include Key Biscayne, Miami Beach, and a number of exclusive island enclaves, as well as Sunny Islands and Golden Beach to the north.

But these positive associations spanned land-locked communities as well as coastal ones. In fact, more than half of the jurisdictions with positive correlations —13 out of 24 — were landlocked. All of these have significant water exposure in the form of lakes and drainage canals. The largest jurisdiction in the sample, unincorporated Miami-Dade County, showed the lowest, but still positive, correlation.

Eoin Treacy's view -

I have no idea if projections for rising sea levels will in fact come to pass. However, there is enough of commentary about this subject right now that it is worth considering from the perspective of how fears of rising sea levels might affect behaviour. If this is taken in conjunction with estimates that hurricanes may become more powerful as a result of warming sea temperatures then that would be a contributing factor in changing sentiment towards property.



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July 13 2018

Commentary by Eoin Treacy

Eoin's personal portfolio July 12th 2018

July 13 2018

Commentary by Eoin Treacy

Vacation 2018

I will be taking two weeks off at the end of July, leaving for China on July 18th and back in action on August 1st. If anyone in the Collective would like to submit a guest article for publication between those dates please get in contact. 

I also received this email

No idea why this popped into my head whilst watching the World Cup !

You need content for the two weeks that you are off. You have a collective whom are educated people. Why don’t you invite everyone to email you the following which you will post:

Current investment positions and why
Best ever investment
Worst ever investment

Eoin Treacy's view -

This is an useful idea and at a rather interesting time. It would allow us as a Collective to think about why we hold what we do, so please feel free to share.  



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July 13 2018

Commentary by Eoin Treacy

Long-term themes review June 22nd 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

I realise this summary at 4600 words is getting rather lengthy which is why I decided to right another book to more fully explore the issues represented by the rise of populism and what that means for markets and the global economic order. I’ve agreed an August/September deadline so hopefully it will be available this year.



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July 13 2018

Commentary by Eoin Treacy

The 49th year of The Chart Seminar

Eoin Treacy's view -

If you have an interest in attending an online Chart Seminar please contact Sarah and we will arrange times based on the time zones of those who wish to attend. I envisage holding our first online seminar in late May or early June. 

There will be another Seminar in London in November and I am in initial discussions with a potential partner about organising a New York Seminar.

If you would like to attend or have a suggestion for another venue please feel to reach out to Sarah at sarah@fullertreacymoney.com.  

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



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July 12 2018

Commentary by Eoin Treacy

July 12 2018

Commentary by Eoin Treacy

MercadoLibre Shrugs Off Amazon With Brick and Mortar Focus

This article by Carolina Millan and Ed Hammond for Bloomberg may be of interest to subscribers. Here is a section:

"Our way of competing successfully is to look at all the players, see what they have that we think is great, and if we can incorporate that into our model, we will, but mostly play our game," Galperin said while speaking from Allen & Co.’s Sun Valley conference, and musing about this year’s global soccer championship. "As you know, we’re looking at the World Cup -- we try to play our game and use our advantages and our strengths. We have a great network of sellers, a great brand, we’re investing very heavily, we already have scale."

Shares of MercadoLibre gained as much as 2.2 percent in New York, the most intraday in almost a week.

It’s also betting on brick and mortar investments to improve service. Earlier this year, MercadoLibre announced a partnership for a 38,000-square meter distribution center in the greater Buenos Aires area. In addition, the company, which is providing loans to merchants and payment processing platforms, is working on a digital wallet that offers returns on whatever money is left, Galperin said. Infrastructure -- notoriously poor in Latin America -- is also a priority.

Eoin Treacy's view -

Many commentators have made the point that social media companies require broadband by either mobile or fixed line access to generate income from a market and therefore have an interest in promoting internet access. However, that is equally true of online retail. Wherever ubiquitous internet access is available online retail flourishes, along with its disruptive influence on the conventional retail sector. These maps of the internet’s pervasiveness may be of interest. 



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July 12 2018

Commentary by Eoin Treacy

Netflix Crowned New King of TV, Toppling HBO in Emmy Nominations

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

Netflix’s accolades follow a rapid ascent in the television world. After its start two decades ago as a DVD-by-mail operation, the company has become a Hollywood powerhouse, signing popular producers, comedians and actors for original content. The company spends about $8 billion a year on new shows and films, far exceeding HBO and other competitors.

“Netflix has proven to be a welcoming home to A-list talent,” said Bloomberg Intelligence analyst Paul Sweeney. “And they have the checkbook to back it up.”

Other streaming services are getting more Emmy recognition, includingAmazon.com Inc. and Hulu. “The Handmaid’s Tale” contributed to 27 nominations for Hulu, while “The Marvelous Mrs. Maisel” helped Amazon collect 22.

Eoin Treacy's view -

Netflix is another company that has gone for scale ahead of profitability in the hope that it will be able to garner critical mass and market share before its competitors in the legacy sector of cable and theatres sector have time to catch up. So far, the strategy has worked and many people, myself included, have traded their cable/satellite TV for the convenience of Netflix.



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July 12 2018

Commentary by Eoin Treacy

Musings from the Oil Patch July 10th 2018

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. This week it contains some interesting commentary on estimates of sea level rises but here is a section on electric vehicle demand:  

There are many reasons why EVs are popular in California.  Continuing to lead national social trends, the large population of wealthy entertainment and technology people love to show off their social awareness credentials, while taking advantage of lucrative financial and other driving benefits by purchasing EVs.  Those benefits are being reduced as EV car manufacturers reach the limits at which federal tax subsidies for EVs are eliminated.  The state has recently decided to double down and boost spending to subsidize EV sales.  What is interesting, however, has been the elimination of the right to drive EVs in High Occupancy Vehicle (HOV) lanes in Southern California with one person, as too many vehicles have slowed lane speed and increased accident risk when EVs are entering and exiting HOV lanes.  When the Toyota Prius lost use of HOV lanes, sales fell the following year.  Prepare for similar shocks.  

Eoin Treacy's view -

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

Tesla will soon or potentially already has achieved 200,000 vehicles in sales which will mean that the $7500 subsidy buyers receive when taking delivery of cars will disappear. That’s a headache for the hundreds of thousands of people waiting to get their model 3s.



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July 11 2018

Commentary by Eoin Treacy

July 11 2018

Commentary by Eoin Treacy

Goldman Says Market Melancholy Is Recipe for Big Earnings Season

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

Relax, says Goldman Sachs -- enough has changed that a replay is unlikely. Bulls should take heart, says David Kostin, the firm’s chief U.S. equity strategist, because whatever euphoria infected markets in the first part of the year has long ago dissipated. Hedge fund clients who were aggressively positioned heading into April are more conservative now, with exposures sitting near the bottom of their 12-month range.

“Going into Q1 earnings season, it was peak optimism,” Jeff Schulze, an investment strategist at ClearBridge Investments in New York, said by phone. “Now you have exactly the opposite situation where that optimism has been converted to pessimism.

As long as companies can hit those estimates, I think the market will reward those, rather than punishing them.”

Fundamentally, the second quarter will look a lot like the first as far as results go. S&P 500 companies are forecast to report 20 percent growth from a year ago and sales are likely to rise 8 percent, mirroring the previous period, which was the best since 2011.

Eoin Treacy's view -

The media’s number one story today has been the tariffs and the prospect of an all-out trade war between China and the USA. At the same time the USA is entering into this situation while engaged in fiscal stimulus while China is tightening to close out speculation in the shadow banking system. That has contributed to very different performance in their respective stock markets.



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July 11 2018

Commentary by Eoin Treacy

Email of the day on currencies and stock market performance:

Thank you for your always articulated views on the general macro. Highlighting the China risk (“China deserves an additional risk premium”) and the direction of credit spreads (“EU junk spreads have been on the rise in 2018”) are particular eye opening

One point on USD though. In your videos resp. online reports, you say / write that the USD should get stronger. One of the reasons you add to the commentaries is that the FED is on its hiking path and the interest rate differential makes the USD interesting relative to zero / negative interest currencies. In addition, you write that Gold suffer when nominal rate rise less than inflation (i.e. real rates rise) and when the USD is on the rise. I hope I am correct in the summary. Otherwise please correct me.

If I look at the recent history I am puzzled to note following: the FED started to raise rate in Dec 2015 and EUR/USD was at around 1.08 USd per EUR. Likewise gold was trading at something like 1’100 USD / Oz.  at the same time.

How is it that 1+6 hikes later (1 in 2015, 1 in 2016, 3 in 2017 and 2 in 2018), EUR /USD is at 1.17 and gold is at 1.250 (and was 1300 just 2 weeks ago)? shouldn’t rate hikes make the USD interesting relative to ZIRP / NIRP countries like the EU Area or Japan?

Isn’t it that the current dollar strength is nothing more than an adjustment of a USD oversold condition prevalent until April? (due to lots of carry trades with EM currencies accumulated last year, most of which are done via a cross on the USD because of liquidity constraints with smaller currencies)

And that when the entire market hysteria around tariffs and on Trump tweets on NATO, on Germany and China retaliations threats etc. etc. calm, we will see the normal path of rising US interest rates and a falling USD combined with a rising JPY and EUR and rising Gold again? at the end of the day this makes sense. Otherwise it would be like a free lunch (buy USD, invest at higher rate and gain on the exchange rate). it cannot last forever.

Negative interest rates and ZIRP are deflationary policies. It makes sense for the EUR and JPY to appreciate.

Am I missing something?

Ps: if I look at history on other countries, higher rates are not supportive for a currency. Look at Turkey, Argentina, etc. All down sharply. the higher the rates to stem a crisis, the lower the currency.

On the other end, when the Bank of Russia reversed its super high interest rate policy after the 2014 crisis, RUB (and its equity market) started to recover. And RUB was also relatively stable during the most recent EM crisis

I would not be surprised to see TRY doing the same if the new governor reduces rates (the FT reported that Erdogan is not a fan of high rates) and the ministry of finance enact a policy aiming at reducing the current account deficit. Then TRY should recover despite the bad-to worst governance structure of the country

I would be interested in hearing your view on that

Best regards and nice holidays in China!

Eoin Treacy's view -

Thank you for this email which raises a number of points about currencies and what we can expect from various asset over the medium-term.

I think the most important thing to remember about currency markets is that they are a discounting mechanism just like equities and bonds. When we think about interest rate differentials it does not make sense to look at today’s levels because that is already in the price. We need to look further out.



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July 11 2018

Commentary by Eoin Treacy

Crude Crumbles Under Trade War That Imperils Economic Growth

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

“There’s no doubt that that uncertainty continues to weigh, not only on the crude oil markets, but really all markets,” said Brian Kessens, who helps manage $16 billion in energy assets at Tortoise. As for the storage report, “there was a little bit of noise in the data. It just depends when the ships actually hit the docks.”

Oil topped $75 a barrel last week amid actual and anticipated supply disruptions from Canada to the Persian Gulf.

Saudi Arabia has promised to ramp up output to help cover shortfalls from other major suppliers, though some observers questioned the kingdom’s capacity to do so.

In the U.S. Gulf Coast region that includes refining centers in Texas and Louisiana, oil imports plunged by 1.13 million barrels last week, the steepest decline since September 2012, according to the EIA.

