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May 23 2016

Commentary by Eoin Treacy

Monsanto Trading Below Bayer Bid Shows Regulatory Risk Concerns

This article by Lydia Mulvany and Simon Casey for Bloomberg may be of interest to subscribers. Here is a section: 

While the combination of Bayer and Monsanto makes sense operationally, it’s not clear yet how regulators will view this or other deals in the industry, said James Govan, a fund manager at Baring Investment Services Ltd. in London, who manages about 60 million pounds ($87 million) of agricultural and food-related stocks, including Monsanto shares. If they focus on the size of overall market share, as opposed to individual product categories, it may be harder for the deals to go through, he said in an interview Monday.

St. Louis-based Monsanto has yet to respond to Bayer’s offer. It’s not unprecedented for a target company to trade at less than an offer before the deal is later completed successfully. The current premium of Bayer’s offer to Monsanto’s share price is the 21st-biggest among 143 live deals tracked by Bloomberg.

Bayer’s offer is probably less than Monsanto’s valuation of itself, as the U.S. company expects significant growth between 2020 and 2025, said Jonas Oxgaard, an analyst with Sanford C.Bernstein & Co. in New York. Oxgaard said he expects an offer of $135 to be more palatable. Even then, he said, Monsanto would be reluctant to agree on a deal.

“Monsanto doesn’t want to be bought,” Oxgaard said by phone. “They have a history of being a standalone company, very focused long term, and they consider themselves the best company in the industry. It rankles a bit to be the best and then be acquired.”

 

Eoin Treacy's view -

Bayer and Monsanto represent two of the world’s largest seed producers and due to regulatory headwinds offer two very different ways of achieving more productive and bug or drought resistant plant strains. Monsanto is the world leader in genetically modified products while Bayer relies on bombarding seeds with radiation to induce mutation. A tie-up between the European and US leaders in seed technology represents a powerful proposition but it is unlikely to come cheap and regulators will undoubtedly have caveats. 



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May 20 2016

Commentary by Eoin Treacy

The Endgame

Thanks to a subscriber for this transcript of a very bearish speech given by Stan Druckenmiller. Here is a section: 

Look at the slide behind me. The doves keep asking where is the evidence of mal-investment? As you can see, the growth in operating cash flow peaked 5 years ago and turned negative year over year recently even as net debt continues to grow at an incredibly high pace. Never in the post-World War II period has this happened. Until the cycle preceding the great recession, the peaks had been pretty much coincident. Even during that cycle, they only diverged for 2 years, and by the time EBITDA turned negative year over year, as it has today, growth in net debt had been declining for over 2 years. Again, the current 5-year divergence is unprecedented in financial history!

And if this wasn’t disturbing enough, take a look at the use of that debt in this cycle. While the debt in the 1990’s financed the construction of the internet, most of the debt today has been used for financial engineering, not productive investments. This is very clear in this slide. The purple in the graph represents buybacks and M/A vs. the green which represents capital expenditure. Notice how the green dominates in the 1990’s and is totally dominated by the purple in the current cycle. Think about this. Last year, buybacks and M&A were $2T. All R&D and office equipment spending was $1.8T. And the reckless behavior has grown in a non-linear fashion after 8 years of free money. In 2012, buybacks and M&A were $1.25T while all R&D and office equipment spending was $1.55T. As valuations rose since then, R&D and office equipment grew by only $250b, but financial engineering grew $750b, or 3x this! You can only live on your seed corn so long. Despite no increase in their interest costs while growing their net borrowing by $1.7T, the profit share of the corporate sector peaked in 2012. The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins, and growing indebtedness. And we are paying 18X for the asset class

Eoin Treacy's view -

Links to both the transcript and slides associated with the above presentation are posted in the Subscriber's Area. 

The points discussed by Stanley Druckenmiller above echo those discussed in the Subscriber’s Audio and in Comment of the Day over the last number of weeks and months but this fleshes out some of our concerns with hard figures. .



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May 20 2016

Commentary by Eoin Treacy

Mapping the World's Prices 2016

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

world. Zurich leads the way, followed by Sydney, London, Milan, Stockholm, Copenhagen, NYC, San Francisco, Amsterdam and Madrid. Tokyo is amongst the most expensive cities on most measures but surprisingly cheap hotel rooms (more akin to EM prices) help push it below many others. Our cheap date index sees Zurich, Copenhagen, Tokyo, Stockholm and Amsterdam as the most expensive cities to woo a partner. One might choose to settle down at a younger age in these countries or risk expensive courtships. London has dropped 2 places this year and out of the top 5. At the other end of the scale, cities in Malaysia, India and South Africa are the cheapest for a weekend away and around a third of the cost of the most expensive places. For those wanting a real cheap ‘cheap date’, India, Indonesia, the Philippines and South Africa are the places to go. Indeed in all of these places you can have at least 4 dates for the price of one in Zurich but please don’t tell the other 3 people! 

Don’t lose your phone while away in Brazil, India, Sweden, Denmark or Italy as a new iPhone is most expensive there. The US remains the place to buy a new one, followed by HK and Japan. Interestingly there are signs that perhaps Uber is making its mark on the world as taxi prices in many places are falling sharply. Indeed in San Francisco (where Silicon Valley resides), taxi prices have fallen more than anywhere in the DM world over the last 12 months (-30%). 

Bad habits cost you most in Melbourne, Singapore, Auckland, NYC and London as our ‘sin index’ of cigarettes and beers suggests. Singapore and Copenhagen really don't want you to own new cars as prices are nearly 4 times and 2 times the cost of NYC here. Buying a new car in India is half the price of NYC if you can find a way of driving it home. In addition to the aforementioned items this report also looks at the cost of various goods and services across the world. The index page provides the full list.

Eoin Treacy's view -

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

Scrolling through the constituents of this index, the same group of countries crop up at the top and bottom of the most and least expensive. Part of the reason for this is because of relative states of economic development but the declines in many emerging market currencies is another consideration and helps to highlight how much competitiveness can be gained from a prolonged period of currency devaluation. 



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May 20 2016

Commentary by Eoin Treacy

What you should know about China's new energy vehicle (NEV) market

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

About two-thirds of Chinese cities exceed the air pollution limits specified by the Environmental Air Quality Standards, according to China’s State Information Center. Rapid increase in internal combustion engine (ICE) vehicle ownership and the consequent traffic congestion, especially in large Chinese cities, are perceived to contribute significantly to carbon dioxide and other harmful gas emissions, and the level of inhalable particulate matter (PM). This makes China one of the most polluted countries in the world.

To curb environmental pollution and improve air quality, various countries have implemented or tightened policies to gradually reduce fuel consumption and/or harmful gas emission. China also has tightened requirements for emission and fuel consumption. Since the country had a slower start in emission controls (Figure 6), it should be one of the fastest to tighten emission controls to catch up with developed countries (e.g. the EU and Japan) (Figure 7).
While countries have multiple means to lower auto emission, e.g. diesel adoption and using conventional hybrid engine technologies, China has placed a greater emphasis on using electric vehicle (EV) or plug-in electric vehicle (PHEV) technologies. To this effect, the State Council in 2012 issued a roadmap for China’s NEV industry development, The 2012-2020

Development Plan for Fuel-efficient and New Energy Vehicle Industry. 
According to the plan, the government targets an accumulated NEV (including EVs and PHEVs) sales volume of 500k units by 2015 and 5m units by 2020E, with an annual NEV production capacity of 2m units by 2020E. Despite rapid growth in NEV sales volume in 2012-14, the absolute sales volume was meager in China, making up less than 0.2% of its vehicle sales during the period and falling way short of its 2015 target ownership level. However, NEV sales catapulted in 2015 at a 3.4x YoY growth rate and made up 1.3% of China vehicle sales (Figure 8). Aggregate NEV sales also approached closer the 2015 target NEV fleet size. In our view, soaring demand for NEVs in China is fueled by massive government subsidies and policy support (to be discussed in the next section).

 

Eoin Treacy's view -

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

China has a massive pollution problem and perhaps more importantly it is now a political liability as an increasingly vocal middle class demand a healthier standard of living. Additionally China’s geopolitical considerations are never far from the minds of its leadership. The fact China does not have the domestic energy resources necessary to fuel its economic growth represents a challenge for policy markets. 



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May 19 2016

Commentary by David Fuller

China Communist Party Goes Way of Qing Dynasty as Debt Hits Limit

Here is the opening of this powerful, incisive column by Ambrose Evans-Pritchard for The Telegraph:

Nobody rings a bell at the top of the credit supercycle, to misuse an old adage. Except that this time somebody very powerful in China has done exactly that. 

China watchers are still struggling to identify the author of an electrifying article in the People's Daily that declares war on debt and the "fantasy" of perpetual stimulus. 

Written in a imperial tone, it commands China to break its addiction to credit and take its punishment before matters spiral out of control. If that means bankruptcies must run their course, so be it. 

Fifteen years ago such a mystery article would have been an arcane matter, of interest only to Sinologists. Today it is neuralgic for the entire global - and over-globalized - financial system. 

China's debt is approaching $30 trillion. The fresh credit alone created since 2007 is greater than the outstanding liabilities of the US, Japanese, German, and Indian commercial banking systems combined. 

Moody's warned this month that China's state-owned entities (SOEs) have alone racked up debts of 115pc of GDP, and a fifth may require restructuring. The defaults are already spreading up the ladder from local SOE's to the bigger state behemoths, once thought - wrongly - to have a sovereign guarantee.

To put matters in context, leverage rose by roughly 50 percentage points of GDP in Japan before the Nikkei bubble burst in 1990, or in Korea before the East Asia crisis in 1998, or in the US before the subprime debacle. This gauge is an almost mechanical indicator of a future credit crisis. 

As we all know, China is in a class of its own. Debt has risen by 120 to 140 percentage points. The scale of excess industrial capacity - and China's power and life and death over commodity markets - mean that any serious policy pivot by the Communist Party would set off an international earthquake. 

Hence the fevered speculation about this strange article published on May 9 in the house journal of the Politburo. It was no ordinary screed.

The 11,000 character text - citing an "authoritative person" - was given star-billing on the front page. It described leverage as the "original sin" from which all other risks emanate, with debt “growing like a tree in the air”.

It warned of a "systemic financial crisis" and demanded a halt to the "old methods" of reflexive stimulus every time growth falters. "It is neither possible nor necessary to force economic growing by levering up," it said.

It called for root-and-branch reform of the SOE's - the redoubts of vested interests and the patronage machines of party bosses - with an assault on "zombie companies".  Local governments were ordered to abandon their illusions and accept the inevitable slide in tax revenues, and the equally inevitable rise in unemployment.

If China does not bite the bullet now, the costs will be "much higher" in the future. "China’s economic performance will not be U-shaped and definitely not V-shaped. It will be L-shaped," said the text.  We have been warned.

David Fuller's view -

Xi Jinping himself or his right-hand man Liu He.  I do not think Xi Jinping could or even would have written it, although it may have his tacit approval.  It is certainly an informed, candid article and also a serious warning for China’s local governments. 

China is a remarkable country, having developed more rapidly than any other nation in history.  However, it faces an exceptionally difficult transition from a developing, metal bashing and export-led economy to a developed, consumer oriented and technology-led nation.  This transition is well underway but the obvious economic speedbumps include rampant corruption in a rigid communistic political system, now compromised by spiralling debts, not least among China’s state-owned entities (SOEs).

This item continues in the Subscriber’s Area, where a PDF of AE-P’s column is also posted.  



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May 19 2016

Commentary by David Fuller

Freakish Diamond Pulled From Sub-Arctic Ice Is About to Go on Sale

Here is the opening from this interesting story from Bloomberg:

Even in the world of rare stones, Foxfire is a freak.

It was buried in a place where big gem-quality diamonds aren’t supposed to exist. A Rio Tinto Group ore processor was configured to discard it. And what saved the diamond’s 187.7 carats from being pulverized was a fluke: Its unusual, elongated shape allowed it to slip sideways through a filtering screen.

“It really is a miracle that it was found,’’ said Alan Davies, chief executive officer of diamonds and minerals for Rio Tinto, the operator of Canada’s Diavik mine, Foxfire’s former home. “It’s a rare find, a really rare find.”

That’s the company’s marketing line as it shows Foxfire to prospective suitors on a worldwide tour and promotes it as the largest gem-quality diamond ever found in North America. Luckily for Rio Tinto, rare diamonds are hot, much hotter than bog-standard rough stones. Sales of those fell 18 percent last year, while their uncommon cousins rack up records. Lucara Diamond Corp. just sold an 813-carat jewel named the Constellation for $63 million, making it the most expensive of its kind—$77,649 a carat. Next month, Sotheby’s will offer one that could fetch more, the Lesedi la Rona, which at 1,109 carats is the size of a tennis ball.

David Fuller's view -

I remain an unabashed bling fan, although fortunately never wishing to wear it myself. 

This item continues in the Subscriber’s Area.



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May 19 2016

Commentary by David Fuller

Leaving Europe Is a Risk the U.K. Should Not Take

The British electorate does not need Americans to tell them how to vote in the June 23 referendum, and I wouldn’t dare try. I have always had great admiration for the British people -- and great respect for the country’s democratic traditions. But from across the Atlantic, we Yanks are watching the campaign closely -- and many of us who have deep personal and business ties to the U.K. can’t help but take a close interest.