“There’s a sense that Saudi Arabia’s going to increase their exports to the U.S.,” Kessens said. “There’s a lingering sense in the back of people’s minds that we’ll see that a little bit later this summer.”

Eoin Treacy's view -

Oil prices have been firm because economic growth has been robust, OPEC had been reducing supply and major suppliers like Libya and Venezuela have dropped out of the market. News today that pro-government forces have retaken four of Libya’s export ports suggests supply will start flowing once more. Meanwhile the threat to China’s economy from a ratcheting up of tariffs is a simmering issue. 



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July 11 2018

Commentary by Eoin Treacy

Eoin's personal portfolio April 11th 2018

July 10 2018

Commentary by Eoin Treacy

July 10 2018

Commentary by Eoin Treacy

China in Ten Charts A New Impossible Trinity

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

However, China faces a new policy trilemma: if President Xi Jinping truly prioritises reforms over growth, we must see more corporate defaults or foreign borrowing. But if the government does not want higher offshore USD debts, they must sacrifice some growth. They can’t have all three. 

Removing the implicit government guarantee is a necessary evil. Since the national fiscal audits in 2013 and 2015, the central government has tried to detach itself from ill-defined liabilities, notably the local government financing vehicles (LGFVs). 

This is done via taming shadow lending (slide 5). Since these activities were a key funding source for LGFVs, SMEs, and other borrowers which major banks do not serve, we must see credit spreads surge as a result of the deleveraging process (slide 6).

Many corporates opted to borrow from offshore (slide 7) in 2017. However, the rapid rise of foreign debt has triggered policymakers’ concern (slide 8). In Q1 2018, China’s foreign liabilities hit a record high of USD1.8trn (29% y/y), extending its uptrend since Q1 2016. 53% of it was USD debt and 64% were short-term debt. Meanwhile, Q1 also saw China’s first current account deficits since 2001 (slide 9). Going forward, the outlook for China’s FX reserves position deserves attention. 

We believe that slowing GDP growth is not a risk; the temptation to pump prime the economy is. The RRR cuts in April and July are unlikely to be monetary policy responses to growth risks. Any impact from the US-China trade war is still insufficient to halt the deleveraging process (slide 10). Thus, we believe the cuts are a response to the normalised ‘M1-M2 gap’ (slide 11) which indicates shadow lending is under controlled. Chinese regulators are tackling credit allocation on banks’ balance sheets under the flag of ‘structural deleveraging’. GDP growth will still slow (ANZ: 6.3% for H2, slide 12). Market sentiment will be poor. But targeting growth over reform will be worse, in our view.

Eoin Treacy's view -

A link to full report and section from it is posted in the Subscriber's Area.

China has banned borrowing in US Dollars and it is closing off funding to highly leveraged regional governments, infrastructure projects and businesses. At the same time, it is allowing the default rate to rise. If we were asking where borrowers are supposed to get the funding they need to refinance or continue operations, we have our answer. Defaults are going to rise further.



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July 10 2018

Commentary by Eoin Treacy

Email of the day on Brexit and likely outcomes

On the latest events, I think this table in attachment is reasonable and persuasive in content.

Basically, it indicates the following as yet the most likely scenario:

“Soft Brexit - Stay in the EEA and Customs Union, or never-ending Transition”

Then expanding to say:

“The EU sticks to its principles and does not allow the Single Market to be broken up. The government and the public become more fearful of the impact of a hard Brexit. No other option solves Irish border issues. Alternatively, the Tories implode or delay Brexit until after the next election, which Labour wins”

It would then become – in my opinion – imperative to open a serious debate re how referenda are done and forbid those on international agreements… I think it has been abundantly demonstrated they are a folly. With good governance restored the country would finally be able to move forward.

Eoin Treacy's view -

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

Thank you for this graphic and email which may be of interest to subscribers. Muddle on has been the policy of choice followed throughout the negotiations where the EU has gotten just about everything it wanted and the UK has made one concession after another. That suggests the UK government has concluded it has more to lose from a “hard” Brexit than the EU.



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July 10 2018

Commentary by Eoin Treacy

Electric vehicle demand will double nickel price as soon as 2022

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

While stainless steel production – currently nearly 80% of total demand for nickel – is expected to stay solid over the coming years, booming demand from the electric vehicle battery market is set to fundamentally alter the structure of the industry.

Michael Sinden, WoodMac Research Director, and Senior Research Analyst, Rory Townsend say in their long-term outlook for nickel that demand for nickel in EV batteries will contribute 1.26 million tonnes to nickel demand in 2040.

That compares to total primary nickel production last year of not much more than 2 million tonnes.

Slightly more than half the total is from so-called Class 1 producers which is suitable for conversion into nickel sulphate used in battery manufacture. Class 1 nickel powder for sulphate production enjoys a premium of as much as a third over LME reference prices, but for miners to switch to battery grade material requires huge investments to upgrade refining and processing facilities.

Eoin Treacy's view -

Tesla announced today that it is going to be building another large battery factory, this time in China. Meanwhile Contemporary Amperex Technology (CATL), which is China’s largest homegrown battery manufacturer is quite likely to outstrip Tesla’s production capacity within the next few years. Meanwhile Nissan announced yesterday that it also cheated on emissions systems which is likely to further fuel the trend towards delivery of electric vehicle models.



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July 10 2018

Commentary by Eoin Treacy

Shipowners on Pace to Scrap $1 Billion in Oil Tankers This Year

This article by Costas Paris for the Wall Street Journal may be of interest to subscribers. Here is a section:

Some 1,000 vessels are broken up every year and their steel and other metals are melted or simply stacked up and sold to factories. The yards in the Indian subcontinent recycle around 80% of all ships, with the remainder going to China and Turkey, although Beijing has said it will suspend scrapping starting next year.

The average age of VLCCs going to scrap this year is 18.8 years, the youngest since 2013, according to VesselsValue. A ship’s average operational age is around 25 years, but after 15 years in the water, the vessel has to go through an extensive survey to determine if it is seaworthy. “An average survey costs about $2 million, and you have to do it again at 20 years, so a number of owners opt to scrap instead,” Mr. Sharma said.

The oil glut is also sending offshore rigs to scrapyards. It is a relatively new business that has boomed over the past five years, as the cost of drilling at sea is much higher than inland exploration. At least 18 rigs have been broken up so far this year, compared with 46 last year, according to GMS.

Eoin Treacy's view -

The cost of maintaining a fleet of aging ships has risen considerably over the last few years because of the imposition of the long-awaited restrictions on bilge water discharge and environmental restrictions on diesel fuel. That is in addition to the cost of supporting vessels in a hostile maritime environment. These costs are helping to remove excess inventory from the market after a lengthy bear market.  



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July 09 2018

Commentary by Eoin Treacy

Video commentary for July 9th 2018

July 09 2018

Commentary by Eoin Treacy

China Stocks Rebound With Biggest Gain Since 2016, Yuan Climbs

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

Chinese stocks are still among the world’s worst performers this year. In addition to the trade war threat, investors have been troubled by a domestic deleveraging campaign weighing on liquidity, signs of an economic slowdown, and a weaker currency.

The Shanghai index is in a bear market after dropping more than 20 percent from its January high. “There’s room for a technical rebound after the selloff in past few weeks, while regulators’ positive comments on A shares showing value also helped,” said Shen Zhengyang, Shanghai-based strategist with Northeast Securities Co.

The Shanghai Stock Exchange said in a statement Sunday that valuations of companies listed on the exchange and big-cap blue chips are at reasonable or even relatively low levels when compared with peers in major economies. Value is emerging after recent declines, it said.

China International Capital Corp. said there’s medium-to- long term opportunities in A shares as valuations and sentiment have hit the bottom, while brokerages including Citic Securities Co. and Essence Securities Co. now expect the market to rebound.

Credit Suisse Group AG remains cautious, forecasting further losses over the coming weeks. It added that the downside would be limited by solid fundamentals.

Eoin Treacy's view -

The Renminbi has bounced over the course of the last week and is looking increasingly likely to stage a reversionary rally back towards the region of the trend mean.



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July 09 2018

Commentary by Eoin Treacy

May Fights to Contain Brexit Crisis After Key Ministers Quit

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

“The dream is dying, suffocated by needless self-doubt,” Johnson wrote. “It is as though we are sending our vanguard into battle with the white flags fluttering above them.”

Straight after her Commons appearance, May went to a packed meeting of rank-and-file Tory lawmakers, where she spoke and took questions for an hour about her plan. There were some voices of dissent during the gathering, one lawmaker said as he left the room, though the end was marked by loud cheers.

Geoffrey Cox, who campaigned to leave the EU, said he can offer May’s proposals to voters with a clear conscience. “This deal does represent a giant step out of the EU,” he said after the meeting. “If I didn’t think so, I wouldn’t support it.”

But Jacob-Rees Mogg, chairman of the pro-Brexit European Research Group, warned that May would split her party if she relies on opposition Labour votes to get her plan through Parliament. The premier’s team briefed Labour Party lawmakers on Monday in an apparent effort to try to count on their support if her own side lets her down.

Eoin Treacy's view -

The UK is still grappling with widely differing visions for what a post Brexit situation will look like and the fact that there has not been an immediate call for a vote of no confidence in Theresa May highlights just how tenuous the Party thinks its hold on power is if an election were to be called.



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July 09 2018

Commentary by Eoin Treacy

Goldman Sachs CEO Lloyd Blankfein interviews Paul Tudor Jones

This interview may be of interest to subscribers.

July 06 2018

Commentary by Eoin Treacy

July 06 2018

Commentary by Eoin Treacy

Japan's Wage Jump Offers Fuel to Ignite Stalled Consumption

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

The figures come at a critical time for Japan’s mission to generate stable inflation. Price growth has softened in recent months and household consumption continues to show signs of weakness. Separate data released Friday showed household spending slid 3.9 percent in May from a year earlier.

Atsushi Takeda, chief economist at Itochu Corp., says strong gains in wages will be needed for many more months before consumption is likely to show a response.

"There’s no question that wages are improving," he said, commenting on the latest figures and citing the results of annual wage negotiations earlier this year. "But people need a substantial period of wage gains to be convinced that wages will keep rising."

The gain in overall wages was partly attributable to a 15 percent jump in bonus pay that reflects continued strength in Japanese corporate earnings.

Eoin Treacy's view -

Japan has a tight labour market, where more women are being encouraged into the workforce and the number of immigrants is rising as jobs go unfilled. Bonuses are not enough to stoke consumerism because they are by nature a one-off event so persistent wage gains will probably be required to stoke consumer demand.



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July 06 2018

Commentary by Eoin Treacy

Art accelerates past wine to take the chequered investment flag

Thanks to a subscriber for this report by Frank Knight which may be of interest and includes a number of interesting graphics. Here is a section:

This time last year art was almost at the back of the Knight Frank Luxury Investment Index (KFLII), but 12 months later it has moved through the field to overtake wine and claim first place with growth of 21% to Q1 2018. Salvator Mundi, a work by the Old Master Leonardo da Vinci, turbo charged the headlines when it was sold for a staggering $450m last year, but paintings by less well-known artists have also been notching up multi-million dollar results, says Sebastian Duthy, of Art Market Research. “Prices for works by Impressionists and post-war artists have dominated auction sales for the past two decades. But this picture has been changing, with works by some contemporary artists appreciating rapidly in the last few years. “In March, artist Mark Bradford hit the headlines when his painting ‘Helter Skelter I’ was sold by ex-tennis star John McEnroe for a record $10.4m at Phillips in London. In May, rapper Sean Combs, aka P Diddy, paid $21.1m at Sotheby’s for a painting by artist Kerry James Marshall. The figure represents an 800-fold increase on the $25,000 paid for the same work in 1997.”

Eoin Treacy's view -

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

Asset price inflation has been the singular success story generated by quantitative easing. The upward trend in the price of collectibles is a function both of growing economies but also of the quantity of money chasing a limited number of items. Since inflation has not been a major factor over the course of the last decade then money supply growth and the rise of a new wealthy class, not least in China, has fueled this market. With central bank balance sheets now contracting, it is a big question whether this growth will consider next year.



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July 06 2018

Commentary by Eoin Treacy

Imperial Takes on Juul as Big Tobacco Faces Upstart Rival

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

The rise of a new entrant in the U.S. and last year’s 18 percent decline in the cigarette market in Japan, where heated-tobacco devices have become popular, have investors worried that an industry known for steady profit growth faces an increasingly uncertain future. Imperial’s shares have fallen 17 percent in the past year.

Cooper told investors this week that Japan was the only market where she expects rapid disruption for the tobacco industry and that the popularity of e-cigarettes in the U.K. and the U.S. means overall nicotine consumption is growing there.

Juul gives vapers a hit comparable to that of a cigarette because it contains benzoic acid, which makes it easier to deliver nicotine at a lower temperature without being harsh to the throat. After its success in the U.S., the startup vape brand is expanding internationally. To fund that effort, the company is said to be raising $1.2 billion in a financing round that would value it at $15 billion. Juul’s slim device, which looks like a flash memory drive, has captured the imagination of young consumers as word spreads via social media.

Eoin Treacy's view -

Defensive sectors tend to do well at the end of cyclical bull markets because the reliability of their dividends suddenly become attractive when growth stocks eventually lose their lustre. 



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July 06 2018

Commentary by Eoin Treacy

Email of the day on the marginal cost of production for silver:

The average marginal cost of production for gold is currently about USD1,000 per troy ounce. What is it for silver? And its also per troy ounce? Thanks in advance.

Eoin Treacy's view -

Thank you for this question which other subscribers may also have an interest in. This article from AmericanBullion.com may be of interest. Here is a section:

By the 20th century, however, silver mining changed. A relatively small percentage of silver originates from traditional silver mines (approximately 25-33%, depending on the year). Nowadays, most of the world’s new silver comes from mines that focus on other metals. For example, a zinc mine in Mexico may pull out 65% zinc, 25% silver, and 10% lead. Since this mine would categorize as a “zinc mine,” the silver production is referred to as “byproduct metal.” Most new silver is byproduct.



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July 05 2018

Commentary by Eoin Treacy

Video commentary for July 5th 2018

July 05 2018

Commentary by Eoin Treacy

Email of the day on when it is best to hold cash:

I’d love to join you in China. I’ve not been there since 1996 but went frequently between 1983 and 1990. Never made money there but that did not quell my belief in China and its people. Since my last email some three months or so again when I suggested that it might make sense to hold more cash, you have (appeared to me) to become increasingly concerned about stretched values and tightening credit markets. I still hold very little cash having made the mistake of reinvesting much of what I had earlier raised. Like a rabbit in the headlights, I’m currently paralysed but feel fairly certain the sensible thing to do would be to hold cash and wait patiently. I doubt if I shall actually be able to do that. My interpretation of your views today is that you think we could see a sharp downward move in markets due to credit tightening, China and global political manoeuvring but that long term a secular bull market remains in place. What you don’t say is whether you believe it’s best to sit tight in equities or lighten, if not eliminate, equity positions and hold cash. Perhaps there’s no reason why you should. However, at times like this, I wish I had a subscription model business like yours and did not actually have to rely on my investments!

Eoin Treacy's view -

Thank you for this email and I have no reservations saying my family enjoy visiting China but we have no desire to live there. Guangzhou is my favourite city not least because of the quality of the food, friendly people and warm weather.

Your email raises a very important point about when to raise cash. First of all, however, I would like to dispel any illusion about whether our interests are aligned. A subscription business is only effective as long as it has subscribers. The only way it can survive therefore is to generate something of value, that is not easily found elsewhere, and to provide it to as wide a field as possible. We do no marketing, relying primarily on word of mouth. Therefore, I have a very clear interest in you doing well from your investments.  



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July 05 2018

Commentary by Eoin Treacy

Email of the day on gold and David's health

Was that not a key-day reversal by London spot gold on July 3? Wonderful service. News about David would be welcome.

Eoin Treacy's view -

Thank you for this email and I am happy to say David is increasingly active and up to walking a few miles a day. He is as interested in the markets as ever but internet connections are not all they might be in rural Devon where he is convalescing. His heartfelt wish is to return to commenting on the market in a limited capacity at some stage but is not up to that challenge just yet.



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July 05 2018

Commentary by Eoin Treacy

With Tariff Deadline at Hand, Businesses Brace for the Fallout

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

And China has been shifting soybean purchases to Brazil, from which it bought nearly 30% more beans in May than it had a year earlier, according to research firm CEIC. Chinese importers have mostly stopped buying U.S. soybeans, said Paul Burke of the U.S. Soybean Export Council, and agricultural giant Cargill Inc. worries about a longer-term shift to other suppliers.

By value, soybeans are the top item targeted by Beijing’s proposed tariffs; China imported around $14 billion in U.S. soybeans last year, according to Wind Information

In all, China’s tariffs would cover 545 categories of U.S. products, while the U.S. tariffs would cover 818 categories of products from China.

Eoin Treacy's view -

The USA and Brazil are by far the largest exporters of soybeans in the world and if China is no longer buying soybeans from the USA it will soon run out of places to buy. What happens when Brazil’s stores run out? China is not about to stop consuming tofu, soybean oil, soy sauce or other soy products. With prices at such low levels, farmers are going to be planting fewer soybeans and that will create a supply shortage at some point.



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July 04 2018

Commentary by Eoin Treacy

Video commentary for July 4th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: China continues to underperform with particular focus on smaller financials and brokers, copper breaks downwards, oil steady, precious metals steady, Europe continues to pause, global financial conditions are tightening. 



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July 04 2018

Commentary by Eoin Treacy

China to be less interventionist on yuan than in 2015

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

While the intervention underscored Beijing’s desire to inject confidence in markets that have been roiled by the trade war fears, the sources say policymakers would tolerate a weaker yuan to help cushion a slowing economy and take some of the sting out of Washington’s proposed tariffs on its exports to the United States.

“Policymakers believe some yuan depreciation is okay, but they don’t want to see it falling below 6.9. Appropriate currency depreciation is needed given that the economy faces downward pressure,” one policy insider said.

A second policy source echoed those views: “there is no big problem with the yuan depreciation. It could be beneficial as the economy is slowing. We are able to control capital outflows. There is no need for aggressive intervention.”

Eoin Treacy's view -

China is not going to tolerate having a strong currency when it is the subject of trade tariffs aimed squarely at containing its economic and geopolitical expansion.



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July 04 2018

Commentary by Eoin Treacy

Copper May Need a Very Hot Chile to Save it From a Cool China

This note by Benjamin Dow for Bloomberg may be of interest to subscribers. Here it is in full:

Looking at LME copper's current price levels, ie near a 10-month low, it seems it would take more than the risk of labor conflict in Chile to keep the red metal from slipping further to $6,000 per tonne -- especially considering the state of the Chinese economic path, which is currently searching for answers.

Verbal intervention in the tumbling yuan and the do-or- don't nature of the deleveraging debate don't give copper longs much of a handle to grasp. In addition, there's the tense wait for the global trade-war boot to drop, and the fact that copper has risen for seven of the past ten quarters. Chilean mine strikes may have to be acrimonious and long to save Dr. Copper.

Eoin Treacy's view -

China is the world’s largest consumer of industrial resources and its markets are currently in a state of flux as measures to contain speculation are being complicated by worries about trade tariffs. Meanwhile the trend of workers demanding higher pay is not isolated to any one country so there is scope for labour disruptions but that is a not a predictable outcome.



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July 04 2018

Commentary by Eoin Treacy

Replaced His Acura's Windshield. Then the Self-Driving Feature Tugged Him Into Oncoming Traffic

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

“I thought [the repair} was a pretty standard procedure,” Ash told CBC News. But after the repair was completed, when he went to drive the car, “It was actually pulling me into oncoming traffic. … it was a startling feeling to have the steering wheel actually pulling you into traffic.” Ash said he was able to control the car and get it back into lane.

According to Ash, a technician at the glass shop pointed at the camera, but Ash doesn’t recall hearing that person suggesting having the camera re-calibrated, which would most likely be at the dealership. Ash told CBC there was fine print in the invoice that talked about having the camera re-calibrated — fine print being the thing almost no one ever reads until there’s a problem. And the manual, which many people do read, says nothing about this.

Eoin Treacy's view -

It is to be hoped that assassinating the driver for using an independent vendor is a bug rather than a feature of self-driving cars. On a more serious note the obvious path to profitability for car companies is to make money on maintenance and repairs if they are constrained by the profitability of the vehicles. That is particularly relevant for electric cars where companies are losing money on every vehicle.



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July 03 2018

Commentary by Eoin Treacy

Video commentary for July 3rd 2018

Eoin Treacy's view -

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

Some of the topics discussed include: China jawbones the Renminbi higher, emerging markets currencies receive some respite, platinum bounces from the $800 level following climactic decline, stock markets remain weak, bonds steadying, high yield spreads breaking out.



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July 03 2018

Commentary by Eoin Treacy

China Verbally Props Up Yuan, Claims It's Not Trade-War Weaponry

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

“The PBOC is sending a verbal warning and intervention that the recent slump in the yuan was too quick,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “In the short term, the yuan could strengthen as traders take profit from the recent slide. But if the market ignores the PBOC and keeps pushing the yuan weaker quickly, the central bank may conduct heavy intervention to send a stronger signal.”

While there were no heavy-handed actions in the market, there were some signs of mild, suspected intervention during morning trading on Tuesday. Some major Chinese banks sold the dollar after the yuan slid past 6.7 per greenback, a move that strengthened the currency above that level, according to four traders who asked not to be named.

“The market sentiment is very one-sided, all the hedging and trading flows are all pointing to further weakening of the yuan," said Ryan Lam, head of research at Shanghai Commercial Bank Ltd. "The yuan is going through a very bad cycle now."

Eoin Treacy's view -

The Chinese banking sector is labouring under renewed measures to contain property market speculation and the shadow banking sector. That makes raising interest rates difficult because it would act as a headwind to the economy at a time when high yield defaults are already rising.