The special relationship between the U.K. and U.S. holds a special place in my heart, and not just because I had the great privilege of being named an honorary Knight of the British Empire by the Queen in 2014. I consider London my second home, my daughters hold British passports (thanks to their British mother), the company I founded employs nearly 4,000 people here, and we have long supported some of London’s world-class cultural institutions.

David Cameron and Boris Johnson, while on opposite sides of the debate, are both good friends and have assured me that no matter what the outcome of the vote, thanks to the Freedom of the City of London I was awarded in 2008, I will still have the right to herd sheep and cattle over London Bridge, and to carry a sword around Piccadilly Circus or anywhere else. Thank goodness for that!

Of course, there is so much more at stake in next month’s referendum, economically and politically -- first and foremost for the British people, but also for Americans and the world. I recognize that, as in most political campaigns, some of the rhetoric on both sides has been wildly exaggerated. But there is no disputing one fact: Given the uncertainty of Brexit’s potential impact, a vote to leave is a risk. The question is: Is the risk worth taking?

I should note: I’ve never been averse to taking risks. In 1981, I started a company to create a product that had no demand, with technology that didn’t exist. Twenty years later, I ran for mayor of New York when no one thought I had even the slightest chance of winning. Against the odds, both decisions turned out better than I could have ever dreamed of. But over the course of my career, there are certain risks that I have refused to take (including running for U.S. president this year) after weighing the evidence and concluding that they were likely to produce more harm than good. Some risks are just not worth it.

As the founder of a business that specializes in financial data, news and analysis, I have carefully evaluated the question of Brexit and concluded that the risks involved are troubling. No one can say for certain if an “Out” vote would shrink the financial services industry, which accounts for about 12 percent of the U.K.’s economic output and the bulk of our customer base. But in my conversations with chief executives of banks and other industry leaders, with rare exceptions, they see Brexit as a serious complication that could lead some jobs to shift to the continent over time. Some in Frankfurt and Paris are rooting for Brexit for this reason.

David Fuller's view -

This is one of the best articles that I have read and also posted on the subject of Brexit. 

Personally, I am less worried about the UK’s long-term prospects outside of the EU but I think this decision is too important internationally for it to be taken entirely on the basis of what fellow UK citizens think is best for our country.  While no one can be certain of what the future holds, I do think Brexit would be extremely divisive.

As for Michael Bloomberg, I regard him as one of the most successful entrepreneurs of my generation, and also the best Mayor of New York that I have seen.  He is probably also one of the best presidents that the USA will never have.     



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May 19 2016

Commentary by David Fuller

May 19 2016

Commentary by David Fuller

Genetically Modified Salmon Approved for Sale as Food in Canada

Here is the opening of this enlightening article from CBC News:

The first genetically modified food animal has been approved for sale in Canada.

At a news conference in Ottawa on Thursday, Health Canada and the Canadian Food Inspection Agency announced AquaBounty's genetically modified salmon has been approved for sale as food in Canada.

A final round of thorough and rigorous Canadian scientific reviews found that AquAdvantage Salmon is as safe and nutritious as conventional salmon, according to technical briefing documents provided by Health Canada.

The same conclusion was reached by the U.S. Food and Drug Administration in 2010, but it took until November 2015 for the agency to approve the fish for sale as food in that country. That decision is being challenged by a group of environmental, consumer, and commercial and recreational fishing organizations.

AquAdvantage Salmon was developed by Massachusetts-based AquaBounty Technologies.

The fish grow twice as fast as conventionally farmed Atlantic salmon because of the addition of genes from a Chinook salmon and an eel known as an ocean pout.

David Fuller's view -

Some people will always carp (no pun intended) about genetically modified fish, or anything else.  However, we have been happily consuming innumerable GM foods, commencing with Mendel’s peas, for decades and often without knowing it.

Yes, there could theoretically be risks such as potential food allergies or more importantly, losses of nutritional value.  Also, fisheries can always improve their ability to lower the risks of pollution and the escape of farmed fish into the open seas.

We may never achieve perfection with all GM foods but mankind’s ability to improve on nature is a great scientific and technological achievement.  As with any other vital industry GM foods also need to be carefully and knowledgeably regulated. 

The best of GM foods will be in our future, and a very good thing too.  The advantages of reducing starvation and undernourishment, by raising higher-yielding crops or not entirely emptying the seas of all fish, considerably outweigh the risks. 

Today I undoubtedly eat more farmed salmon and genetically modified vegetables and fruit than anything else.  Thank heavens they are available and affordable.   

 



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May 19 2016

Commentary by David Fuller

The Markets Now

Monday 11th July at the East India Club, 16 St James's Square, London SW1Y 4LH

David Fuller's view -

Here is the current Brochure.

I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.    



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May 19 2016

Commentary by Eoin Treacy

Conviction themes for a fat and flat market; equities to N over 12m

Thanks to a subscriber for this report from Goldman Sachs. Here is a section: 

Markets have been calmer and cross-asset correlations with oil have fallen since our last GOAL on March 21. Declines in bond yields, owing to a continued dovish Fed, a weaker dollar and stronger commodity prices, have been the key cross-asset moves. This has lifted bond and credit returns, but equities have not benefited much. Global earnings growth revisions have been negative and equity valuations remain high, with the equity risk premium a less useful predictor of returns owing to uncertainty over trend growth and normalisation of bond yields (see GOAL – Global Strategy Paper No. 18: Valuation investigation: Varying signals for the ERP, May 3, 2016).

We stick with our ‘fat and flat’ view for equities. After the rebound from the trough on February 11, and with the S&P 500 at the upper end of its recent range, we downgrade equities to Neutral over a 12-month horizon, in line with our 3-month view. Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels. Our equity strategists have become more defensive, owing to heightened drawdown risk and growth scarcity (see US Weekly Kickstart, May 13, 2016 and Strategy Expresso, May 16, 2016). While we see some upside to equities in local currency (particularly Japan), we expect the dollar to strengthen (see FX Views, May 13, 2016), resulting in poor USD returns over the next 12 months (Exhibit 1).

We prefer to implement the divergence theme via FX rather than equities; equities are generally more volatile than FX and, while the equity/FX correlation for Europe and Japan remains negative, it has increased recently (Exhibit 2) (see GOAL: Lost in translation, October 2, 2015). For Europe, equity/FX correlations could become even less negative as political risks in Europe intensify. We also move to Neutral across equity regions on a 12-month basis (in line with our 3-month basis) alongside these effects.

 

Eoin Treacy's view -

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

Corporate Profits have come in below expectations in the first quarter which makes it harder to justify valuations at where they are right now. 

Companies are not spending as much on buybacks and what they are spending is buying less because prices have gone up so much already. Quite apart from that buybacks inflate earnings per share which has a knock-on effect that compresses P/E ratios. 

 



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May 19 2016

Commentary by Eoin Treacy

Email of the day on Vietnam:

I would also be grateful for an update of your view on the Vietnam market, which has broken out above its 200 day MA and is approaching the top of a multi-year trading range.  The government has announced the merger of the Hanoi and HCM stock exchanges as well as other market friendly initiatives which could perhaps be behind the recent outperformance of Vietnam vs other Asean indices.

Eoin Treacy's view -

Vietnam’s Communist Party is attempting to improve the governance of the economy and has been through a painful period where inflation has been running ahead of expectations. The Dong took the brunt of selling pressure but has been reasonably steady so far this year. Nevertheless, a sustained move below the MA would be required to question medium-term Dollar dominance. 



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May 19 2016

Commentary by Eoin Treacy

Email of the day on the Philippines

Yep All good here thanks. I hope same for you. 

Regarding the new President Duterte, for now it's a wait and see till his final team composition is made.

If he eradicates crime that's already a good thing. I don't think minor crimes (drugs, small crimes) are the major issue in the Philippines, but he made a big emphasis on this during his campaign. And if he really includes corruption into that terminology (I believe he does), then it'll be even better! President Aquino made a lot of improvements on the corruption issues, but it's still a very big challenge. I guess Duterte will make "no joke" on this topic. So I hope for the best. 

For the other economy aspects (a lot is linked to corruption though), especially large infrastructures in my opinion, we hope for a strong economic team, but anyway he pretty much said he'd continue the economic  policies of Aquino, so hopefully it's at least as good as before. 

I know he was called the Trump of Asia and is believed to have human right issues. A lot seems (hopefully!) to be overdone, it was during the campaign which had to be "fun" like the Filipinos like it.

We are in the "hope" phase then...,

 

Eoin Treacy's view -

Thank you for sharing this perspective; which is that of a generous French expat in the Philippines.   



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May 19 2016

Commentary by Eoin Treacy

Buy Robot. Silicon Valley Misses a Trick as China Nabs Kuka

This article by Chris Bryant and Nisha Gopalan for Bloomberg may be of interest to subscribers. Here is a section: 

Adding robotics exposure makes sense, as rising Chinese labor costs are expected to drive a big increase in factory automation there. At present, China uses much less automated manufacturing than more developed economies such as South Korea and Germany. 
China's robot sales rose 16 percent last year, according to the International Federation of Robotics, which predicts that by 2018 it will account for more than one third of industrial robots installed worldwide. 

So you can see the strategic sense of a Kuka deal. But it still begs the question: why didn't Silicon Valley jump in here? Midea's offer values Kuka's equity at 4.5 billion euros ($5 billion), chump change for the likes of Google, Apple or Amazon.

And yes, that whacking great premium is surely designed to see off any potential white knights, but -- just like China -- the U.S. tech giants aren't restricted by the usual rules of corporate finance.

There's been a lot of big talk there about robotics, but besides Amazon's clever acquisition of Kiva, which makes robots that whizz around its logistics centers, we've seen little fruitful action. In March, Google beat a partial retreat by putting its Boston Dynamics unit up for sale.

Of course, the U.S. reigns supreme in software, increasingly central to the success of robotics. But if you want to own the future, you'll have to marry that expertise to intelligent hardware. And it's here where Kuka excels.

The German company has branched out beyond its car-plant robot roots to other sectors, including electronics and medical applications. It's taking a run at the so-called "internet of things" by making its machines easier to program. Its lightweight model called the iiwa is a technological wonder that can work side-by-side with humans, without a safety cage.

 

Eoin Treacy's view -

China is investing heavily in automation because having achieved the moniker “workshop of the world” it intends to hold onto it as labour costs rise. However there is another reason China Inc. is on such a buying spree; acquiring everything from luxury hotels and food companies to robotics in the last year. 



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May 18 2016

Commentary by David Fuller

Most Fed Officials Saw June Hike Likely If Economy Warrants

Most Federal Reserve policy makers in April said an interest-rate increase would be appropriate in June if the economy continued to improve, but were divided over whether those conditions were likely to be met in time.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the committee’s 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June,” according to minutes of the Federal Open Market Committee’s April 26-27 meeting released Wednesday in Washington.

“Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting,” the minutes stated.

Referring to the June meeting, officials “generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision” based on how the economy evolves, the minutes said.

After a weak first quarter, more recent indicators show a rebound in the second. A bump in inflation reported this week lifted investor expectations for the path of rates this year, though odds of a June hike remained low, at about 14 percent, based on federal funds futures pricing.

Consumer Prices

The consumer price index rose by the most in more than three years in April. Recent data on housing and consumer spending have also indicated signs of growth. Gross domestic product in the second quarter is on pace to expand 2.5 percent, according to the Atlanta Fed’s GDPNow gauge. That’s a pickup from 0.5 percent growth in from January through March.

David Fuller's view -

The Fed clearly hopes that it will be able to raise rates in June or more likely July.  If it could do so without fearful hesitation, and that is a big ‘IF’, the strategy of a gradual move towards 2% for the Federal Funds Rate would provide it with some insurance for the medium to longer term.  That would give the Fed more flexibility in dealing with the next recession, whenever that may occur. 

Additionally, the Fed would like to be able to raise rates in the knowledge that the US economy is actually improving.  This would be generally recognised as a validation of the Fed’s cautious strategy to date. 

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May 18 2016

Commentary by David Fuller

Interesting Charts of the Day

David Fuller's view -

These charts are related.  First, look at the Dollar Index, which has failed to maintain its recent downward break.  I maintain that this pattern since DXY initially completed its multiyear base formation in the second half of 2014 and rallied to 100 in March 2015, is a very lengthy consolidation following the first upward step of a secular bull market recovery.  The Fed will still want to restrain the Dollar, because in the upper side of this range, let alone should it sustain a break above 100 this year, it would once again become a strong headwind for the US economy.  

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May 18 2016

Commentary by David Fuller

Earth Relentless Warming Just Hit a Terrible New Threshold

Here is the opening and a brief latter section from this sobering report:

The number of climate records broken in the last few years is stunning. But here's a new measure of misery: Not only did we just experience the hottest April in 137 years of record keeping, but it was the 12th consecutive month to set a new record.

It's been relentless. May 2015 was the hottest May in records dating back to 1880. That was followed by the hottest June. Then came a record July, August, September, October, November, December, January, February, March—and, we learned from the National Oceanic and Atmospheric Administration on Wednesday—the hottest April. In an age of rising temperatures, monthly heat records have become all too common. Still, a string of 12 of them is without precedent.  

Perhaps even more remarkable is the magnitude of the new records. The extremes of recent months are such that we're only four months into 2016 and already there's a greater than 99 percent likelihood that this year will be the hottest on record, according to Gavin Schmidt, who directs NASA's Goddard Institute for Space Studies.  

The chart below shows earth's warming climate, measured by land and sea, dating back to 1880. 

And

To be sure, some of this is the result of a monster El Niño weather pattern lingering in the Pacific Ocean. El Niño may finally be coming to an end, shifting this summer to a cooling La Niña by the time Arctic ice coverage reaches its nadir, according to NOAA's Climate Prediction Center. The agency gives a 75 percent chance of a La Niña pattern developing this year. 

Beyond these cyclical changes, however, there seems no escaping the larger trend that we live on a planet that's warming rapidly. Coastal cities are flooding more regularly, wildfires are starting early, and the world is in the midst of the most prolonged die-off of the ocean's coral ever witnessed.

Perhaps most worrisome, if recent trends are any indication, is that it won't be long before this record-hot year looks cool, compared with what's to come. 

David Fuller's view -

This trend has been clear for a long time, although many people have not wanted to acknowledge it for understandable reasons.  Also, global warming has been good for some of us… so far.  I enjoy London’s mild winters, with a few garden plants blooming throughout the year.  Northern agriculture has been a net beneficiary of milder winters and increased moisture, leading to longer growing seasons.  A slightly wetter climate also relieves drought problems in some arid areas. 

Nevertheless, these gains are very likely to be more than offset by the trend of increased warming which is not only global but also accelerating.  Potential risks for countries closer to the equator are severe.  Unless the rate at which global temperatures are rising is checked, either naturally or with our help, coastal cities will be increasingly susceptible to flooding, with considerable consequences for GDP in those regions.       



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May 18 2016

Commentary by David Fuller

The Markets Now

Monday 11th July at the East India Club, 16 St James's Square, London SW1Y 4LH

David Fuller's view -

I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.    

The new Brochure will be released shortly but you can reserve your seats immediately by contacting Sarah Barnes on this email: [email protected]

 

Please note: This copy was delayed by an overnight loss of online connection.

 



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May 18 2016

Commentary by Eoin Treacy

Email of the day on the Philippines and Duterte

I was a little perturbed to see both of you mentioning Duterte's rise to power as if this was a move in the direction of good governance.  

The man is a complete maverick. He is a populist who has been compared to Donald Trump, but he sounds much more dangerous.  His main claim to fame is ridding his city Davao from crime, which was done by supporting death squads. He has said that he will kill 100,000 criminals.  He made fun of the rape of an American missionary in a prison by saying she was so beautiful that he should have been first in line to rape her.

Nobody has any real clue about what he will do in office.  He probably doesn't know himself.

Here is the best article I have been able to find about that.

 

Eoin Treacy's view -

Thank you for sharing your view and here is a link to an article from the Sydney Morning Herald referring to the episode when Duterte made a wholly inappropriate comment on the rape and murder of an Australian missionary during a prison riot in 1989. He also claims to have been the person to fire the first shot during the subsequent storming on the prison where a significant number of the perpetrators were killed. 



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May 18 2016

Commentary by Eoin Treacy

Email of the day on cannabis/marijuana companies

May 18 2016

Commentary by Eoin Treacy

Death of the Gold Market

Thanks to a subscriber for this report by Paul Mylchreest for ADM Investors Services International Limited covering the most bullish scenario for gold. Here is a section:  

Using data from the LBMA and Bank of England on gold stored in London vaults and net UK gold export data from HM Revenue & Customs, we estimate that the “float” of physical gold in London (excluding gold owned by ETFs and central banks) has recently declined to +/- zero.

If we are correct, the London Bullion Market is running into a problem and is facing the biggest challenge since it collapsed from an insufficient supply of physical gold in March 1968.

Besides the growth in physical gold demand from existing sources (see below), there is more than US$200 Billion of trading every day in unallocated (paper) gold. If buyers lose confidence in the market’s structure and ability to deliver actual bullion, the market could become disorderly (via an old fashioned “run” on the vaults) as it seeks to find the true price of physical gold.

Eoin Treacy's view -

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

The argument often cited by gold bugs is that the derivatives market for gold dwarfs the size of the physical market. That is also the case in the equity, bonds and other futures and options markets because most people wish to benefit from volatility in prices rather than holding the physical asset. This only becomes a problem when someone attempts to corner the market, by buying up available futures contracts then taking delivery and refusing to have their holdings lent against. 



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May 18 2016

Commentary by Eoin Treacy

Obama Administration Extends Overtime Pay to Millions

This article by Dave Jamieson for the Huffington Post may be of interest to subscribers. Here is a section:

The administration will accomplish that by raising what’s known as the overtime salary threshold. Nearly all workers earning salaries beneath that threshold are entitled to time-and-a-half pay whenever they work more than 40 hours in a week.

The current threshold is just $23,660. The White House will be doubling that number, to $47,476, guaranteeing overtime rights for salaried workers earning less than that. The Labor Department will now update the threshold every three years to make sure it keeps pace with inflation.

The White House estimates that the change will bring overtime rights to 4.2 million workers who are currently excluded. It will also clarify eligibility for another 8.9 million workers who may or may not have overtime protections under the current rules, officials said.

On a call with reporters Tuesday, Labor Secretary Tom Perez said the reform was meant to address “both underpay and overwork.”

“The overtime rule is about making sure middle-class jobs pay middle-class wages,” Perez said. “Some will see more money in their pockets … Some will get more time with their family … and everybody will receive clarity on where they stand, so that they can stand up for their rights.”

Eoin Treacy's view -

US Average Hourly Earnings All Employee YoY broke out of a six-year range in September and the Fed raised interest rates for the first time in years shortly afterwards. There is a great deal of speculation about the health of the economy but there is no denying minimum wages demands are rising; with a number of major conurbations having already hiked the rate to $15. The move by the government to make more mid-level employees eligible for overtime is another move that is likely to put upward pressure on wage demands. 



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May 17 2016

Commentary by David Fuller

Make America Gold Again: Calls for A Favourite [Controversial] Standard Are Back

Here is the opening of this interesting article from Bloomberg:

When times are tough, new economic theories get a better hearing. Maybe some old ones, too.

The gold standard is one of the oldest ideas about money, but the hardest of hard-money hawks sense an opening to breathe new life into it. Decades ago, the amount of cash circulating in a country was often limited by the stash of bullion held in its coffers. Especially since 2008, developed-world policy has headed in the exact opposite direction, expanding the powers of central banks to stoke growth. Helicopter drops of money, potentially the next new thing, would be a giant leap further.

For those in the U.S. who see much risk and little benefit in the current course, gold is still a rallying point. And their audience may be growing.

“The fringe has become the mainstream,” said Jesse Hurwitz, a U.S. economist at Barclays Capital in New York. He sees the gold standard as a bad idea but “something we’ll increasingly talk about.”

Of course, full restoration of the system that reigned in the U.S. for a century through the 1970s is almost inconceivable. Even many gold bugs say it can’t be done, and there’s near-unanimity among economists that it shouldn’t be attempted: the U.S. would be in much worse shape, they say, with a Federal Reserve stripped of its ability to freely tinker with the money supply.

But the backdrop to this well-rehearsed debate is changing. Rumbling discontent with the economy has left the establishment under siege, and you can’t get more establishment than the Fed. So, in a curious twist, it’s becoming easier for supporters of hard money -- historically a policy favored by the rich -- to give the idea a populist slant. The money conjured up by central bankers after the crisis, the argument goes, all went to bankers, leaving most Americans no better off. It’s time to tie the Fed’s hands, if not to gold, then at least to something.

David Fuller's view -

Should the USA and other countries go back on a gold standard?  No, although I am interested to see that this topic is back in circulation. 

Advocates of a gold standard will point to times throughout human history when it has worked reasonably well, at least for a while.  The last period of gold standard success was during the Bretton Woods Agreement established in 1944, following WWII.  It worked for a number of years because the USA was the world’s strongest economy, by far, and it also held over half of the available gold reserves at the time.  Consequently, it was able to supply readily exchangeable US dollars to European countries and Japan, which needed this liquidity to rebuild their economies.   

However, Bretton Woods began to unravel because countries led by Japan and Germany were increasing their percentage of global GDP.  US Dollars were not only no longer essential to economic recovery, but also seen by other nations as a system which mainly favoured the USA.  After all, the Fed could print £100 bills at will, but other countries had to provide the equivalent in goods and services to acquire them.  Meanwhile, the US economy was becoming weaker and the Dollar more overvalued due to this monetary inflation and growing public debt caused by the Vietnam War. 

This item continues in the Subscriber’s Area.



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May 17 2016

Commentary by David Fuller

Yes, the IMF and 200-Plus Economists Can Be Wrong

Here is the latter section of another informative column by Roger Bootle for The Telegraph:

In the current debate, the EU’s single market is the focus of much attention. Allegedly, if we are not members, we will not have “access” to it.

This word “access” is extremely misleading. And so is its derivative, “full access”. Every country has access to the single market.

To sell into it, non-members normally have to pay EU tariffs, submit their goods for inspection at border controls, together with the associated paperwork, and comply with rules concerning the origin of goods and their components.

There is no doubt that not having to bear these various costs and inconveniences is an advantage. So, if this advantage came without any costs, you would of course want to have it.

But that is precisely the point – it comes with umpteen costs: having to impose EU rules across the whole of your economy; having to pay the EU’s annual membership fee; being unable to negotiate trade deals with other countries around the world; having to impose the EU’s external tariffs on imports into your country; and being obliged to take any number of EU citizens to live and work in your country.

So the issue is about weighing up costs and benefits – and how these might change over time.

But it is more of a judgment call than a totting-up of numbers. In trying to make it, I suggest that you ponder three key questions.

First, if the benefits of the single market are so enormous, then why is it that over recent years countries all around the world have increased their exports into the single market at a faster rate than most single market members?

Second, if the single market is of such overwhelming importance, why are so many of its members in a terrible state? Why is the Greek economy not carried forward on a wave of prosperity unleashed by the absence of form-filling and checking at borders?

Third, if trade deals are so important, why does the UK do such a huge amount of trade with countries that it doesn’t currently have a trade deal with – including America? 

Even though I believe that we should leave, I concede that there are some good arguments for remaining in the EU. But the fact that various economic bodies with a less than distinguished record of foreseeing the future warn us against leaving is not one of them.

David Fuller's view -

I think Roger Bootle is right on all of the points in this instructive article.  The main reason for voting Remain, I believe, is to remain ‘a good European’ in the eyes of all who fear for the EU, and also wish it well.  As such, the UK can hopefully offer stability and remain a constructive influence.  The risk is that it will remain a costly and frustrating exercise, on an undemocratic and increasingly divisive journey.   



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May 17 2016

Commentary by David Fuller

The Markets Now

Monday 11th July at London’s East India Club

David Fuller's view -

I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club.  David Brown will provide new material of considerable interest to long-term investors.  Iain Little will also have some new material, in addition to his review of interesting investment trusts.

Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India’s cash bar.     



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May 17 2016

Commentary by Eoin Treacy

Musings from the Oil Patch May 17th 2016

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

 

The appointment of a much younger al-Falih to replace the aging al-Naimi, is in keeping with the generational leadership change underway in Saudi Arabia. Producing more oil as Saudi Arabia is doing will act to keep oil prices from soaring even as U.S. and various OPEC member outputs fall. The current rise in oil prices is supported not only by evident production declines around the world, but also by the rise in unscheduled outages such as Canada’ oil sands and oil output from Nigeria’s Delta region. The latter outages are temporary, but they are helping to more rapidly correct the oil inventory glut. That trend is leading to more optimistic outlooks for a quicker balancing of global oil supply and demand. Saudi Arabia will certainly welcome the additional income from higher oil prices, but it is equally concerned with generating more rapid oil demand growth. Until demand growth accelerates, Saudi Arabia will remain locked in an intense battle for market share, especially in Asia, with Russia and the expanding output from a recovering Iranian oil industry. 

The market shock of the replacement of al-Naimi as Saudi Arabia oil minister has worn off. We suggest, however, that people should not be surprised by further policy and leadership changes in the Kingdom. The urgency for royal leadership to put in place the policies and leadership that it believes can successfully navigate the transition of the Saudi economy and its society from one totally dependent on oil to one based on a more diverse industrial and financial foundation is intense. The ability to make that transition will provide greater assurance that Saudi Arabia will not become another failed Middle Eastern state. The world should be rooting for a successful transition even it means moderate oil prices for many years into the future, which will challenge the economies of oil exporting countries around the world. 

Eoin Treacy's view -

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

The oil market remains in a state of flux but the rally has recently been supported by outages at major production geographies which have acted as a bullish catalyst. Nevertheless, none of the outages are permanent in nature and the higher prices move the greater the incentive to speed up repairs. At the same time Saudi Arabia is waging a three fronted war against Iran and the last thing the kingdom wants is to lose market share to its regional nemesis. 