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July 03 2018

Commentary by Eoin Treacy

Taiwan's Technology Secrets Come Under Assault From China

This article by Chuin-Wei Yap for the Wall Street Journal may be of interest to subscribers. Here is a section:

 

Taiwanese government officials and company executives say China is deliberately targeting Taiwan, whose manufacturers make chips for the biggest American companies, including Apple Inc., Nvidia Corp.and Qualcomm Inc. They say China aims both to pressure what it considers a breakaway province and to pursue its goal of reducing its reliance on foreign suppliers.

Technology-theft cases more than doubled to 21 last year from eight in 2013, according to official data. Taiwanese authorities and attorneys say they mostly haven’t indicted Chinese entities believed to be the ultimate beneficiaries, often for political reasons and because they don’t believe they would be able to enforce court judgments on the mainland.

While China manufactures most of the world’s smartphones and computers, it imports almost all the semiconductors needed to provide the logic and memory that run the gadgets. Last year, China paid $260 billion importing chips—60% more than it spent on oil. Chinese leaders want homemade chips to account for 40% of locally produced smartphones by 2025, more than quadruple current levels.

Eoin Treacy's view -

China’s Achille’s heel in a trade war is that it depends on imports of semiconductors to fuel the continued evolution of its higher value-added manufacturing sector. It can put tariffs on soybeans but it still has to import semiconductors and that is not only a business weakness but a geopolitical issue for the country.



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July 03 2018

Commentary by Eoin Treacy

Email of the day on volume at major peaks and troughs

I hope this email finds you and yours in fine spirits, especially ahead of your holiday in China. In August 1982 it was pointed out to me that the Dow Jones had undergone its largest volume in transactions ever. The argument was that people had held on and held on in the hope that something would change, remembering that the Dow had traded sideways, basically between 1000 and 500 for 16 years, since the 1966 peak. That those who sold had given up the ghost and those who bought were a whole new generation of optimists. Obviously, the new generation where proved correct, as apart from a minor hiccup in 1987 the market went on a secular bull market until the year 2000.

Since that time, I have always used market volume indicators, both for stock markets and individual share prices as short and medium-term indicators of sentiment and any change therein. During today’s check through my favourite charts I noticed that 3 weeks ago the Russel 2000 and the DJ Wilshire 5000 float had their largest volume spikes in at least 5 years.

I was using your weekly charts. Do you think we might be entering a similar change in sentiment which seems to be encapsulating the majority of global stock markets at the moment?  FYI global stock market trading peaks gave me the confidence to increase my equity exposure in 2003 and 2009. Personally, I do not think that volume spikes at a low or a high are coincidence, but indicate a change of investor sentiment in this ever-intriguing global market

Eoin Treacy's view -

Thank you for this interesting observation and I agree that spikes in volume, particularly following accelerations can be indicators a panicky buying or selling.



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July 03 2018

Commentary by Eoin Treacy

Email of the day on how to invest in water

With world population growing the need for clean water is growing as well. How can one invest in this sector?

Eoin Treacy's view -

Thank you for this question which comes up from time to time. Water is essential to life and in short supply where the majority of people live. However, for just that reason the majority of infrastructure is controlled by governments because it is difficult to pass through the full cost of building infrastructure to consumers. Nevertheless, there are a number of ETFs which invest in pipe, metering, waste management and utilities that offer exposure to the sector.



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July 02 2018

Commentary by Eoin Treacy

Video commentary for July 2nd 2018

Eoin Treacy's view -

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

Some of the topics discussed include: China continues to underperform with banks leading lower, junk bonds break lower, emerging market currencies under pressure from higher US interest rates, Wall Street rallies off lows to finish at high of the day 



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July 02 2018

Commentary by Eoin Treacy

Mexico's young democracy is facing its sternest test yet

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

The most troubling and tragic threat to Mexico’s democracy is violence. Since campaigning began in September 2017, 132 politicians (jpg), including 48 official and aspiring candidates, have been killed, according to Ellekt, a consulting firm.

The most recent murder happened on June 25 in the southern state of Oaxaca. Emigdio López Avendaño, a candidate for local representative from AMLO’s party, MORENA, was gunned down along with four of his supporters.

The level of violence represents a huge spike from the run-up to last presidential election, in 2012, when less than a dozen politicians were killed, according to Ellekt. The firm’s director, Rubén Salazar, attributes the increase to state governors’ waning control over municipalities. Thanks to free elections, voters have been kicking out incumbents from governor’s offices around the country—a step forward for democracy. But at the municipal level, it’s had the perverse result of clearing the way for local strongmen to hijack the election process, sometimes at gunpoint.

“These changes have happened faster than the transformation of the political and democratic culture at the local level ,” he said in an interview in Artistegui Noticias (link in Spanish).

Eoin Treacy's view -

The three primary tenets of improving governance that we look for in an investment destination are that it have respect for minority shareholder interests, an independent judiciary and a free press. Those attributes increase the potential that economic growth will flow through to the stock market and that you will be able to get your money out when it comes time to sell.



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July 02 2018

Commentary by Eoin Treacy

China Rebound's Gone Within a Day as Even Biggest Stocks Crumble

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

The list of negatives facing the $6.6 trillion stock market is growing. The economy is already showing signs of vulnerability to a U.S. trade war before new taxes are levied at the end of this week. Analysts and investors alike are struggling to keep up with the yuan’s descent, while there’s been little sign of heavy state intervention to stem the slump in either stocks or the currency. Concern is also growing over the health of the country’s massive property market.

"Sentiment will remain bad in the near term," said David Qu, economist at Australia & New Zealand Banking Group Ltd. in Shanghai. "The market doesn’t hold high hopes that China and the U.S. will find a way out before the tariffs are imposed."

The Shanghai Composite has only risen on four days out of the past 15, and on each occasion the gauge has closed lower the following trading session. A momentum indicator is near a five- year low, while losses in Chinese bourses have topped $2 trillion since January’s peak. In percent terms, the Shanghai measure is the world’s worst after Argentina with a 22 percent retreat in the period.

"It would be a bad time to buy right now as pessimism prevails," said Liang Jinxin, Shanghai-based strategist with Tianfeng Securities Co.

Eoin Treacy's view -

Prime Beijing and Shanghai Property prices are not far off the levels of the world’s most expensive property markets on a price per square metre basis. China is a large country with a middle class larger than the total population of either the USA or EU but it is also a middle-income country where the ability to buy a home is beyond the reach of an increasingly large proportion of the citizenry.



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July 02 2018

Commentary by Eoin Treacy

How Tesla is doing everything to get Model 3 cars out the door

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

In an effort to drastically ramp up production, Tesla employees are now tinkering with the core designs of the Model 3 car and the production process, detailed by a New York Times report (paywall), something that experts say is unprecedented. Executives at Tesla decided that the car didn’t need so many spot welds holding the underbody together, so engineers found 300 “unnecessary” welds and reprogrammed the welding robots cut them from the production process.

Eoin Treacy's view -

Tesla made its 5000 cars a week target but if the company is cutting corners in manufacturing what are the safety implications of that decision going to be for the thousands of people waiting in line for the Model3?



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June 29 2018

Commentary by Eoin Treacy

June 29 2018

Commentary by Eoin Treacy

Now Merkel's Adversaries Face Ultimatum to Back Down on Migrants

This article by Arne Delfs, Birgit Jennen and Patrick Donahue for Bloomberg may be of interest to subscribers. Here is a section:

Merkel and other European Union leaders defied expectations to forge an accord early on Friday, putting the onus on Bavaria’s ruling CSU party that sought the clash. Its leaders must now decide at a meeting Sunday whether to risk a historic breakup of the party bloc that’s governed Germany for most of the time since World War II or beat a face-saving retreat.

With migration hard-liners Italy and Austria backing a coordinated European approach at the summit, the CSU appeared increasingly isolated before deciding whether to defy Merkel and start sending back asylum seekers at the German border who already registered in another EU country. Polls suggested public support for the Bavarians’ stance is waning.

“At this point, the CSU can’t afford to dig in against a compromise,” Juergen Falter, a political scientist at Johannes Gutenberg University in Mainz, said by phone. “They’d come across as troublemakers.”

As investors welcomed the summit result, the CSU said the deal addressed concerns about migration it has raised for a long time. Merkel’s Christian Democratic Union, the biggest party in her governing coalition, rallied behind the chancellor.

“Now these measures actually need to be implemented,” Alexander Dobrindt, the CSU caucus leader in the German parliament, said in a statement. The Bavarian party will review the summit deal “very thoroughly,” he said.

Eoin Treacy's view -

There is no more useful political manoeuvre than the “bait and switch”. It seems any politician who wants to stick around needs to master it and Italy’s populists are obviously quick studies.  By focusing on immigration rather than tax cuts and spending, the new Italian administration threw focus onto Angela Merkel’s less than comfortable position on the topic of migrants and diverted attention from the looming wall of debt Italy needs to refinance.



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June 29 2018

Commentary by Eoin Treacy

"Terminal Velocity?"

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

Eoin Treacy's view -

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

Wall Street’s relative performance this year has been driven by the parts of the technology sector which have been largely excluded from competing in China. They might be exhibiting short-term overbought conditions right now but they are largely immune to trade war fears.  



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June 29 2018

Commentary by Eoin Treacy

Kevin Rudd on Xi Jinping, China and the Global Order

I view this transcript of a speech delivered at the Lee Kuan Yew School of Public Policy in Singapore on Tuesday as required reading for anyone interested in China. Here is a section:

It is deeply significant that at the 2018 Work Conference, Xi Jinping states boldly that a core component of his new ideology of a “diplomacy of socialism with Chinese characteristics” would be for China to: “lead the reform of the global governance system with the concepts of fairness and justice.” This is by far the most direct, unqualified and expansive statement on China’s intentions on this important question we have seen.

China, like the rest of the international community, is acutely conscious of the dysfunctionality of much of the current multilateral system. It also sees the US walking away from much of the system as well: from the JCPOA which was agreed to by the UN Security Council; from the UN’s Paris Agreement on Climate Change; its withdrawal from the UN Human Rights Commission; its open defiance of the Refugees Convention; and its challenging of the underlying fabric of the WTO.

Nature, as we know, abhors a vacuum. International relations even more so. And we all saw Xi Jinping’s riposte to President Trump on climate change and trade at Davos 18 months ago just after President Trump’s election. If China is indeed serious about leading the reform of global governance, its attitude to various of these multilateral institutions will be radically different to the historical posture of the US. Take for example the Human Rights Council in Geneva, which China would like to see emasculated. Mind you, so too now, apparently, does the current US administration!

Eoin Treacy's view -

I think it is fair to say that the rise of populism and the inability of the status quo to come up with anything other than a policy of appeasement is a reflection of an identity crisis evident in many Western economies. China’s Communist Party does not suffer from that kind of identity crisis. In fact, it is on the front foot and is responding to internal challenges by attempting to expand abroad not least to boost the profile the Party at home.



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June 29 2018

Commentary by Eoin Treacy

Email of the day on Amazon's impact on pharmacies

Thank you for your superb service. Can you please advise your views on how vulnerable do you think the pharmacy shares are in the US after Amazon's entry to the field? Thank you in advance.

Eoin Treacy's view -

There are obvious fears that the introduction of Amazon’s business model to the pharmacy sector will have the same effect it had on the big retailers. However, I suspect the most profound effect will be felt among the smaller independent pharmacies that command about half the total US market. Here is a section from an article by bizjournals.com that may be of interest:

There are currently about 22,500 independent pharmacies in the United States, and these pharmacies dispense nearly half of the nation's retail prescription medicines, Norton says.

All told, independent pharmacies are an $81.4 billion marketplace annually. They fill 1.38 billion prescriptions a year — about 201 a day, per pharmacy — and employ 314,000 people on a full- or part-time basis.



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June 28 2018

Commentary by Eoin Treacy

Video commentary for June 28th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: China continues to underperform and is dragging the wider Asian region lower, Yen, Aussie and Kiwi currency weakness is supporting the nominal prices of their respective indices, oil steady, precious metals remain under pressure, Wall Street steadies from region of MA. 



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June 28 2018

Commentary by Eoin Treacy

From Goldman to Deutsche Bank, What to Watch for in Stress Tests

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

In the first stage of the test, leverage ratios at Goldman Sachs Group Inc. and Morgan Stanley were projected to drop close to the minimum allowed in a stressed scenario, sounding alarm bells about their ability to increase payouts to shareholders.

That test examined hypothetical losses with dividends continuing as before. The second phase looks at requests for future stock buybacks and higher dividends. Both firms quickly issued statements after last week’s result to warn against reading too much into it, arguing their capacity to distribute capital may be greater than what the numbers suggested.

Still, analysts have grown more skeptical the firms can increase their payouts -- or in Goldman’s case, that it can even maintain last year’s level.

“We don’t get to see all the details of how the Fed gets to its numbers, but it’s still hard to fathom how they can meet pre-test expectations,” said Brian Kleinhanzl at Keefe, Bruyette & Woods. “The math just doesn’t work.”

The pair may have to lower their proposed payouts to pass, Kleinhanzl said. Goldman already took that so-called mulligan twice since 2013, when the option was introduced. Morgan Stanley has used it once. Others saw the statements as lobbying the Fed for leniency, which could work in the bank-friendly regulatory environment under President Donald Trump.

“In the past that basically fell on deaf ears,” said Gerard Cassidy, analyst at RBC Capital Markets. “The new guys might look at it a little differently.”

Eoin Treacy's view -

The results of the Fed’s stress tests are pivotal to the ability of banks to increase their dividends. The narrative behind why banks were turning to outperformance last year was that interest rates were rising which would improve margins and the tax cuts would lead to greater loan growth which was good for business and that combined this would lead to bigger dividends.



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June 28 2018

Commentary by Eoin Treacy

Imperial Brands Joins Snoop Dogg as Cannabis Investment Heats Up

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

The U.K.’s medical cannabis industry is getting another boost, with cigarette maker Imperial Brands Plc investing in a British startup that’s developing treatments derived from the marijuana plant.

Imperial Brands Ventures Ltd. and rapper Snoop Dogg’s Casa Verde Capital have invested in Oxford Cannabinoid Technologies, or OCT, which focuses on researching, developing and licensing compounds and therapies based on the plant. The total investment is approaching $10 million, with pain, inflammation, cancer and gastrointestinal diseases among areas of focus, Casa Verde Capital managing partner Karan Wadhera said in a Bloomberg TV interview.

“Cannabinoid products have significant potential and our investment enables Imperial to support OCT’s important research while building a deeper understanding of the medical cannabis market,” Bristol, England-based Imperial Brands said on its website Thursday.

Belief in the potential of medical cannabis is gaining steam with the U.S. Food and Drug Administration’s approval this week of Cambridge, England-based GW Pharmaceuticals Plc’s Epidiolex epilepsy treatment. The liquid is made from a compound in the marijuana plant called cannabidiol, a different chemical from tetrahydrocannabinol, or THC, which gets users high.

The investment in OCT comes as tobacco companies look for new business lines amid slowing sales and tightening regulations for cigarettes. Imperial Brands’ stake in OCT is “the most significant move among the global tobacco players in the cannabis industry to date,” Cowen analyst Vivien Azer wrote in a note Thursday. “We continue to expect to see more activity in cannabis from both global tobacco and global alcohol.”

Simon Langelier, who had a 30-year career with Philip Morris International Inc., joined the board of Imperial Brands as non-executive director in June 2017. He is chairman of PharmaCielo Ltd., a supplier of medicinal-grade cannabis oil extracts.

Eoin Treacy's view -

Here is a link to a CNBC interview of Karan Wadhera of Casa Verde Capital discussing the medium-term outlook for cannabis. Even when I worked in Amsterdam I never had any interest in smoking cannabis so I cannot speak from personal experience about the sector. However, it is hard to argue with people who suffer from chronic pain conditions who attest to the easing of symptoms they experience when consuming cannabis products over the highly addictive and often unsatisfactory results they get from consuming opioid painkillers.



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June 28 2018

Commentary by Eoin Treacy

China's Baidu Approves a Share Buyback of Up To $1 Billion

This note by Edwin Chan may be of interest.

Chinese search giant Baidu Inc. has approved a plan to buy back as much as $1 billion of its own shares over the next 12 months, a move that may help prop up its stock as global market volatility grows.

Its board has green-lit a program to use existing cash to buy shares in the open market at prevailing prices, the Beijing- based company said in a statement Wednesday. It will review that program periodically and may adjust its terms and size.

Baidu’s shares are up more than 7 percent this year, just underperforming the Nasdaq Composite’s gain but outstripping larger rival Tencent Holdings Ltd., which is down 7 percent in 2018.

Eoin Treacy's view -

Baidu has a market cap of almost $84 billion with free cash flow last year of $28 billion. A $1 billion buy back program might be a new departure for the company but it is unlikely to be large enough to influence investor interest beyond the sensational headline.



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June 28 2018

Commentary by Eoin Treacy

June 27 2018

Commentary by Eoin Treacy

Video commentary for June 27th 2018

June 27 2018

Commentary by Eoin Treacy

Lithium and cobalt a tale of two commodities

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

Eoin Treacy's view -

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

An industry can progress from a developmental stage to global domination if it is held hostage by commodity prices. That is the fallacy which proponents of the bull market in cobalt have been lured into accepting. The simple fact of the matter is that if cobalt is rare and the global industry needs lots of it, then either the global industrial expansion stalls or it finds a way to progress without cobalt.



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June 27 2018

Commentary by Eoin Treacy

Email of the day on UK listed precious metal miners

Fresnillo’s (London) share price has been falling, among other things due to weakness in the Mexican Peso. Historically, JSE gold shares have surged on ZAR weakness with a rising USD gold price. In the event of a recovery in the USD silver price, could it be argued that FRES would do better?

Eoin Treacy's view -

Thank you for this question is something I believe a number of subscribers will be interested in. The underperformance of the UK listed precious metals sector has been something of a quandary and is now fully explained by the relative weakness of emerging market currencies. For example, the bounce in the Mexican Peso over the last couple of weeks has done nothing to arrest the decline in Fresnillo’s shares.



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June 27 2018

Commentary by Eoin Treacy

Musings from the Oil Patch June 26th 2018

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

To appreciate how the energy world is changing, two charts presented by Mr. Dale set the stage.  Global energy growth last year was 2.2%, up from 1.2% in 2016, and above the 10-year average of 1.7%.  That robust growth came as a result of strong global economic growth, but also due to a decline in energy productivity.  While the International Monetary Fund is warning of potential dark clouds on the horizon for global economic growth, its forecast remains robust, meaning energy growth is likely to remain high.  

Also important is the difference in where energy growth originated.  The driver for the above-average growth was the strength of the developed economies of the OECD, but also some deterioration in energy productivity.  However, nearly 80% of the total energy growth came from the non-OECD or developing economies of the world.  That is not surprising as they benefit from the global economic recovery, especially China.  China saw energy demand grow by 3%, nearly three times its growth rate of the past several years.  That higher growth was driven by recoveries in numerous high-energy sectors such as iron, crude steel and non-ferrous minerals.  Still, the high growth rate was well below China’s 10-year average rate, even though it was helped by a decline in energy intensity that was more than twice that of the global economy.  

The picture of primary energy fuel mix highlighted the title of Mr. Dale’s remarks – Two Steps Forward and One Step Back.  He pointed to the dramatic growth in natural gas and renewables as the two steps forward.  Combined, those two fuels accounted for 60% of the total growth in energy fuels.  

The backward step was the growth in coal usage.  In 2017, global coal use rose by 1.0%, or 25 million tons of oil-equivalent, marking the first annual increase since 2012.  The increase was driven by India, although China’s consumption also rose after declines in the three prior years.  

Eoin Treacy's view -

Batteries might eventually remove the need for quite so much back up conventional power generating capacity as renewable penetration of the energy market continues, but that is still some ways off. At present natural gas represents the happy medium between reliance on coal and the fact that renewables are not yet ready to stand on their own.



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June 27 2018

Commentary by Eoin Treacy

June 26 2018

Commentary by Eoin Treacy

June 26 2018

Commentary by Eoin Treacy

Email of the day on the yield curve spread:

Article in yesterday’s NYT. Is this the predictor of a recession that will follow trade wars?

Eoin Treacy's view -

Thank you for this article which may be of interest to subscribers. Here is a section:

There is an argument to be made against reading too much into the yield curve’s moves — and it hangs on the idea that, rather than the free market, central banks have had a big influence on both the long-term and short-term rates.

Since the last recession, central banks bought trillions of dollars of government bonds as they tried to push long-term interest rates lower in order to lend a helping hand to the economy.

Even though they’re reversing course now, central banks still own massive amounts of those bonds, and that may be keeping long-term interest rates lower than they would otherwise be.

Also, the Federal Reserve has been raising short-term interest rates since December 2015 and has indicated it will keep doing so this year.

So, if long-term rates were pushed lower by central bank bond buying, and now short-term rates are being pushed higher as the Fed tightens its monetary policy, the yield curve has nowhere to go but flatter.

“In the current environment, I think it’s a less reliable indicator than it has been in the past,” said Matthew Luzzetti, a senior economist at Deutsche Bank.



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June 26 2018

Commentary by Eoin Treacy

The Impact of Airbus on the UK Economy

Thanks to a subscriber for this report from Oxford Economic focusing on Airbus dated June 2017. Here is a section:

Airbus’ impact is not limited to its cutting-edge manufacturing: it also makes a substantial and important contribution to the UK’s economy. This impact stems not only from the Company’s activities at its UK facilities, but also the presence of UK firms in its global supply chains and the spending of its UK-based workforce in the wider consumer economy.

Oxford Economics’ bespoke Global Economic Impact Model has been used to map Airbus’ complex, interwoven, global supply chains. This enabled us to explore how the Company’s purchases from its operations in France, for example, then trigger activity in the UK, further up the supply chain. Consequently, this unique model makes it possible to develop a comprehensive picture of the Company’s impact on the UK economy.

In 2015, Airbus’ global operations supported a £7.8 billion contribution to the UK economy. Much of this impact was generated in Airbus’ UK supply chain, which includes companies such as Rolls-Royce, GKN and BAE Systems. To put this footprint into context, in 2015, the contribution to GDP supported by Airbus was larger than Newcastle’s economy and nearly a third bigger than the economy of Oxford.