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May 17 2016

Commentary by Eoin Treacy

Global Lenders on Edge as Cyber Attacks Embroil More Banks

This article by Michael Riley, Jordan Robertson and Alan Katz for Bloomberg may be of interest to subscribers. Here is a section: 

While Swift has for decades made sure its own financial messaging network was secured, less attention was paid to the security surrounding how member banks -- each with their own codes and varying levels of technology -- were connecting. Even today, when it discusses the cyber attacks, Swift emphasizes that its own network wasn’t breached and says its members are responsible for their own system interfaces.

Some U.S. banks are pushing to open discussions with Swift about whether it should have responded more quickly to the breaches and should now help member banks better secure their systems, according to one of the people familiar with the thinking within a large U.S. bank. BITS, the section of the Financial Services Roundtable aimed at combating cyberfraud and other technological issues, could be tapped to broker those discussions, the person said.

More broadly, some U.S. banks expect Swift to come up with a technological solution that could apply to all connected institutions and would help reduce these risks, another person said.

 

Eoin Treacy's view -

As more banking is conducted online the need for all counterparties to beef up security, and on a global basis, is no longer about choice but necessity. Cyber criminals both private and government-backed have ample resources to probe the global financial infrastructure for weaknesses they can exploit. Therefore it is necessary to insist on greater security across the network to ensure the thefts seen in Bangladesh and now Vietnam do not become common place. 



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May 17 2016

Commentary by Eoin Treacy

El Nino-Hit Brazil Doubles Cocoa Imports as Harvest Tumbles

This article by Isis Almeida and Gerson Freitas Jr. for Bloomberg may be of interest to subscribers. Here is a section: 

"The drought we suffered starting at the end of last year and the first month of this year, it has really, really hurt not only the main crop, which came in much smaller than was expected, but mainly it will hurt the mid crop that’s starting right now," Hartmann said.

Brazil is being forced to import cocoa to keep processing factories running. Processors need to work with 240,000 tons of cocoa to ensure capacity is utilized and to prevent costs rising, he said. Beans come mainly from Ghana, the second- largest producer, as shipments from top grower Ivory Coast are banned along with those of Indonesia, which ranks third.

"The only permitted cocoa to come to Brazil is from Ghana, which is the most expensive stuff," Hartmann said.

 

Eoin Treacy's view -

Cocoa prices have been subject to some quite abrupt volatility over the last couple of months with the result that the sharp peak to trough swings, evident within the two-year range, remain in place. With prices falling back towards the lower boundary a clear upward dynamic will be required to signal a return to demand dominance which would pressure shorts. 



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May 16 2016

Commentary by Eoin Treacy

California is poised to become the center of cannabis culture

This article by Robin Abcarian for the Los Angeles Times may be of interest to subscribers. Here is a section: 

Personally, I am not a weedinista. I hate feeling stoned. I don't think pot will save the world, and dependence, especially with younger users, can be a problem. But I do think, in some settings, it can work miracles.

A year ago, probably after hearing me knock pot smokers one too many times, David Downs, a San Francisco cannabis journalist, who is married to my niece, sat me down and explained something I hadn't known. There are two important components in marijuana. The primary psychoactive ingredient in pot is THC, which also has medicinal properties such as pain relief and nausea reduction. And there's CBD, a non-psychoactive ingredient that has been shown to be helpful for many ailments, including epilepsy, cancer pain and anxiety.

Increasingly, researchers are investigating the health benefits of CBD. Growers, in turn, are meeting consumer demand for pot strains that are high in CBD and low in THC.

You can achieve a tremendous benefit from high-CBD marijuana and never feel stoned.
This was a revelation.

 

Eoin Treacy's view -

I have to smile at signs proclaiming UCLA is a smoke free campus when driving through Westwood Los Angeles since the smell of marijuana smoke is such a common occurrence. Cannabis is available to anyone who wants it today and not just in California. Considering it is now legal in a handful of states and the FDA is coming under increasing pressure to reclassify it, the movement to build a greater awareness and market for the drug is increasingly successful. 



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May 16 2016

Commentary by Eoin Treacy

Email of the day on China and governance

In Friday’s audio, you speculated about possible reasons for China’s tightening of social conditions.  The following report from an Australian reporter in China, leaves me with little doubt. Xi has already shown his cards.  If the country is opaque today, the future will be more so.  If governance is everything, China will be a laggard.

My first assessment was that more centralization and tougher social conditions in China would delay economic growth but I now think the opposite is just as likely.  

The need for economic reform has been obvious but progress has been slow.  Debt has increased, excess capacity remains a serious problem  while attempts to influence stock markets were ham-fisted.  The failure of the bureaucracy is evident but implementing tough economic policies in the face of public resistance has been difficult. The existence of the country’s strongest unions in the infrastructure and heavy industry sectors, seems to have made change impossible.

In the West we are seeing how democratically elected governments are being taken over by populists whose promises are unrealistic and mostly damaging to their economies.  In Australia we are at day nine in an eight week election campaign where the economically conservative government, which is acutely aware of the nation’s unsustainable path, is struggling to sell a moderate budget which sees debt continuing to increase while depending also on continuing world economic growth and financial stability.  

Premier Xi has no intention of allowing China to go down that same path.  He can see the country’s problems as clearly as we can but the system has failed.

I can easily see Xi blaming bureaucrats and weak leadership in the provinces.  The scene is being set for a major purge.  A second cultural revolution.  Xi can see what the markets are saying and he could  use his power to implement tough economic policies.  There will be significant short term social pain and major economic risks but a strong turnaround in the economy is likely to emerge. China could regain its position as an economic powerhouse.

The period of turmoil will see China’s markets collapse. This will be a black swan event.  Knock-on effects around the world will be serious but, as is often the case, will be another good long term buying opportunity.

 

Eoin Treacy's view -

Thank you for sharing your perspective and this article highlighting the increasingly leftist leanings of Communist Party rhetoric. Most forward looking societies prize bettering oneself through pursuing education and China is no different. Therefore regardless of how you dress it up in idealism, relegating the most educated people in society to its lowliest echelons can only be considered a retrograde step. 



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May 16 2016

Commentary by Eoin Treacy

Bull Market Losing Big Ally as Buybacks Fall Most Since 2009

This article by Lu Wang for Bloomberg may be of interest to subscribers. Here are two sections:

The first-quarter slowdown was mostly executives responding to the economic and credit stress earlier in the year, according to Joseph Amato, chief investment officer of equities at Neuberger Berman LLC in New York, where the firm oversees $243 billion. As the fear subsides, buybacks are likely to stay elevated, he said.

“The scare in the first quarter was overblown,” Amato said. “The economy is growing on the global basis at a reasonable level. That, in our mind, would suggest that companies will come back and have a typical buyback program consistent with levels of the last few years.”

And 

Their role in keeping the bull market afloat is more pronounced this year. According to Bank of America Corp., the firm’s trading clients from hedge funds to wealthy individuals were net seller of stocks for 15 straight weeks through May 6, a record streak. The only buyer was corporations scooping up their own shares.

“Companies have been a fairly consistent buyer that has supported the late stage of this bull market,” Channing Smith, a managing director at Capital Advisors Inc. in Tulsa, Oklahoma, said by phone. The firm oversees about $1.6 billion. Their potential retreat means “there is less firepower to counter any type of bout of selling,” he said.

 

Eoin Treacy's view -

I devoted a lengthy discussion in the Subscriber’s Audio on Friday to the role of buybacks in both supporting the market and manipulating valuations by decreasing EPS. Anything that impinges on companies buying back their shares represents a challenge for the market. Corporations have been the primary driver of demand for shares and buybacks have been an important artery for the transmission of central bank liquidity. 



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May 13 2016

Commentary by Eoin Treacy

Euro-Area Growth Revised Down Slightly Despite Germany

This article by Maria Tadeo and Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section: 

“The headline number was slightly weaker than the estimate, but it’s a good number nonetheless,” said Marco Valli, chief euro-area economist at UniCredit Bank in Milan. “My feeling is there were some temporary factors that supported growth in the quarter, but the underlying trend is slightly softer.”

Expansion in Germany accelerated to 0.7 percent, the fastest pace in two years, beating the 0.6 percent estimate in a Bloomberg survey of economists. Italy grew 0.3 percent and the Dutch economy 0.5 percent. The Greek economy contracted 0.4 percent for the same period.

Germany has benefited from record-low unemployment that has supported consumer demand, while European Central Bank stimulus is helping to drive a cyclical recovery in the euro area as a whole. But the divergence across the bloc highlights the challenge for the policy makers to boost uneven growth and revive an inflation rate that’s fallen below zero again. ECB President Mario Draghi has said the outlook for growth remains “tilted to the downside.”

 

Eoin Treacy's view -

Germany remains one of the clearest beneficiaries of the creation of the Euro not least because it was best prepared for its creation following the necessary fiscal consolidation that followed reunification. Having much of the continent accept its currency, which allowed companies to expand rapidly into less developed peripheral markets while at the same time encouraging massive credit growth in those markets led to outsized gains until the credit crisis. 



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May 13 2016

Commentary by Eoin Treacy

Email of the day on intermarket correlations

The January 2016 to April 2016 correlation between the CCI Index (especially oil component), and world equity markets, and the $US (inverse) has been widely noted. From late April the equities/dollar relationship has been maintained (both have mildly reversed) but unusually, the stronger dollar seems not to have had the same impact on commodity prices.

That a stronger dollar has not hit oil or gold is a little surprising.  This is especially the case for oil, which also faces the prospect of increasing supply, but how can gold be expected to continue its advance?  

 

Eoin Treacy's view -

Thank you for raising a question which I suspect many investors are puzzling over. I certainly have and I’m not sure there is a conclusive answer. In fact considering the lack of commonality I think the answer lies in treating each market on their individual merits. 



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May 13 2016

Commentary by Eoin Treacy

Yield Grab Pushes Treasuries Curve Near the Flattest Since 2007

This article by Alexandra Scaggs and Taylor Hall may be of interest to subscribers. Here is a section: 

The analysts expected a steeper curve after the Fed’s March meeting, when it lowered forecasts for 2016 rate increases, since the policy statement prompted traders to anticipate officials will let inflation quicken. That would erode the value of long-term debt most. Yet securities maturing in 10 years or longer have returned 5.9 percent since that meeting, while short-term notes have gained 1.3 percent, according to Bloomberg index data. That’s because long-term debt prices have been supported by investors searching for yield, the RBS strategists wrote.

“We’ve got a large wall of money from investors who need to hit a nominal yield target. As the market rallies, they need to reach farther out the curve to meet those targets,” Blake Gwinn, a U.S. rates strategist with RBS Securities, said in an interview. The market “hasn’t really behaved in the way we would have envisioned.”

 

Eoin Treacy's view -

Nobody knows what the net effect of the negative rate experiment, much of Europe and Japan are engaged in, is likely to be. The resilience of precious metals is probably one of the unintended consequences. The fact Australian 10-year yields are testing the historic lows and likely to contract further is another. 



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May 12 2016

Commentary by David Fuller

Italy Must Choose Between the Euro and Its Own Economic Survival

Here is a middle section sample from this sobering article by Ambrose Evans-Pritchard for The Telegraph:

"Italy is enormously vulnerable. It has gone through a whole global recovery with no growth," said Simon Tilford from the Centre for European Reform. "Core inflation is at dangerously low levels. The government has almost no policy ammunition to fight recession."

Italy needs root-and-branch reform but that is by nature contractionary in the short-run. It is viable only with a blast of investment to cushion the shock, says Mr Tilford,  but no such New Deal is on the horizon.

Legally, the EU Fiscal Compact obliges Italy to do the exact opposite: to run budget surpluses large enough to cut its debt ratio by 3.6pc of GDP every year for twenty years. Do you laugh or cry?

"There is a very real risk that Matteo Renzi will come to the conclusion that his only way to hold on to power is to go into the next election on an openly anti-euro platform. People are being very complacent about the political risks," said Mr Tilford.

Indeed. The latest Ipsos MORI survey shows that 48pc of Italians would vote to leave the EU as well as the euro if given a chance.

The rebel Five Star movement of comedian Beppe Grillo has not faded away, and Mr Grillo is still calling for debt default and a restoration of the Italian lira to break out of the German mercantilist grip (as he sees it). His party leads the national polls at 28pc, and looks poised to take Rome in municipal elections next month.

The rising star on the Italian Right, the Northern League's Matteo Salvini, told me at a forum in Pescara that the euro was "a crime against humanity"  - no less - which gives you some idea of where this political debate is going.

The official unemployment rate is 11.4pc. That is deceptively low. The European Commission says a further 12pc have dropped out of the data, three times the average EU for discouraged workers.

The youth jobless rate is 65pc in Calabria, 56pc in Sicily, and 53pc in Campania, despite an exodus of 100,000 a year from the Mezzogiorno - often in the direction of London.

David Fuller's view -

This situation is tragic, not least in terms of unemployment. It is also unsustainable, increasingly divisive within Europe, and the single currency is a big part of the problem.  



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May 12 2016

Commentary by David Fuller

Asian Crisis-Again and Again

My thanks to Bernard Tan, an independent and very experienced analyst in Singapore for his latest report.  Here is the opening, backed by clear graphics in the report:

 

In May 2013, I wrote an essay “ASIAN CRISIS AGAIN”. I was mainly referring to ASEAN, not so much North Asia. As I continued to follow the theme, it became clear that it would not be a sudden shock event like in 1998 but a long period of protracted economic malaise.