The activity supported by Airbus sustained 117,400 jobs throughout the UK in 2015. This means that more than 100,000 people who did not work for Airbus had jobs linked to the Company in some way. For some 64,000 people, their jobs were located in Airbus’ UK-based supply chain. The total number of jobs supported by Airbus’ operations in 2015 was equivalent to all of the jobs in Swansea.

Eoin Treacy's view -

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

orporations have been very clear in their messaging that they will not tolerate a no-deal outcome to the Brexit negotiations. While media attention has been focused on efforts by the House of Lords to force the government to allow parliament a say in the final agreement the decisions of major corporations in deciding how to deal with Brexit are much more important for the economy.



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June 26 2018

Commentary by Eoin Treacy

How to read Turkey's election results

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

This weekend’s vote was, in short, a surprise. Contrary to predictions, Erdoğan won decisively, and his new presidential system has received a seal of approval from the electorate. However, the AKP’s failure to secure an absolute majority in parliament is an important message for Erdoğan. It remains to be seen whether Erdoğan will take this as an opportunity to address the long list of challenges facing Turkey and reconstruct its democracy and economy, and regain the respect that he once enjoyed internationally. The March 2019 municipal elections will be the next test of his performance.

Eoin Treacy's view -

The strength of a nation’s public institutions is what separates failed states from those that can evolve and weather a period of economic peril. Erdogan is an aspiring despot who wants to rule for life. The fact that Turks approved of his presidency but did not give his party an absolute majority suggests they favour limitations on presidential power which is in keeping with any democratic country’s constitution.



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June 25 2018

Commentary by Eoin Treacy

Video commentary for June 25th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: China continues to underperform, Turkish Lira under pressure, Europe underperforming, US Dollar eases, oil steady, copper testing important area of support, Nasdaq at risk of unwinding overbought condition, banks underperforming



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June 25 2018

Commentary by Eoin Treacy

China, Europe Warn Trade War Could Trigger Global Recession

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

Later this week, the U.S. Treasury Department is expected to release fresh rules on Chinese investment in technology companies, Bloomberg reported on Monday, putting additional pressure on China -- which hit back against the plans. Chinese investment has provided jobs and tax income for the U.S., and it should view commercial activities “objectively,” Foreign Ministry spokesman Geng Shuang told reporters in Beijing on Monday.

The U.S. is due to impose tariffs on $34 billion of Chinese imports from July 6, and Trump has threatened to impose levies on another $200 billion of Chinese goods. If that threat is realized, it could cut as much as half a percentage point off China’s economic growth, and also hit the American economy, economists have said.

Anxiety over the economic fallout is cutting deep in financial markets, with China’s yuan sliding to a six-month low Monday. The S&P 500 Index fell to the lowest since May and the Dow Jones Industrial Average sank for the ninth time in 10 sessions.

As if to reinforce concerns about the economic outlook, the Dutch Bureau for Economic Policy Analysis on Monday published its latest trade monitor, showing world trade momentum dropped in April to the lowest since 2015. The measure has fallen sharply since hitting a seven-year high at the start of 2018.

Eoin Treacy's view -

The EU’s export-oriented economies along with China have been some of the greatest beneficiaries of globalisation and therefore are also likely to be the primary defenders of the “multilateral trading” regime. Nevertheless, the rise of populism which I describe as a revolt against the status quo represents a challenge to that system which is currently being led by the Trump administration but represents a significant theme in an increasingly large number of countries.



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June 25 2018

Commentary by Eoin Treacy

Email of the day on central bank balance sheets:

Thanks for a wonderful service Eoin. I'm probably splitting hairs here but one thing has been bothering me lately: to me you seem a bit early in declaring the central banks' total balance sheets as contracting. The US is on a modest reducing mode while the rest are steady/still increasing. The total balance chart is USD denominated, which explains the decline that shows on the chart when dxy has rallied over the last few months. On a bigger picture scale, CB balances tend to increase as the underlying economies grow. Or am I missing something here? All the best.

Eoin Treacy's view -

Thank you for this question which highlights some important points. There is little doubt that the US Dollar has been resurgent over the last few months and that will certainly have played a role in the contraction of the total assets on central bank balance sheets.



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June 25 2018

Commentary by Eoin Treacy

Supreme Court Rules States Can Collect Sales Tax on Web Purchases

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

“Many states will pick up on those details and incorporate them into their own regulatory regimes,” said Eric Citron, an attorney who represented South Dakota. He said he expected nearly every state with a sales tax to move legislation or regulations to enforce collections. “Complete compliance will become the norm within the next year or two,” he said.

Amazon originally set up its business model to avoid state sales taxes, limiting its physical presence to a handful of warehouses. But it changed strategy to build more warehouses closer to consumers as it has relied more on its Prime two-day shipping offer—and started charging sales tax on items it sells directly.

Amazon hasn’t collected the taxes for most independent merchants who sell on its platform. About $200 billion in sales originated with independent merchants selling on Amazon world-wide last year, according to Factset analyst estimates, compared with about $116 billion in direct sales by Amazon. The company declined to comment on the ruling.

Eoin Treacy's view -

The cost of compliance is rising in just about every sector. Since the credit crisis the burden of regulatory compliance has been a significant headwind for the banking sector and it has changed the nature of how they do business. The UK’s Retail Distribution Initiative resulted in the cost of doing business rising for financial advisors. The EU’s drive to introduce GDPR has seen some company email lists drop from hundreds of thousands to the tens of thousands. Asking online retailers to monitor how much and how often they sell into each state will increase compliance costs regardless of whether tax is then due.



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June 22 2018

Commentary by Eoin Treacy

June 22 2018

Commentary by Eoin Treacy

Bitcoin Approaches Year Low as Japan Cracks Down on Venues

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

Bitcoin approached its lowest price for the year after Japanese regulators hit six of the country’s biggest cryptocurrency trading venues with business-improvement orders.

The crackdown surprised investors, ending what was about to be the first winning week since early June for the largest digital coin and for the 10 most-liquid tokens. The MVIS CryptoCompare Digital Assets 10 Index tumbled as much as 11 percent on Friday. The gauge already fell in five of the past six weeks.

Some of the targets of Japan’s regulator were quick to react. Bitflyer Inc. said it would stop accepting new customers and also review identity verification for some existing users after it received an order from Japan’s Financial Services Agency. The FSA called for improved measures at all the exchanges against money laundering. The companies must submit their plans by July 23.

Peer-to-peer money has come under fresh pressure in recent weeks after two South Korean exchanges said they were hacked.

That raised fresh concerns about the security of investor holdings. New pressure in Japan, one of the most crypto-friendly jurisdictions, demonstrated the market’s fragility to regulatory moves in the absence of much positive news.

“The market is still trading on low volumes and has yet to break out of its current downtrend, leaving itself susceptible to sell-offs,” said Ryan Rabaglia, head trader with cryptocurrency dealing firm Octagon Strategy Ltd. in Hong Kong, in an email. “Although the market reacted negatively, I view this as a positive for the industry as a whole.”

Eoin Treacy's view -

Bitcoin has been trending lower since early this year and has steadied above the $6000 area over the last couple of months. However, the continued ambivalence of regulators towards the market and the liquidation of Mt.Gox’s holdings represent headwinds which the market continues to explore the full ramifications of.



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June 22 2018

Commentary by Eoin Treacy

OPEC+ to Boost Oil Output After Saudis Secure Deal With Iran

This article by Wael Mahdi, Grant Smith and Nayla Razzouk for Bloomberg may be of interest to subscribers. Here is a section:

The final communique made no mention of whether the kingdom, or any other member, could compensate for losses elsewhere. Yet it said the group as a whole should strive for “overall conformity” of 100 percent, which in practice will only be achievable if those nations with spare production capacity step in to fill the gap left by others.

"The lack of specificity is bullish for prices,” said Joe McMonigle, senior energy analyst at Hedgeye Risk Management LLC. “It’s a mystery oil production increase because we don’t really know the final numbers."

Eoin Treacy's view -

OPEC is going to raise production by maybe 1 million barrels a day which is less than it could have. That probably represents the difficulty that exists in getting Saudi Arabia and Iran to agree on anything and suggests the market will be tighter than might otherwise have been the case.



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June 21 2018

Commentary by Eoin Treacy

June 21 2018

Commentary by Eoin Treacy

Sector Cross-Currents: How to Surf the Swirl of Trump & Tech Disruption

This report by Maneesh Deshpande for Barclays may be of interest to subscribers. Here is a section:

Moore’s Law basically ended in 2016 and we can already see that the speeds of computer chips have remained stagnant for the last few years. Enhancements have been delivered through longer battery life, more memory and separate drives for booting and storage but the speed of the chips has not moved much.

Eoin Treacy's view -

Moore’s Law basically ended in 2016 and we can already see that the speeds of computer chips have remained stagnant for the last few years. Enhancements have been delivered through longer battery life, more memory and separate drives for booting and storage but the speed of the chips has not moved much.



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June 21 2018

Commentary by Eoin Treacy

Baby Boomers Strains U.S. Welfare Programs

This article by Janet Adamy and Paul Overberg for the Wall Street Journal may be of interest to subscribers. Here is a section:

The surge of retiring baby boomers is reshaping the U.S. into a country with fewer workers to support the elderly—a shift that will add to strains on retirement programs such as Social Security and sharpen the national debate on the role of immigration in the workforce.

For most of the past few decades, the ratio of retiree-aged adults to those of working age barely budged. In 1980, there were 19 U.S. adults age 65 and over for every 100 Americans between 18 and 64, census figures show. That number—called the old-age dependency ratio—barely edged up over the next 30 years, rising to just 21 retiree-aged Americans for every 100 of working age in 2010.

But there has been a rapid shift since then. By 2017, there were 25 Americans 65 and older for every 100 people in their working years, according to new census figures released Thursday that detail age and race for every county. The ratio would climb to 35 retiree-age Americans for every 100 of working age by 2030, according to census projections released earlier this year, and 42 by 2060, though currently unforeseen factors could alter that.

Eoin Treacy's view -

The Labor Force Participation rate has been relatively static for much of the last couple of years and that is despite the pick-up in economic activity from the tax cuts and the tightness in the labour market. The retirement of baby boomers is a logical explanation for why the measure is not rising.



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June 21 2018

Commentary by Eoin Treacy

Spotlight on Australia as Banks Fuel Rally to Highest in Decade

This article by Matthew Burgess and Abhishek Vishnoi for Bloomberg may be of interest to subscribers. Here is a section:

Rude Health
“There’s been a few shots on the trade side, but nothing has fully broken out,” said Dermot Ryan, a fund co-manager at AMP Capital in Sydney. “Ultimately, the stock market looks at the valuation and health of the sectors. The resources sector is in rude health at the moment.”

Not as Sensitive
“Australia sometimes acts as an EM by proxy, but with one key difference: it’s not as sensitive to the potential negative impact from increasing tariffs on Chinese and U.S. goods,” said Kerry Craig, global market strategist at JPMorgan Asset Management in Melbourne. “We’re not as crucial in the supply chain as many north Asian economies. While there would be some impact on the materials sector if Chinese growth was expected to take a hit and metals demand fell, it’s more than likely that China would respond by increased infrastructure spend to keep the ship steady.”