I already discussed some the factors in my essay “ASEAN Enters Its Lost Decade. Maybe Two” in Aug 2015. Since then, many of the numbers I follow have become worse and the more I read, the more I am convinced that ASEAN is at a dead end.

The bureaucracy of ASEAN is talking about AEC and TPP as if it is going to solve our problems. It’s a classic situation of using the same formula again and again, even when the circumstances have changed. AEC and TPP won’t matter. ASEAN’s problems go far deeper.

ASEAN exports have struggled with a NEGATIVE growth bias since 2013 and the magnitude of the decline has accelerated in the past 12 months.

Only Vietnam is doing well on the export front. A lot of people have the perception that it is from a small base but their export boom has been ongoing for long enough that the base is no longer small.

For example, Vietnam’s export of electrical & electronic products has just overtaken that of Malaysia.

From the above chart, you can see that Malaysia’s export of “high tech” goods has stagnated since the mid-2000s.

The overall economic malaise is borne out by the Manufacturing PMI, which has been mostly below 50 i.e. contraction mode, since 2014.

Of course, there is the “consumption boom that will come from the burgeoning young population of ASEAN”. How many times have you heard this argument? In my opinion, it is hogwash.

Here is the logic without the jargon.

You can’t consume more if you don’t have rising income. You won’t have rising income unless you have the ability to keep producing ever higher value goods and services (to domestic and overseas markets). And you can’t do that unless you keep investing heavily in the education of your population.

Even if you do make the investment in education, you can’t benefit fully unless you have your own indigenous companies that are built on the intellectual property you have created or if your best trained people keep leaving the country in large numbers for greener pastures. The former situation limits your benefits as a nation to only the remuneration portion of the value-added while the latter puts you on an endless treadmill just to keep your position.

David Fuller's view -

This is certainly a sobering analysis but how does it compare to the charts of the main ASEAN Indices.  Shown in local currencies, here are Singapore (p/e 11.67 & yield 4.11%), Malaysia (p/e 18.26 & yield 3.14%), Indonesia (p/e 23.67 & yield 2.05%), Thailand (p/e 19.16 & 3.40%), Philippines (p/e 22.23 & yield 1.81%) and Vietnam (p/e 13.42 & yield 3.81%).

This item continues in the Subscriber’s Area, where Bernard Tan’s report is also posted.



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May 12 2016

Commentary by David Fuller

May 12 2016

Commentary by David Fuller

What Are The Odds Of Finding Earth 2.0?

Here is the opening of this fascinating article from Forbes:

Just a short 25 years ago, if you had asked astronomers and astrophysicists whether there were planets around other stars, the answer would have been, “probably, but we don’t know for sure.” Thanks to a number of new techniques and advanced equipment, we’ve now discovered thousands of stars within our own galaxy that have their own Solar System. Planets come in a huge diversity of sizes and masses, and are found at all sorts of orbital distances; there are planets larger than Jupiter that orbit their star in less than 48 hours, there are Solar Systems with up to five planets interior to where Mercury is to our Sun, and there are over 200 Earth-sized planets discovered around those stars so far, plus 21 rocky worlds in the habitable zones of their stars.

Almost all of this information came from NASA's Kepler mission, which has been the primary exoplanet-discovering tool at our disposal. Yesterday marked the transit of Mercury, where our Solar System’s innermost planet passed in front of the Sun’s disk, blocking its light for a short period of time. At the start of a transit, the star’s brightness drops by whatever portion of the star’s disk is covered, then increases again when the planet moves off. That apparent dip in the star’s brightness, as tiny as it is, provides us with the very method that Kepler uses to detect planets around stars other than our own. When a planetary system is perfectly aligned with a star, relative to our line-of-sight, we can observe this transit, and detect worlds around another star.

The Kepler spacecraft observed a field of view containing approximately 150,000 stars over a period of approximately four years, detecting more than 2,000 planets and with over 1,000 additional “likely planets” that are still awaiting confirmation. But that doesn’t mean that only 1%-2% of stars have planets around them; the likelihood of having a good planetary alignment with our line-of-sight is very low, and furthermore, we can only detect planets with orbital periods that are less than Kepler’s observing time, so nothing farther out than Mars is.

When we compare what we’ve seen with what we expect to be there from the things we cannot yet see, we find some incredible things:

  • About 80% of star systems are expected to have planets around them,
  • The vast majority of planets are three times the size of Earth or smaller, not gas giant worlds,
  • And that it’s estimated that there are approximately 60 billion rocky, habitable-zone planets in our galaxy alone.

Since my childhood I have always hoped that we would be able to find other life species in outer space, ideally intelligent ones.  It seems absurd that we could be the only evolving species in the universe.  Nevertheless the odds of contacting other life forms remain exceedingly long, not least because of the distances involved.  

David Fuller's view -

Since my childhood I have always hoped that we would be able to find other life species in outer space, ideally intelligent ones.  It seems absurd that we could be the only evolving species in the universe.  Nevertheless the odds of contacting other life forms remain exceedingly long, not least because of the distances involved.  

 

Please note: I will be away on Friday.



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May 12 2016

Commentary by Eoin Treacy

GMO Quarterly Letter

Thanks to a subscriber for this instalment of Jeremy Grantham’s report which may be of interest to subscribers. Here is a section:  

This relative optimism was an unusual position for me and the snapback in these markets has validated, to a modest degree, my thinking at the time. I still believe the following: 1) that we did not then, and do not today, have the necessary conditions to say that today’s world has a bubble in any of the most important asset classes; 2) that we are unlikely, given the beliefs and practices of the U.S. Fed, to end this cycle without a bubble in the U.S. equity market or, perish the thought, in a repeat of the U.S. housing bubble; 3) the threshold for a bubble level for the U.S. market is about 2300 on the S&P 500, about 10% above current levels, and would normally require a substantially more bullish tone on the part of both individual and institutional investors; 4) it continues to seem unlikely to me that this current equity cycle will top out before the election and perhaps it will last considerably longer; and 5) the U.S. housing market, although well below 2006 highs, is nonetheless approaching a one and one half-sigma level based on its previous history. Given the intensity of the pain we felt so recently, we might expect that such a bubble would be psychologically impossible, but the data in Exhibit 1 speaks for itself. This is a classic echo bubble – i.e., driven partly by the feeling that the substantially higher prices in 2006 (with its three-sigma bubble) somehow justify today’s merely one and one-half-sigma prices. Prices have been rising rapidly recently and at this rate will reach one and three-quarters sigma this summer. Thus, unlikely as it may sound, in 12 to 24 months U.S. house prices – much more dangerous than inflated stock prices in my opinion – might beat the U.S. equity market in the race to cause the next financial crisis.

Eoin Treacy's view -

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

The Fed is a serial bubble blower and it is hard for them not to be. They are almost compelled to wait for evidence that conditions are overheating before acting and then have to play catch-up by tightening. Eventually policy becomes restrictive enough to prick the bubble but not before truly eye-watering valuations have been achieved.

It needn’t be this way but the political capital and force of will required to run truly counter cyclical policies has not been in evidence since Paul Volcker was Fed chair. In addition politicians do not appear to have the appetite for the coincident fiscal policy required to ensure a positive outcome. Therefore we cannot discount the potential this bull market will eventually climax in a bubble. 

 



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May 12 2016

Commentary by Eoin Treacy

Why structural reforms are EM's last stand

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

Despite its impressive growth record over the past decade and a half, India’s structural deficiencies are well known, holding back its potential. Infrastructure is poor, goods market efficiency suffers from excessive regulation, labor market is inflexible, little is spent on health and education, and both the economy and financial markets have been hampered by heavy handed state intervention.

Our analyses show that not only is India in a mediocre cohort with respect to its structural strength, it has in fact slipped in recent years. While education attainment has improved marginally and the economy has undergone a few bouts of liberalization measures, there have been setbacks in areas such as goods market efficiency, labor and financial markets, along with no discernible improvement in institutional quality. India scores particularly poorly on infrastructure.

It is too early to tell if the new government that came to power in mid-2014 will be able to improve India’s structural scores expeditiously. Efforts to maintain fiscal discipline, raise the efficiency of cash transfer to the poor, reduce wasteful subsidies, tackle corruption, improve health indicators, pass the much-belated Goods and Services Tax legislation, widen the scope of privatization, liberalize the labor market, break down goods market cartels, pass business friendly laws, etc are welcome, but clearly the to-do list is arduously long

Furthermore, the structural scores would rise only when such measures are pushed through successfully, many of which would likely receive pushback from vested interests and face numerous other implementation risks, especially related to the political calendar. We appreciate the goal of the government to improve India’s ranking in the cost of doing business surveys, but would need to see a broader range reform initiatives in order to anticipate decisive improvement in structural rankings. 

 

Eoin Treacy's view -

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

Structural reform is perhaps the clearest evidence of improving standards of governance. However if one waits for the full effects to take shape the chances are the market will have already priced in the majority of the positive outcome. There is no doubt that India has many challenges facing its economy in achieving greater efficiencies and growth outcomes for more of its people. 



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May 12 2016

Commentary by Eoin Treacy

Aussie as King of Real Yields Seen Halting World's Steepest Drop

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

The economy’s underlying resilience helped trip up investors earlier this year when the currency was trading at its weakest in seven years. From a January low of 68.27 cents, the Aussie surged to a 10-month high of 78.35 in April as hedge funds and other large speculators boosted bullish bets.

“When we were sub-70 in January, you couldn’t give the Aussie dollar away, and it was a pretty bitter experience for many to watch the Aussie recover 10 cents from there,” said NAB’s Attrill. “That’s impacted views on the Aussie.”

The past few weeks have been hard on the bulls, with the currency sliding after disappointing price data forced RBA action. Officials said days later that inflation will probably miss the bottom of their target band even with another cut priced into markets.

None of that changes the outlook for the Aussie as external factors tend to dominate domestic developments, said Todd Elmer, a Singapore-based foreign-exchange strategist at Citigroup. The currency’s standing as a higher-yielder as well as Australia’s links to emerging-market growth are likely to be more important in an environment where the Fed’s reluctance to signal higher rates weakens the U.S. dollar, he said.

 

Eoin Treacy's view -

Even if the RBA cuts interest rates to another historic low, the Australian Dollar will still have a positive carry versus just about every other major currency. For yield hungry investors in a negative interest rate world that will still prove enticing. However interest rates are medium-term considerations while commodity prices tend to be shorter-term arbiters for the Aussie’s outlook. 



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May 12 2016

Commentary by Eoin Treacy

May 11 2016

Commentary by David Fuller

Dimmer Outlook from Macy Sends Retail, Apparel Stocks Tumbling

Here is the opening of this topical article from Bloomberg:

A glum outlook from Macy’s Inc. renewed concerns about the broader retail industry, contributing to a stock rout for consumer companies such as Wal-Mart Stores Inc., Michael Kors Holdings Ltd. and Ross Stores Inc. on Wednesday.

Macy’s cut its profit forecast for this year and posted first-quarter revenue that missed analysts’ estimates -- a sign that slow foot traffic at shopping malls continues to take a toll on the largest U.S. department-store company.

Shares of Macy’s plunged as much as 14 percent to $31.91 in New York, their worst intraday decline in six months. And it wasn’t alone. Wal-Mart, the largest U.S. retailer, slid as much as 4.6 percent to $65.61. Target Corp. fell as much as 5 percent to $76.01, its biggest intraday drop since November.

Macy’s is spooking investors with the message that consumers just aren’t spending, said Ken Perkins, president of Retail Metrics. And the chain doesn’t see that changing soon.

“It’s beginning to feel like a new world,” Perkins said.

Companies that stock retailers with goods also got hit. Nike Inc. tumbled as much as 4 percent. VF Corp., owner of the North Face, Lee and Wrangler clothing brands, dropped as much as 5.7 percent. Michael Kors, meanwhile, plummeted as much as 13 percent.

Gap Inc., the largest specialty chain focused on apparel, also reported weak results this week. It posted a 7 percent decline in Gap’s same-store sales last quarter. Analysts had predicted a gain of 1.1 percent, according to Retail Metrics.

Gap’s evaporating sales may force the retailer to rely more heavily on real estate deals and other cost-cutting moves to maintain profit, said Fitch Ratings, which cut its long-term issuer default rating to junk status on Wednesday.

The retreat for U.S. retailers takes some of the shine off of what had been a strong year for the stocks. Even with Wednesday’s drop, the group has surged 19 percent from mid-February, when the Standard & Poor’s 500 Index fell to a 22-month low. It’s the sixth-best performer of 24 industry groups in the three months, though much of the rally can be attributed to a 41 percent jump in Amazon.com Inc., which makes up more than a quarter of the retailing index.

David Fuller's view -

I am surprised the hammer did not fall sooner because the biggest disruptor in Western retail – Amazon – makes up more than a quarter of the retailing index, according to the article above. 

Amazon is not going away so retailers face a tough period ahead.  Nevertheless, successful retailers are very good at reinventing themselves so they will come up with attractive policies which attract the missing buyers.

Meanwhile, value investors will be increasingly attracted by the retail sector’s current underperformance.  Macy’s currently sells at an estimated p/e of 8.69 and yields 4.77%, according to Bloomberg. 

This item continues in the Subscriber’s Area and includes an obvious but too often overlooked behavioural technique for evaluating these shares.  



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May 11 2016

Commentary by David Fuller

Devastating MORI Poll Shows European People Share British Rage Over EU

Here is the opening of this informative article by Ambrose Evans-Pritchard of The Telegraph:

When David Cameron first announced the UK’s referendum on Europe in 2013, the reaction from EU capitals was disdain. Brexit would be a disastrous error for Britain – perhaps suicidal – but Europe would brush off the effects.

As I reported at the time, Spain's foreign minister José Manuel Garcia-Margallo told us that Brexit would lead to "terrible devastation" of our industries, leaving nothing left but "a few petty bankers" in xenophobic isolation.

"David Cameron must understand he cannot slow the speed of the EU cruiser," came the finger-waving admonition from Madrid.

The penny has since begun to drop that Brexit fall-out might be very serious for them as well.

Yet even as recently as this February the prevailing view was still that the referendum saga was largely a British affair, to do with the idiosyncrasies of an island people, or some such peculiarly British pathology, or to do with the post-imperial hang-ups of the English – an irritating canard that inverts the truth, since those Britons with an imperial reflex often rediscover their natural home in the EU power structures.

This was still the view of the policy elites even after the Schengen fire had been raging for months. There was a strange reluctance to accept what has been obvious for a long time, that comparable feelings of irritation with Brussels have been welling in France, Italy, Holland, Scandinavia, and Germany itself.

They still could not see that the EU had over-reached disastrously, or that it had breached the historical contract with Europe’s nation states, or that broader contagion was a mounting threat to their own interests.

David Fuller's view -

I think Europe is more divided today than at any time since the 1970s, not despite the EU’s influence but because of it.  However, I also agree with an earlier comment by Ambrose Evans-Pritchard which I quoted on 28th April:

“You can quarrel with Europe, or you can quarrel with the US, but it is courting fate to quarrel with the whole democratic world at the same time.”

For that reason I am marginally more likely to vote ‘Remain’ in the UK’s referendum on 23rd June, even though I think the EU is in a downward spiral of its own creation.  Meanwhile, the UK can hopefully continue to provide an element of stability and sensible advice, while also fending off any further intrusions on our sovereignty. 

(See also: Nation states have been the making of Europe, by Alan Sked for The Telegraph on 9th May 2016.  He is Emeritus Professor of International History at the LSE, and his perspective is interesting.)



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May 11 2016

Commentary by David Fuller

What Vegetarian Lions Say About Erdogan Plans for Turkey

Here is the opening of this unsettling report from Bloomberg:

“No one has the right to turn Turkey into a country of lions condemned to a vegetarian diet.”

Confused? In President Recep Tayyip Erdogan’s usage, a lion subsisting on salad is like a country running old software even though it's got strong hardware. 

No?

Vegetarian lions and out-of-date software are the same as a shirt that’s too tight, to use another of Erdogan’s recent phrases. These colorful metaphors all boil down to one thing – that thing being the president’s determination to move Turkey away from the parliamentary system that he says has outlived its usefulness.

Since at least his election to the post in August 2014, Erdogan has been seeking to shift Turkey’s center of power to the presidency instead of parliament, expanding the scope of his powers in what had previously been more of a ceremonial role. 

That’s why Capital Economics’ Emerging Market Economist William Jackson places the president’s latest turns of phrase on a continuum with other expressions of his might, like the act ofedging out his prime minister that sent markets tumbling last week. The lion quip is an attempt to seize the momentum after Prime Minister Ahmet Davutoglu’s ouster and put constitutional reform back on the agenda. 

In an interview with Bloomberg, former presidential adviser Burhan Kuzu revealed that behind the scenes plans for political reform are in full swing. Turkey's ruling party may push for a "mini constitutional change package" that allows Erdogan to assume leadership of the ruling AKP in a transitional step on the way to an enhanced presidential system, he said yesterday. 

David Fuller's view -

A confident Erdogan is dismantling Turkey’s previous advantage – a healthy democracy since the days of Mustafa Kemal Atatürk, in an often troubled region of the globe.  For ‘Sultan’ Erdogan, democracy represents a tedious restraint on his superior leadership.  His confidence is bolstered by a fawning EU’s dependence on Turkey to take some of the Middle Eastern and North African refugees off their hands, albeit for a considerable price.    



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May 11 2016

Commentary by David Fuller

May 11 2016

Commentary by Eoin Treacy

Brazil Impeachment Vote May Spell Rousseff's Last Day on Job

This article by Raymond Colitt and Anna Edgerton for Bloomberg may be of interest to subscribers. Here is a section: 

The scandal and crisis have taken on a quality of endlessness and many here are growing numb to each development.

A decision from Fitch Ratings to downgrade Brazil’s sovereign credit rating yet again was relegated to page 27 of O Globo newspaper. The detention of former Finance Minister Guido Mantega for questioning this week wasn’t even the top story for most papers.

By law, Temer would be in charge for 180 days or until the Senate permanently ousts Rousseff. She is charged with having illegally tapped state banks and taken loans to cover up budget deficits. Most analysts agree it will be very difficult for Rousseff to recover support in the Senate and avert a final ouster, not least because she will no longer have control over discretionary spending for legislators’ public works projects.

Rousseff is expected to remain in the official residence, but the Senate will determine whether she will lose other executive privileges, such as the right to use the presidential plane, or take a cut of her salary.

Temer aides say that as soon as Rousseff is notified of the Senate vote, he will take office and quickly nominate a new cabinet. Former central bank chief Henrique Meirelles is the front-runner to become his finance minister, they said.

While financial markets have rallied this year on the prospect of a more business-friendly Temer taking over, there are also concerns that an ongoing corruption scandal and wide- spread disillusionment with the political establishment could come back to haunt the 75 year-old constitutional lawyer.

A Datafolha poll published last month showed 61 percent of respondents support Rousseff’s removal from office, while Temer fared only slightly better with 58 percent calling for his ouster.

 

Eoin Treacy's view -

In addition to the corruption charges levelled against her Rousseff was also unlucky that her premiership occurred during a lengthy decline in commodity prices. With her ouster the potential for reform is still cloudy considering how much of the political establishment are embroiled in the corruption scandals. As a result the makeup of a new cabinet will have a significant bearing on how well the new administration is received by investors. The fact commodities prices have in all likelihood bottomed should act as a tailwind for the economy and leave some room for manoeuvre as the budget deficit is tackled.  



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May 11 2016

Commentary by Eoin Treacy

Email of the day on Chinese commodity trading

Do you have any insights to share regarding reported chaotic futures trading in China. You said markets were likely be volatile going forward but I never imagined this wild ride. As for my personal investments I have consciously sold into recent market rally's while significantly increasing my weighting to cash. I need to maintain a disciplined response to markets otherwise I get stressed.

Eoin Treacy's view -

Thank you for a topical question. There is a lot of hot money chasing short-term profits in China. It’s a symptom of a wider problem where there are limited options to invest for yield, a wide spread between the lending and deposit rates and lax to non-existent regulation. The result is that manias tend to occur with uncomfortable regularity. The stock market last year and the commodity markets this year are two examples. 



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May 11 2016

Commentary by Eoin Treacy

Crop Prices Rally as Report Points to Easing of Glut

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

The Agriculture Department report offered the first official forecast for the new season’s production and consumption around the world.

It said poor weather in South America would contribute to a surge in soybean exports from the U.S. as production in places like Argentina falls off.

“The demand that USDA set forward is incredible,” said Mr. Reilly of the forecast for soybean exports.

The USDA expects U.S. soybean reserves to dwindle to 305 million bushels by August 2017 from an estimated 400 million a year earlier as exports pick up.

Even at their current level, however, soybean prices are about 40% lower than their peak in 2012, and the level of stocks still are comfortable.

Corn futures jumped even though the USDA forecast farmers would harvest a record 14.43 billion bushels this year. The agency’s supply estimates, however, fell short of analysts’ expectations. The USDA projected stockpiles will climb to 2.153 billion bushels by August 2017 from 1.803 billion a year earlier, the largest since the mid-1980s.

The USDA said global corn reserves at the end of the 2016-17 season would total 207 million tons, down from an estimated 207.9 million tons for the current season.

 

Eoin Treacy's view -

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

The full effects of the El Nino weather phenomenon are now becoming evident in soft commodity pricing despite the fact it has already peaked. Soybeans  completed a six-month base in March and continues to extend the breakout. An increasingly overbought condition is developing but a clear downward dynamic would be required to check momentum. 



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May 10 2016

Commentary by David Fuller

Follow Living Wage with a Curb on Pay at the Very Top

On this issue, the economist Andrew Smithers has been labouring in the vineyard for some time. It is high time that his analysis was taken seriously. He notes that whereas many substantial investment projects require a long time horizon and much patience, most senior executives have a short time horizon dictated by impending retirement. As the stock market typically responds to good news about earnings, while baying for blood if things go badly, senior executives have an incentive to scrutinise investments with a very beady eye.

As Smithers points out, the aggregate data from both the US and the UK tell a worrying tale. In both these countries, fixed investment as a share of GDP has fallen substantially. There are all sorts of possible explanations for this decline but surely a leading candidate is the prevailing structure of executive pay which incentivises business leaders to minimise investment.

Interestingly, this has major implications for the performance of earnings more generally. In America, surely much of the reason for the Trump phenomenon is the extremely disappointing performance of real earnings for the average American. This, too, has several roots. But one is surely US firms’ low investment.

This has constrained the amount of capital available to workers, and constrained the growth of their productivity. Without productivity growth, it is impossible for average real earnings to increase for a sustained period. 

The current Conservative government has taken an enormous gamble by interfering with market forces at the lower end of the labour market to raise minimum earnings. It remains to be seen what effect this will have, but the result could be a significant reduction in employment.

It should now direct its attention to pay at the top. The Government needs to act to ensure owners of businesses are empowered – and obliged – to restrain the excessive growth of executive pay and overturn the perverse incentives created by the concentration on short-term share performance.

Not only would this help to win widespread support for the capitalist system, but it would also help to improve overall economic performance.

David Fuller's view -

I think many subscribers will agree with this, as I certainly do, so a hat tip to Roger Bootle and Andrew Smithers. 

Note the number of today’s successful companies which are still run by their founders.  



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May 10 2016

Commentary by David Fuller

The Most Extreme Speculative Mania Unravels in China

Here is the opening in this reoccurring story from Bloomberg:

From the Dutch tulip craze of 1637 to America’s dot-com bubble at the turn of the century, history is littered with speculative frenzies that ended badly for investors.

But rarely has a mania escalated so rapidly, and spurred such fevered trading, as the great China commodities boom of 2016. Over the span of just two wild months, daily turnover on the nation’s futures markets has jumped by the equivalent of $183 billion, outpacing the headiest days of last year’s Chinese stock bubble and making volumes on the Nasdaq exchange in 2000 look tame.

What started as a logical bet -- that China’s economic stimulus and industrial reforms would lead to shortages of construction materials -- quickly morphed into a full-blown commodities frenzy with little bearing on reality. As the nation’s army of individual investors piled in, they traded enough cotton in a single day last month to make one pair of jeans for everyone on Earth and shuffled around enough soybeans for 56 billion servings of tofu.

Now, as Chinese authorities introduce trading curbs to prevent surging commodities from fueling inflation and undermining plans to shut down inefficient producers, speculators are retreating as fast as they poured in. It’s the latest in a series of boom-bust market cycles that critics say are becoming more extreme as China’s policy makers flood the financial system with cash to stave off an economic hard landing.

David Fuller's view -

There are clearly more influences on the international commodity markets than production and consumption, as these strategic resources are increasingly traded in the world’s leading financial centres.  Much of Monday’s downward dynamics in commodities, including precious metals, occurred in response to the news of China’s latest tightening of margin requirements. 

This item continues in the Subscriber’s Area.



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May 10 2016

Commentary by David Fuller

Email of the day

On the Scottish election:

David,

I was interested to read your article in Friday’s comment of the day about the result of the Scottish election. I agree it was a good result from Ruth Davidson’s point of view, but it is likely that Sturgeon will use the Greens to help her force through taxation policies which will be disastrous and there won’t be much opposition from the Socialists under Dugdale. The Greens won’t support the “head gardner” approach of the SNP – otherwise known as the much derided policy of each child having a brainwasher from birth to the age of eighteen. I am sure she will find a suitable crumb to throw the Greens so far as taxation is concerned to buy them off.

There was an interesting article in the Telegraph (Scottish edition) wherein Stephen Tierney who is the director of the Edinburgh Centre for Constitutional Law had this to say –“If the UK Government argues that the concession in 2012 was an extraordinary one –ie to test the independence issue which had been on the table for nearly half a century- then it can reasonably say that an independence referendum cannot be held again for a generation given the costs that secession potentially entails for the state. In other words many would argue that even a clear manifesto commitment to hold a referendum in the life of the next Parliament could be refused unless another extraordinary event intervenes, such as Brexit. I think the key to any refusal is not that it is not in the manifesto or only vaguely alluded to in the manifesto but that secession is an extraordinary issue and STATES CANNOT FUNCTION IN A STABLE WAY IF THIS ISSUE CAN BE RAISED AT ALMOST ANY TIME. As the SNP have only one policy ie the threat of independence I fear that Scotland will be in a dire state for the next five years exacerbated by their taxation policies which will simply drive the wealth creators away and without them there can be no widespread prosperity. I hope that Ruth Davidson is ready to pick up the leaking bucket in five years’ time.