Pretty Cheap
“The banks look pretty cheap,” for a longer-term investor, said Don Hamson, managing director at Plato Investment Management in Sydney. “It’s been a bad 18 months, but maybe we’re coming toward the end of it.”

Eoin Treacy's view -

The Australian financial sector has been under a cloud because of the Royal Commission's focus on overcharging in the small to medium sized enterprises sector. However, the hearings are about to refocus on relations between financial firms and people living in remote areas such as Aboriginal peoples. While that is likely to represent some political risk, it is less likely to have a large impact on the stock market.



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June 21 2018

Commentary by Eoin Treacy

Italian Assets Resume Slide After Euroskeptic Appointments

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

The Italian Senate picked euroskeptic economist Alberto Bagnai, author of two books advocating the dismantling of the European monetary union, as head of the finance committee.

Claudio Borghi, an adviser for the League party on the economy and on issues such as the mini-bots short-dated notes, was named the head of the budget committee in the lower house. The populist government program doesn’t include any reference to a possible option for a euro exit.

“There are a couple of high caliber League euroskeptics getting appointed to important parliamentary jobs in Italy this morning: Borghi and Bagnai,” said Antoine Bouvet, an interest- rate strategist at Mizuho International Plc. “The fact that they get roles that have to do with finance and budget has been understood by the market as a sign that the League intends on pushing its anti-euro ideas.”

Eoin Treacy's view -

There is one simple fact that overrides all of the political machinations going on in Italy right now. Italy has almost as much debt as the USA does which needs to be rolled over this year. As recently as May Italian debt out to almost 3-year maturities was trading at negative rates. Today those refinancing costs are a lot more expensive. That represents a major obstacle for Italy’s populist eurosceptics.



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June 21 2018

Commentary by Eoin Treacy

Long-term themes review May 16th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:



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June 20 2018

Commentary by Eoin Treacy

June 20 2018

Commentary by Eoin Treacy

Germany's Largest Auto Makers Back Abolition of EU-U.S. Car Import Tariffs

This article by William Boston and Bojan Pancevski for the Wall Street Journal may be of interest to subscribers. Here is a section:

That would mean scrapping the EU’s 10% tax on auto imports from the U.S. and other countries and the 2.5% duty on auto imports in the U.S. As a prerequisite, the Europeans want Mr. Trump’s threat of imposing a 25% border tax on European auto imports off the table.

Over the past few weeks, Mr. Grenell has held closed-door meetings with the chiefs of all major German automotive companies, including bilateral meetings with the CEOs of Daimler AG , BMW AG and Volkswagen AG , which operate plants in the U.S. Overall, Germany’s auto makers and suppliers provide 116,500 jobs in the U.S., according to the Association of German Automotive Manufacturers.

During these talks, which the ambassador initiated, the managers said they would back the scrapping of all import tariffs on trans-Atlantic trade in automotive products as the keystone of a broader deal covering industrial goods. The German government is on board and Mr. Grenell promised to support the idea, according to U.S. and German officials.

Eoin Treacy's view -

Trade tensions are ebbing and flowing on almost a daily basis. Efforts led by the German auto manufacturers to defray risks to their US business obviously highlight how seriously companies are taking the threat of trade friction and what it could mean for their businesses. That is particularly true in the aftermath of the diesel cheating scandal which continue to make headlines.



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June 20 2018

Commentary by Eoin Treacy

Starbucks Delivers the Wrong Kind of Jolt

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

So I'm paying more attention to the weak comparable sales guidance the company offered for the third quarter, and the factors it says have been weighing on sales of late.

Executives said Tuesday that in the U.S. market, Starbucks struggled to draw customers in the afternoons. This has been an ongoing problem for Starbucks, and executives haven’t demonstrated they have a clear solution. They've recently put up some TV advertising emphasizing Starbucks as an afternoon destination, and perhaps we'll soon see payoff from that.

But it'd have an easier time luring people for more than just their morning caffeine fix if it could establish itself as more of a go-to for food, not just beverages. And speaking of its menu, the chain has work to do on its signature drink offerings, too. Look at what has happened to Frappuccino sales:

Perhaps this shouldn't come as a shock, given that Frappuccinos pack a lot of calories and customers are increasingly looking for healthy choices. But Starbucks needs some new hits to give people a reason to come back through its doors, especially with so many insurgent and boutique coffeehouses chasing the same customers.

Eoin Treacy's view -

Starbucks generates approximately 70% of its revenue from North America while 15% comes from China. The company’s mix of coffee, sweet and/or fatty treats and free Wi-Fi was a winning strategy before the evolution of 4G and ubiquitous web access. It used to be that you would go to Starbucks to sit down, look cool and show off your new gadget while accessing the Wi-Fi. That’s just not enough to inspire users any more.



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June 20 2018

Commentary by Eoin Treacy

Investing Without People

Thanks to a subscriber for this memo from Howard Marks at Oaktree which may be of interest. Here is a section:

It seems obvious that s formula’s application and popularization eventually will bring an end to its effectiveness. Let’s say (in an incredibly simplified example) you study of the market show that a small-company stocks have beaten the market over a given period, so you overweight them.

Since “beating the market,” “out-appreciating” and “out-performing” often are just the flip of “becoming relatively expensive”, I doubt any group of stocks can outperform for long with becoming fully- or over-priced, and thus primed for underperformance.
And it seems equally clear that eventually others will detect the same “small-cap effect” and pile into it. In that case, small-cap investing will become widespread and – by definition – no longer a source of superiority.

To reiterate, George Soros’s Theory of Reflexivity says the behavior of market participants alters the market. Thus no formula will be a winner forever. For me, that means the achievement of superior returns through quantitative investing requires the ability to constantly and correctly update the formula. Since investing is dynamic, the rules relied on in quantitative investing have to be dynamic.  

According to Raj Mahajan of Goldman Sachs, my principal tutor on these matters. “The best models today will change exposures as the environment changes and as dynamics of the factors chance (e.g. as they become cheaper or more expensive). The rules have become increasingly complex, and they are able to “learn” (that is, they are “conditional” or “contextual”) in that they understand more of the environment.” Constant renewal – not “a formula along” – seems to be a minimum requirement for any quants’ long-term success.

Eoin Treacy's view -

No trend persists indefinitely and nothing lasts forever. The more data points we have to support a trend the closer it is to being full valued. To my mind that has always been similar to Heisenberg’s Uncertainty Principle. Perhaps it is too simply described as the “more you know about the position of the particle the less you know about its trajectory and vice versa”.



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June 20 2018

Commentary by Eoin Treacy

Noble's Marathon Revamp Nears Finish After Goldilocks Deal

This article by Krystal Chia and David Yong for Bloomberg may be of interest to subscribers. Here is a section:

The remaining equity in the new company is being split between senior creditors and management. Under the latest deal, senior creditors stand to receive 70 percent of the trader, while management’s share will be 10 percent.

In a separate statement, Noble Group said Pinpoint Asset Management Ltd. and Value Partners Ltd., holders of its perpetual securities, withdrew a lawsuit filed against the company on June 13. Perpetuals have been offered $25 million of new bonds in exchange for securities with a face value of $400 million. On Wednesday, the perpetuals rose 0.6 cent, the most in a week, to 7.8 cents.

“Obstacles to the completion of the restructuring are probably getting removed,” said Neel Gopalakrishnan, senior credit strategist at DBS Group Holdings Ltd. “But the key question is still whether, post restructuring, the company will be able to turn around operations for creditors to recover value.”

Eoin Treacy's view -

Noble Group suffered from bad commodity bets in the agriculture sector but also from the demise of coal which took a lot of people in the commodity business by surprise in terms of its ferocity. The share trended lower along with commodity prices from the 2011 peak but failed to sustain the rally that began in 2016 and it collapsed in 2017.

The biggest challenge for any trader is to avoid catastrophic failure when dealing on a leveraged basis. That is a lesson for all us.



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June 19 2018

Commentary by Eoin Treacy

Video commentary for June 19th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: central bank balance sheets are contracting, Wall Street continues to exhibit relative strength, yield curve continues to contract, China breaks downwards and Renminbi weakens, commodity currencies weak, Europe testing the trend mean. oil eases, gold steady, platinum at a new low.  



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June 19 2018

Commentary by Eoin Treacy

Xi Can Make Life Difficult for U.S. Companies After Trump Threat

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

Pressuring companies through bureaucratic means “is a practice that the Chinese have used for a long time and our companies are on guard,” William Zarit, chairman of the American Chamber of Commerce in the People’s Republic of China, said on Bloomberg Television. “This is definitely a concern.”

South Korean and Japanese companies have all felt this effect, with their businesses in China hurt as part of a dispute between states.

In 2017, following the Seoul government’s decision to deploy an anti-missile system that China opposed, China forced South Korean retailer Lotte Shopping Co. to suspend operations at many of its hypermarkets in the country for alleged violations of fire-safety rules. The company eventually decided to pull out of China, but still can’t sell all its units and continues to rack up losses. In total due to the dispute, Lotte Group lost an estimated 2 trillion won ($1.8 billion) in the year from March 2017, according to Yonhap News Agency.

The backlash also led to boycotts, with consumers shunning cars from Hyundai Motor Co. and cosmetics from Amorepacific Group. Chinese tourists cancelled Korean vacations, forcing airlines to scrap flights and hotels to slash rates. The Bank of Korea estimated that 0.4 percentage point was cut from 2017’s gross domestic product.

Eoin Treacy's view -

China has such a wide trade surplus with the USA that it is going to be hard to meet the increased level of tariffs the USA is proposing, without greatly increasing the levels on the goods it does import. However, there are additional measures the country can take to express its dissatisfaction.



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June 19 2018

Commentary by Eoin Treacy

US Oil Firms Use Shale Know-How To Revitalize Old Oilfields

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

Wildcatters first pumped oil from the Austin Chalk nearly a century ago, but output reached its peak in the early 1990s even though the formation still contains about a billion barrels of crude, according to U.S. government's Geological Survey.

That is not unusual. Oil producers have historically extracted less than half the oil from any particular field because the rest has not been accessible at a profit.

That is changing in fields like the Austin Chalk.

Based on test wells and modeling techniques, Conoco believes long, horizontal wells with multiple fracks - a technique used often in shale fields - will deliver strong results from its acreage in the Austin Chalk.

"What we were seeing with some of the newer technologies work really well in the Austin Chalk," Conoco Chief Executive Ryan Lance told Reuters.

Some wells they have fracked in the Austin Chalk have produced more prolifically than shale wells. Wildhorse's newer Austin Chalk wells produced more than three times the initial output of wells at the Eagle Ford shale field, the company said this month.

EOG also said an Austin Chalk well it drilled this year in Texas produced nearly 3,000 bpd in its first month, more than twice the first month rate of a shale well it had completed in the Permian during the same period.

Eoin Treacy's view -

One of the oldest adages in the energy business is “you find oil where your found oil” The benefit of employing new technology in proven grounds is that there is no risk the oil is not in fact there. That reduces the cost of drilling substantially if the technology can get to less accessible reservoirs.



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June 19 2018

Commentary by Eoin Treacy

On Target June 19th 2018

Thanks to Martin Spring for this edition of his ever-interesting letter which may be of interest to subscribers. Here is a section:

 

I think it very doubtful that Italy will either choose to leave the Eurozone or be forced out. Britain’s tortuous Brexit negotiations have made everyone in Europe aware of the horrendous complexities of such disengagements. And the Brussels elite will go to great lengths to avoid another country exiting European membership.

They may need to do so. The new government in Rome is determined to introduce cash handouts for less-wealthy citizens, big tax cuts, and state aid for troubled banks. If investors take fright at the prospect of a spending spree in Rome, which would be a serious breach of the European Union’s fiscal rules and produce major conflict with it and the European Central Bank, that could trigger a flight out of Italian assets by both foreigners and Italians.

There would be significant risk of that ballooning into financial disaster. Italy has the biggest debt-crisis potential in Europe, with public debt of €2.3 trillion. The available lending capacity of the EU crisis rescue fund for the whole of Europe is less than €380 billion -- a panic would overwhelm the euro currency system.

Clashes over money won’t be the only source of Rome’s warfare with Brussels, Berlin and Frankfurt. Stir in a big row over forced repatriation of illegal immigrants. And possibly trouble over the union’s anti-Russian policies (which the populists oppose). It all adds up to what seems certain to be an avalanche of conflict, with the European Union seriously distracted from addressing its other major issues.

Many of those stem from the lamentable failure of European leaders to convert people to the idea of sacrificing national sovereignty to bring about strong central institutions. That’s why Europe, despite being in aggregate the world’s largest economy, has no closely co-ordinated economic policies, depends on one superpower for its defence, and depends on the other for most of its energy imports.

Eoin Treacy's view -

The European Union now appears likely to reform the immigration policy that has allowed millions of economic migrants into the region over the course of the last few years. It has taken the rise of populism in Italy and the accession of the far right leaning Alternative Fur Deutschland to the Bundestag to send a wake-up call to the status quo that the citizenry are unhappy with the course of policy.



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June 19 2018

Commentary by Eoin Treacy

Email of the day on which moving average to use

On the same matter of MA average, I would like you to refresh my memory to a question I asked long time ago but unfortunately forgot the answer ( an early Alzheimer' sign ?).
In what instance do you use SMA and EMA ? Are they actually related to whatever price scale is used ? (ie. SMA for linear scale & EMA for log scale ) ...And finally, which one of the two is the most reliable ? 

I never never got bored to read your Comments of the Day and listened to your excellent audio videos as I keep learning every day.

Thank you and best regards,

Eoin Treacy's view -

Thank you for this question and I am delighted you are enjoying the service. The question of whether to use a simple or exponential moving average is a matter of taste. Personally, I think an exponential moving average makes more sense because I believe the most recent data should have a slightly greater weighting but other than that there is not much difference.



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June 18 2018

Commentary by Eoin Treacy

Video commentary for June 18th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: US Dollar resurgent against just about all currencies but Asian and commodity currencies are breaking downwards, MSCI emerging markets breaks downwards, Euro/US Dollar carry trade is helping increase the difference in performance between the two markets, agricultural commodities volatile, industrial resources steady and oil is firm,



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June 18 2018

Commentary by Eoin Treacy

Emerging Asia Hit by Biggest Foreign Investor Exodus Since 2008

This article by Yumi Teso for Garfield Clinton Reynolds, and Adam Haigh for Bloomberg may be of interest to subscribers. Here is a section:

“It’s not a great set-up for emerging markets,” James Sullivan, head of Asia ex-Japan equities research at JPMorgan Chase & Co., told Bloomberg TV from Singapore.

“We’ve still only priced in about two thirds of the U.S. rate increases we expect to see over the next 12 months. So, the Fed is continuing to get more hawkish, but the market still hasn’t caught up.”

While many emerging-market investors and analysts have praised Asian economic fundamentals, pointing to world-leading growth rates and political stability, some are starting to raise red flags as global liquidity starts to shrink. The Bloomberg JPMorgan Asia Dollar Index sank to a 2018 low on Monday, extending two weeks of declines after the Fed and European Central Bank both took steps toward policy normalization.

Yet some still remain optimistic. Bank of America Merrill Lynch expects some of the regional currencies including the baht and the Philippine peso to appreciate slightly by the end of the year, a research note sent Monday showed. Six of 10 best- performing emerging currencies so far this year are in Asia, led by the ringgit’s 1.2 percent advance and the Chinese yuan’s 1.1 percent gain.

Eoin Treacy's view -

By tightening monetary policy after leading the world in easing, the USA is effectively exporting its monetary policy to the rest of the world. More than few of the more troubled emerging markets have had to move aggressively to support their currencies but continued selling pressure suggests they probably have more work to do to shore up investor confidence.



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June 18 2018

Commentary by Eoin Treacy

Bonds Reflect Diverging Growth Prospect

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

For the first time in a very long while, the Fed’s decision was slightly more hawkish than I had been expecting. The anticipated 25 basis-points hike in the most-watched policy rate and the openness to another hike as soon as September were accompanied by a change in projections (albeit involving just one of the key “dots”) that raised the Fed’s baseline signal for 2018 to four rate hikes from three.

The next day, the ECB took over from the Fed in exerting systemic market influence. It incorporated in its announcement an unanticipated addendum related to the path of interest rates in 2019. Mario Draghi, the president of the ECB, provided an unexpectedly dovish addition to the bank's plan to reduce its monthly purchases under its quantitative easing program after September and, if the data support it, stop buying bonds entirely at the end of December. At a news conference, Draghi said the soonest the next rate hike could occur would be after the middle of next year.

Taken together, these developments added up to a greater widening of the policy differential between the Fed and ECB than had been expected by markets. This was amplified by data suggesting that U.S. economic growth continues to pick up, while Europe is hitting a soft patch, if not decelerating to a lower path.

The growth and policy differentials could widen further in the months to come, putting fully in play two notions that markets had excessively embraced last year: a synchronized pick up in global growth and more correlated central bank policies in the new era of quantitative tightening.

Economic developments in the next few months are likely to highlight more and more that U.S. growth is a major outlier in the advanced world. The U.S. is benefiting from policy actions that fuel three simultaneous and interrelated engines: higher consumption, underpinned by a strong labor market; greater business investment, supported by relatively strong balance sheets; and increased government spending, including on account of tax cuts.

Eoin Treacy's view -

The relative outperformance of Wall Street versus Europe is a clear indication of where investors see value and that has been evident since at least 2013. Economists might only be catching up to that conclusion now but it has been clear to anyone looking at charts which markets were likely to offer the best returns for years.



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June 18 2018

Commentary by Eoin Treacy

Le Divorce Investment themes for the post-Transatlantic world

This report by Vincent Deluard for INTL FCStone may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

There is a realistic possibility that the USA could become energy independent and is in fact already an exporter of oil and natural gas. The widening of the Panama Canal and receding ice around the North Pole have created new shipping lanes that did not exist a decade ago. Meanwhile if the USA is an exporter it has a reduced need to secure supply channels from the Middle East and we are already seeing greater ambivalence towards active engagement in that region.



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June 15 2018

Commentary by Eoin Treacy

June 15 2018

Commentary by Eoin Treacy

Trade Angst Sinks Metals and Miners as Gold Sags Most in a Month

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

The stronger dollar and speculation that a trade war will hamper demand fueled a drop in raw materials, with the Bloomberg Commodity Index declining for a second straight day. Federal Reserve Chairman Jerome Powell said this week that trade is a “risk” to the outlook, and that concerns about changes in trade policy are rising even if the impacts aren’t yet seen in economic numbers.

The tariffs mean China “won’t be importing as much of the base metals,” said Peter Thomas, a senior vice president at Chicago-based metals broker Zaner Group. “As these tariffs take affect, we’ll see less consumption from each side until it gets settled. It started with base metals and it’s pulling on gold.” China is the biggest consumer of industrial metals.

Gold futures for August delivery fell 1.6 percent to $1,292.20 an ounce at 10:14 a.m. on the Comex in New York, on course for the biggest decline since May 15.

Eoin Treacy's view -

Donald Trump is not a conventional politician, he is in fact following through on his campaign promises even though no one seems to have believed he was serious before he was elected. As Angela Merkel pointed earlier this week, the USA enjoys a net surplus with Germany when service providers like Google and Facebook are included. However, that kind of finessing of the data is not something the base Trump is appealing to is interested in.



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June 15 2018

Commentary by Eoin Treacy

Japan's coming Golden Age of Activism

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

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area.

Long-term trends change the fundamentals of a market and Japan is one of the most relevant examples of that in the world today. The deflationary environment has prevailed for so long that that I am reminded of the quip from the commodity markets “those who know it best, love it least because they have been disappointed the most”.



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June 15 2018

Commentary by Eoin Treacy

Fund That Profited From Turkey Rout Sees Aussie Dollar Slump

This article by Matthew Burgess and Ruth Carson for Bloomberg may be of interest to subscribers. Here is a section:

A Sydney-based fund manager that profited from the selloff in Turkey’s bonds and currency last month now expects a slump closer to home, as a stronger greenback weighs on the Australian dollar.

The Aussie may fall more than 10 percent to the “mid-60s” U.S. cents in 12 months, said Vimal Gor, head of income and fixed interest at Pendal Group, at a conference Thursday. A hawkish Federal Reserve will continue raising rates “until something breaks,” while its Australian counterpart stands pat, he said.

“The U.S. is the only country that’s genuinely hiking rates, so the interest-rate differential story is giving a huge tailwind to the dollar,” Tim Hext, a Sydney-based portfolio manager in Gor’s team, said separately by telephone.

Pendal’s view follows the Reserve Bank of Australia’s decision to keep interest rates at a record low 1.5 percent last week after a key unemployment metric edged higher. RBA governor Philip Lowe once again highlighted concern over the outlook for household consumption amid sluggish wages growth and high debt.

Eoin Treacy's view -

China is Australia’s largest trading partner so anything that has an impact on commodity demand is not good news for the economy and therefore the currency.



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June 15 2018

Commentary by Eoin Treacy

Email of the day on moving average calculations

Good afternoon, I am a long-time subscriber to your wonderful website and just have a question regarding the chart library. 

I was looking at the moving averages on daily, weekly and monthly charts in your library, and noticed that when comparing to other chart terminals like Bloomberg or sites such as StockCharts, the MA values for weekly and monthly charts don't appear to match despite the same values being inputted. As an example, I attach the weekly charts for S&P500 with the MA values of 34, 89 and 200. Interestingly, the daily charts do have MAs matching.

I was wondering what would be the cause of this discrepancy, perhaps a different formula or method for calculating the MA? I like the way that your chart library appears to calculate the MAs, so if this is indeed the case, is there a way to use the same method for calculating the MA on, say, a Bloomberg terminal? 

Thank you in advance and I look forward to hearing from you.

Eoin Treacy's view -

Thank you for this question which comes up from time to time. The discrepancy is easy to explain. We calculate moving averages on a daily basis because we include all the data at our disposal. Other chart systems calculate the moving average based on the data displayed.



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June 14 2018

Commentary by Eoin Treacy

Video commentary for June 14th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: Euro pulls back sharply, Europe stocks firm from MA, Wall steady, Nasdaq breaks out led my tech and small caps, silver closes above $17, China continues to underperform along with emerging markets on US Dollar strength,  



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