Best wishes

David Fuller's view -

Many thanks for your insights on this topic, which I know is a considerable worry for subscribers in Scotland. 

The good news is that the SNP has peaked and the Conservative Party is back in the game, following Ruth Davidson’s sensible leadership.  The former point shows that the SNP’s trend in popularity has stalled, albeit at a high level, while the latter point means that Scottish Labour is a diminishing threat to the UK in the next UK General Election.  That could be very important, although perhaps less so for residents of Scotland. 

It will take more time for voters in Scotland to lose their enthusiasm for the SNP and its leader Nicola Sturgeon, following their respective high-water marks at the December 2015 General Election.  Therefore, I think you are right that Sturgeon will force through her taxation policies, targeting Scotland’s wealthier residents, probably with support from the Greens as you suggest. 

Regrettably, the next several years are likely to be difficult for Scotland, not least as more wealth creators will most likely be driven away, adding to the economy’s problems.  That would weaken the SNP’s hold on power, although it could take more than one election cycle to remove them from office.  Without a victory for Brexit in the UK’s referendum, I think it will be a long time before Scotland holds another vote on independence.   



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May 10 2016

Commentary by David Fuller

May 10 2016

Commentary by David Fuller

May 10 2016

Commentary by Eoin Treacy

Asked the general trend of the first quarter start

This missive attributed to an “authoritative source” from the central government of China highlights the challenges facing the administration as overcapacity in a number of key sectors is unwound. Here is a section from the Google Translation:

However, it is undeniable that we are faced with the inherent contradiction has not fundamentally resolved, some new problems have also been exposed. "Stability" of the foundation is still mainly rely on the "old way", that is investment-led, large fiscal balance pressure in some areas, increased economic risk probability. Especially private enterprises to invest in a substantial decline in the real estate bubble, an increase in excess capacity, non-performing loans, local debt, equities, foreign exchange, bonds, and so the risk of illegal fund-raising point. Some lower market-oriented, industrial low-end, single structure of the region, economic downward pressure is still increasing, highlighting the problem of employment, social conflict has intensified. Thus, in the face of the main contradiction is down structural than cyclical situation, "into" is "stable" foundation. "In" is to solve the economic operation of the supply side, structural and institutional issues, which will take time, is still in the initial stage, the new power is also not afford to pick beam.

Comprehensive judgment, our economy can not be U-shaped, but can not be V-shaped, but the L-shaped trend.

Want to emphasize that this is an L-shaped stage, not a year or two past. The next few years, the overall weak demand and overcapacity coexist hard for fundamental change, economic growth is not possible, as once picked up it will continue upward as before and one after another to achieve high growth years. "Step back" in order to "two steps forward." We are confident about the development prospects of China, China's full economic potential, toughness, large room for maneuver, if not exciting, not much speed down. In this regard, it must be internalized in the heart outside of the line. Some economic indicators to rebound, do not visibly; some economic indicators down, do not panic.

 

Eoin Treacy's view -

Generally speaking when we hear from an unnamed authoritative source in what is considered a mouthpiece for the central government it is taken as a tacit reflection of standing committee perspective. An L-shaped recovery aimed at the rationalisation of overcapacity and acceptance that the bad loans problem will need to be dealt with, can be viewed as net positives. This is despite the fact it means China is unlikely to be the global growth leader in the next five years that it was in the last decade. 



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May 10 2016

Commentary by Eoin Treacy

May 10 2016

Commentary by Eoin Treacy

Oil Rises From Two-Week Low Amid Libya, Nigeria Supply Fears

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

Oil rose from a two-week low on concern that supplies from Nigeria and Libya, holders of Africa’s largest crude reserves, will be disrupted.

Futures advanced 2.8 percent in New York. Royal Dutch Shell Plc and Chevron Corp. are evacuating workers from the Niger Delta because of deteriorating security, a union official said.
In Libya, some fields will be forced to halt output unless a port blockade is lifted, according to the National Oil Corp.

Canada’s oil-sands companies curbed supply as wildfires ripped across Northern Alberta last week. Gains accelerated as global equities rose.

"The market is getting support from the disruption in Canadian oil sands production and increased threats to output in the Niger Delta," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut.

"The underlying fundamentals remain weak. If not for supply disruptions and the decline in U.S. production, prices would be lower."

Crude has rebounded from a 12-year low earlier this year on signs the global oversupply will ease as non-OPEC output declines and regional supply faces threats in Africa and Canada.

 

Eoin Treacy's view -

Oil prices have been the subject of a great deal of media coverage over the last few months not least because of Saudi Arabia’s court politics. There are so many moving parts to this market that we can really only be guided by the price action as an arbiter of what people are doing with their money. 



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May 10 2016

Commentary by Eoin Treacy

Hedge Funds Bullish on the Philippines as Duterte Wins Election

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

"Politics in Southeast Asia are always volatile and unpredictable," Alex Klein Tank, a managing director at Bangkok- based Civetta, said. "But we stick with the fundamentals and I don’t think the growth trajectory on the Philippines will be derailed by the election."
     
Civetta’s long-only equity fund has about 40 percent of its portfolio invested in the Philippines. It holds shares of four companies: EEI Corp., a Quezon City-based construction company; San Miguel Pure Foods Co.; 8990 Holdings Inc., a low-cost housing developer; and Xurpas Inc., a mobile e-commerce company, Klein Tank said in a telephone interview. The fund, which returned 15 percent this year through April 30, may add to its holdings if there is weakness in coming weeks, he said.
     
"Foreign hedge funds get nervous, but things will go back to normal and countries like the Philippines will continue to grow," Klein Tank said.

 

Eoin Treacy's view -

Above all else Duterte is anti-crime and has been a vocal critic of ineffectual governance so his accession to the Presidency is a potential positive if he can impose stronger standards in government. 



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May 09 2016

Commentary by David Fuller

After 20 Years, OPEC Bids Farewell to Saudi Arabia Oil Chief

Here is the opening of this topical article from Bloomberg:

Saudi Arabian Oil Minister Ali al-Naimi, the architect of the 2014 switch in OPEC policy that’s since roiled the energy market, companies and entire economies from Mexico to Nigeria, is leaving his post.

An 80-year-old who rose from modest Bedouin roots, al-Naimi headed the ministry for almost 21 years, steering the world’s largest crude exporter through wild price swings, regional wars, technological progress and the rise of climate change as a key policy concern.

“During my seven decades in the industry, I’ve seen oil at under $2 a barrel and $147, and much volatility in between,” al-Naimi told a gathering of the who’s who of the American oil industry in February in Houston. “I’ve witnessed gluts and scarcity. I’ve seen multiple booms and busts.”

The departure of al-Naimi, who for years could move markets just by uttering a few words, is the latest sign of how the country’s young Deputy Crown Prince Mohammed bin Salman is stamping his authority over oil policy. Khalid Al-Falih, chairman of Saudi Arabian Oil Co., the state-owned producer, will replace him as minister of energy, industry and mineral resources. Al-Falih is known to be close to King Salman and to Prince Mohammed.

“Khalid has been integral to the current oil policy of Saudi Arabia and has worked very closely with the deputy crown prince,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York and a former White House oil official.

While al-Naimi enjoyed a relatively free hand to implement oil policy under King Fahd and King Abdullah, his room for maneuver seemed to have narrowed since last year’s accession to power by King Salman and the growing influence of his 30-something son, Prince Mohammed.

At the April 17 meeting in Doha where producers discussed a possible production freeze to shore up prices, al-Naimi lacked authority to complete a deal, according to his Russian and Venezuelan counterparts. The view of Prince Mohammed, who had insisted that no accord was possible without Iran, eventually prevailed and the talks collapsed.

David Fuller's view -

All change as Deputy Crown Prince Mohammed bin Salman ups the stakes in this war of attrition.  Consumers and oil importing countries will be the long-term beneficiaries.   



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May 09 2016

Commentary by David Fuller

Email of the day

On EU insurance companies:

Dear David, In this week's RiverFront survey on European stocks, the author stated that the European financial sector was among the most risky groups. He referred constantly to banks but what about insurance and reinsurance?

David Fuller's view -

Thanks for a question which will certainly be of interest to a number of other subscribers.

This item continues in the Subscriber’s Area.



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May 09 2016

Commentary by David Fuller

Small Is Beautiful

Here is the opening of this interesting report from Tim Price which commences with some less familiar quotes from Warren Buffett:

The shareholders of Berkshire Hathaway have just celebrated their latest ‘Woodstock for capitalists’ in the form of the company’s annual general meeting. Fund manager Jeffrey Miller of Eight Bridges Capital Management made the following comments having watched Berkshire’s webcast, which found their way into Barron’s:

“The most interesting part was when he was asked why Berkshire had changed from investing in companies with high returns on capital and no-or-low capital requirements to those that require massive amounts of capital, like railroads and pipelines. His answer: because Berkshire is too big now to invest in those great low-capital businesses (even though they are superior to what he is buying recently and are what created the track record of which so many are envious). My takeaway: smaller is better in asset management, because it opens up many more opportunities that are unavailable to investors that grow too large – like Berkshire Hathaway. Buffett hesitated before he answered, because the answer revealed an uncomfortable truth – that Berkshire is no longer able to maximize returns for its shareholders, but Buffett is unwilling to return the capital to them to go and find other investments.” [Emphasis ours.]

That size can be a barrier to high investment returns is no secret, and it’s an observation that Warren Buffett has himself made before:

“If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

But Berkshire Hathaway today is a $350 billion company, and elephants don’t gallop.

David Fuller's view -

I had not seen this quote immediately above and I did not find the date for it, but I assume that it had to be in a relatively early period of Buffett’s career.  The 1950s, for those who remember, were the momentum years of an earlier secular bull market which was ending in the mid-1960s.  The approximately equivalent years of the last secular bull market were post 1987 and well into the 1990s. I would not be surprised to see a similar environment following 2020, but that can only be a guess so please don’t hold me to it. 

This item continues in the Subscriber’s Area, where a copy of Tim Price's report is also posted. 



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May 09 2016

Commentary by David Fuller

May 09 2016

Commentary by Eoin Treacy

Lithium 101

Thanks to a subscriber for this comprehensive heavyweight 170-page report on lithium. If you have questions on the lithium sector the chances are they will be answered by this report. Here is a section: 

Global lithium S&D analysis highlights opportunity for high-quality assets
The emergence of the Electric Vehicle and Energy Storage markets is being driven by a global desire to reduce carbon emissions and break away from traditional infrastructure networks. This shift in energy use is supported by the improving economics of lithium-ion batteries. Global battery consumption is set to increase 5x over the next 10 years, placing pressure on the battery supply chain & lithium market. We expect global lithium demand will increase from 181kt Lithium Carbonate Equivalent (LCE) in 2015 to 535kt LCE by 2025. In this Lithium 101 report, we analyse key demand drivers and identify the lithium players best-positioned to capitalise on the emerging battery thematic. 

Global lithium demand to triple over the next 10 years
The dramatic fall in lithium-ion costs over the last five years from US$900/kWh to US$225/kWh has improved the economics of Electric Vehicles and Energy Storage products as well as opening up new demand markets. Global battery consumption has increased 80% in two years to 70GWh in 2015, of which EV accounted for 35%. We expect global battery demand will reach 210GWh in 2018 across Electric Vehicles, Energy Storage & traditional markets. By 2025, global battery consumption should exceed 535GWh. This has major impacts on lithium. Global demand increased to 184kt LCE in 2015 (+18%), leading to a market deficit and rapid price increases. We expect lithium demand will reach 280kt LCE by 2018 (+18% 3-year CAGR) and 535kt LCE by 2025 (+11% CAGR). 

Supply late to respond but wave of projects coming; prices are coming down 
Global lithium production was 171kt LCE in 2015, with 83% of supply from four producers: Albemarle, SQM, FMC and Sichuan Tianqi. Supply has not responded fast enough to demand, and recent price hikes have incentivized new assets to enter the market. Orocobre (17.5ktpa), Mt. Marion (27ktpa), Mt. Cattlin (13ktpa), La Negra (20ktpa), Chinese restarts (17ktpa) and production creep should take supply to 280kt LCE by 2018, in line with demand. While the market will be in deficit in 2016, it should rebalance by mid-2017, which should see pricing normalize. Our lithium price forecasts are on page 9.

 

Eoin Treacy's view -

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

The cost of lithium ion batteries falling rapidly and the fact this is occurring at the same time solar cells costs have been trending lower is a major incentive for installations of both technologies; increasingly in parallel. With costs coming down and technology improving growth in demand is a major consideration as factories achieve scale and miners invest in additional supply. 



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May 09 2016

Commentary by Eoin Treacy

The Cold, Hard Facts Raining on China's Commodity Parade

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

The rally last month was accompanied by a surge in trading volumes, with as much as 1.7 trillion yuan ($261 billion) in commodity futures changing hands in a single day. That drew comparisons with 2015’s credit-driven stock market rally that preceded a $5 trillion rout, and prompted exchanges to raised transaction fees and margins amid orders from regulators to limit speculation.

Waning Enthusiasm
As the exchanges stepped in, trading volumes shrank. About 20 million contracts of everything from eggs to steel changed hands on the Dalian Commodity Exchange, Zhengzhou Commodity Exchange and Shanghai Futures Exchange on Friday, down from a peak of 80.6 million contracts on April 22.

“Bullish enthusiasm in Chinese commodities futures has been rapidly declining, especially after the exchanges pushed out massive measures to curb speculative trading,” Yu said.
Iron ore futures in Dalian sank to 388 yuan a metric ton on Monday, while rebar, used to strengthen concrete, slumped by the Shanghai Futures Exchange limit to 2,175 yuan a ton. Coking coal, used in steel making, dropped as much as 6.3 percent to 650.50 yuan a ton and copper slid to 35,840 yuan a ton. Cotton, of which enough was traded in a single day last month to make a pair of jeans for all of humanity, lost as much as 3.9 percent to 11,865 yuan a ton.

Iron ore inventories held at ports across China increased 1.4 percent last week to the highest since March 2015, according to data from Shanghai Steelhome Information Technology Co., while rebar stockpiles rose for the first time in nine weeks.

Imports of unwrought copper and products slumped to 450,000 tons last month from 570,000 tons in March, Chinese customs data showed on Sunday, as swelling stockpiles discouraged shipments.

 

Eoin Treacy's view -

The casino culture that has been increasingly evident in Chinese financial markets does nothing to encourage confidence among investors that the market is functioning correctly as a price discovery mechanism. In fact one can but draw the conclusion it is the subject of wild swings by leveraged traders out for quick profits at the expense of consumers without the inhibition of the kind of regulatory oversight we are accustomed to in more developed markets. 



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May 09 2016

Commentary by Eoin Treacy

Dollar Extends Best Streak Since March on Fed Speculation, China

This article by Andrea Wong and Taylor Hall for Bloomberg may be of interest to subscribers. Here is a section: 

"We’re expecting a bit of dollar rebound," said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London. "The baseline for the Fed is still for two hikes. We’ve had some negative prints off the China data, that’s weighing on the commodity currencies."

The greenback has pared its 2016 decline on signs the move had become overdone and as policy makers including New York Fed President William Dudley restate plans to raise rates. The dollar has rallied during the month of May for nine of the past 10 years.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, gained 0.6 percent as of 2:42 p.m. in New York, after climbing 1.5 percent last week, the most since Nov. 6. The U.S. currency rose 1.3 percent to 108.48 yen, touching the highest since April 27.

The rebound hasn’t stopped hedge funds from extending their bearish bets on the dollar. Speculators extended so-called net- short positions on the U.S. currency versus eight major currencies to the most since April 2014, according to the most recent figures from the Commodity Futures Trading Commission.

Hedge funds’ bearish dollar bets against the yen held near their April peak, which was the highest in data going back to 1992. Speculators have turned "extremely bearish on the dollar,"

 

Eoin Treacy's view -

The Dollar extended its rally today against a broader swathe of international currencies not least the Yen and Rand. That is supportive of the view that it had already priced in more than short-term worries about the pace of growth and was assuming there was no chance of a hike this year. Right now there is some repricing a potential Fed rate hikes. 



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May 06 2016

Commentary by David Fuller

Investment Surge Gives US the Early Lead In Rise of the Robots

The US and China are poised to take the lead from Japan and Germany in the race to become the global robotics leader

Surging investment in artificial intelligence is giving the US an early advantage in the race to dominate a new era of robotics, according to investors and experts in an industry that is set to become one of the most strategically important.

Recent advances in AI, particularly in a technique known as deep learning, have shifted robotics from its core industrial market into areas such as self-driving cars, fuelling debate over the benefits and threats posed by the rise of the robots.

As the technology extends its reach beyond factory production lines, the US and China are poised to take the lead from Japan and Germany, which dominate traditional industrial robotics.

Investment in the sector in the US more than doubled to $587m last year, according to CB Insights, a venture capital research firm. That is helping drive global growth of 17 per cent a year, according to research group IDC, which projects the robot market will almost double from $71bn to $135bn by 2019.

“The most interesting things are in Silicon Valley or the US,” said Dmitry Grishin, a Russian internet entrepreneur and investor who has raised a $100m fund to invest in robot and other hardware start-ups. As low-cost robots move into more consumer and business uses, such as drones, China’s hardware manufacturing expertise will also make it a more significant player, he added.

David Fuller's view -

Although large industrial robotics for vehicle assemblies were developed decades ago and continue to be refined, we are now witnessing an explosion in other forms of robots, which are limited only by human imagination. 

It is hard to think of a more fascinating sector but profitability is another matter.  For instance, Boston Dynamics was sold by Google, primarily because it spent too much time and money creating humanoid robotics of limited use, at least so far.  

Among the key areas for profitability are products with helpful software and practical uses for middleclass consumers. 

(See also: Google Puts Boston Dynamics Up for Sale in Robotics Retreat and Robotics maker Fanuc likely to prosper)



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May 06 2016

Commentary by David Fuller

Ruth Davidson Urges Nicola Sturgeon to Rule out Second Independent Referendum

At a press conference in Edinburgh, Ms Davidson said the SNP leader now had “no mandate, no majority and no cause” to hold another vote on the issue, and any claims to the contrary had been “utterly shredded”.

Ms Davidson was speaking after the Tories recorded their best-ever Holyrood result by securing 31 MSPs to overtake Labour while the SNP took 63 of the 129 seats, failing to win a second overall majority.

Speaking at the Apex Hotel in Edinburgh’s Grassmarket, Ms Davidson said: “As I said during the election campaign, the SNP manifesto does not give Nicola Sturgeon a mandate for a second independence referendum.

“Now that she has failed to win a majority, whatever claims the SNP were pursuing with regard to constitutional brinkmanship over the next five years have now been utterly shredded.

“No mandate, no majority, no cause – the SNP must now let Scotland move on.

“There has been a material change. As she starts her new term of office, I hope Nicola Sturgeon makes it clear that she will now focus entirely on what she was elected to do – lead a devolved administration.

“She should give families and firms the certainty they need. Nicola Sturgeon has it within her power to do that.

“I urge her to start this new parliament by ruling out another referendum.”

David Fuller's view -

Ruth Davidson is a strong, sensible minority leader for Scotland and I agree with some of our subscribers in that beautiful country who maintain that the SNP has peaked.  I doubt that Nicola Sturgeon or any other SNP leader will have another absolute majority because their policies are too divisive and too socialist for canny Scots, who wish to build on their 300-plus years of success in the United Kingdom. 

Combative Nicola Sturgeon will not want to rule out another referendum because leaving the UK is the SNP’s main objective.  However, if she was foolish enough to try, I think it would be soundly defeated and hasten the SNP’s decline in the process. 

(See also 22/12/2015, 10/11/2015, 19/08/2015, and 18/08/2015



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May 06 2016

Commentary by David Fuller

The Weekly View: Eurozone: Ugly Headlines, Resilient Data

My thanks to Rod Smyth and colleagues for this latest edition of their excellent letter, published by RiverFront Investment Group.  This issue is written by Chris Konstantinos, and here is a brief sample from the opening:

The Eurozone is not an easy story to believe in.  Years after the onset of a credit crisis that continues to test cultural and economic resolve, the region is still the setting for some of the world’s ugliest news headlines.  Terrorism, questions of solvency in the banking system, and a still-simmering migrant crisis are but a few items that have assaulted markets in recent months.

As value investors, we believe that sustained ugly headlines over time can create attractive entry points for assets.  We tend to think that bad news eventually begets cheap prices, which begets outsized future returns.  RiverFront’s Price Matters asset allocation process is suggesting that, at current prices, developed international stocks (including the Eurozone) offer attractive potential 5- and 10-year forward returns, if history is any guide.  (See our Strategic View, dated 3/2.16, for more on this topic.)

However, many investors are understandably asking us a different question: why do we believe that any of this value is set to be realized over the next 12 months?  After all, valuation can be a poor timing tool, and being “early” in the portfolio management business is the same thing as being wrong.  The purpose of today’s Weekly View is to lay out a transparent framework for some of the recent data that informs our preference for Eurozone stocks, as well as to show how we monitor risks to our view.

David Fuller's view -

This is an intelligently written and credible analysis, even though most investors will be in agreement with the opening sentence above.  We can thank ‘Super’ Mario Draghi of the ECB for most of the improvement cited, and not just recently.  He should be there for at least another three years before his term expires in October 2019, assuming he can tolerate the masochism.  However, Germany has already signalled that it wants to take control of the ECB, for better or worse, when Draghi leaves.

This item continues in the Subscriber’s Area, where a PDF of The Weekly View is also posted. 



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May 06 2016

Commentary by David Fuller

May 06 2016

Commentary by Eoin Treacy

IBM brings quantum computing to the masses

This article by Colin Jeffrey for Gizmag may be of interest to subscribers. Here is a section:

Though not a full-blown quantum computer (the IBM processor comprises just five superconducting qubits) it does represent the latest advances in IBM's quantum architecture that the company claims may one day scale up to create very much larger, more complex quantum processors and eventually lead to the development of a universal quantum computer, which could solve some of the problems that simply can't be solved using classical computers.

"Quantum computers are very different from today's computers, not only in what they look like and are made of, but more importantly in what they can do," says Arvind Krishna, senior vice president and director, IBM Research. "Quantum computing is becoming a reality and it will extend computation far beyond what is imaginable with today's computers. This moment represents the birth of quantum cloud computing. By giving hands-on access to IBM's experimental quantum systems, the IBM Quantum Experience will make it easier for researchers and the scientific community to accelerate innovations in the quantum field, and help discover new applications for this technology."

Housed in the IBM T.J. Watson Research Center in New York, the processor uses five qubits formed by superconducting metals embedded on a silicon chip. As Gizmag reported last year, IBM researchers showed that breakthroughs in detecting quantum errors were possible by bringing superconducting qubits together in a lattice arrangement, and it is this quantum circuit design that is brought to bear in IBM's cloud-connected processor with advanced parity measurement error correction protocols.

Although universal quantum computers do not yet exist, IBM believes that medium-sized quantum processors of 50-100 qubits will be a reality within the next decade. A quantum computer created with just 50 qubits would already be more powerful than any of the world's top 500 supercomputers.

 

Eoin Treacy's view -

As silicon transistors get progressively smaller and draw closer to the absolute limit of one atom thick the race has been on to develop alternatives. So far there is no clear winner but there are a number of potential technologies that could hold the answer. Among these are quantum computing, DNA computing, optical or light based computing and graphene based chips.  



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May 06 2016

Commentary by Eoin Treacy

Email of the day on possible stock market scenarios

Can you give me your view?

As there is a change in monetary policy in the US it is obvious to see a pause in 6 years bull trend in stock markets. For the same reason an overbought sentiment on monthly charts is being unwound. We cannot expect a bull revival yet. Potential tests of resistance and false breakout yes, but then I would expect prices to slide down towards supports (S&P500 to 1800). 

If Fed raises rates in 2nd half of 2016 we may see further pressures towards pre-crises 2007 highs. What’s the potential and probability that this will happen if we think of it as a great discount but with further pressures from corporate bonds expiring in 2018 and 2020? It does not give me enough confidence for this scenario. I rather think of rate hikes will ban markets from establishing higher highs, keep markets in range until corporate bonds expire causing bigger sell off towards 2007 highs and from there we may see another secular leg upwards. What is your take on my 2 scenarios? Are there other scenarios that you can think of?  Can stocks rise when Fed tightens?

 

Eoin Treacy's view -

Thanks for laying out two possible scenarios but as you know guessing the likely level of a market three years from now is fraught with uncertainty not least because no one knows what is going to happen between now and then. 

To answer your last question first. Yes stocks tend to rise when the Fed begins to raise rates because they wouldn’t tighten without the economy being healthy enough to tolerate them; so it is generally a vote of confidence. However as rates rise they represent an increasingly strident headwind. The problem on this occasion is we are in a new paradigm where no one knows if past relationships will be borne out. For example the market experienced a sharp pullback shortly after the Fed raised rates. 

 



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May 06 2016

Commentary by Eoin Treacy

CLSA Sees China Bad-Loan Epidemic With $1 Trillion of Losses

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

Cheung’s assessment adds to warnings from hedge-fund manager Kyle Bass, Autonomous Research analyst Charlene Chu and the International Monetary Fund on China’s likely levels of troubled credit. The IMF said last month that the nation may have $1.3 trillion of risky loans, with potential losses equivalent to 7 percent of gross domestic product.

‘Shadow Banking’
CLSA estimates bad credit in shadow banking -- a category including banks’ off-balance-sheet lending such as entrusted loans and trust loans -- could amount to 4.6 trillion yuan and yield a loss of 2.8 trillion yuan.

CLSA cites a diminishing economic return on stimulus pumped into the economy as among the reasons for a worsening outlook, with Cheung saying at a briefing that bad loans had the potential to rise to 20 percent to 25 percent.

“China’s banking system has reached a point where it needs a comprehensive solution for the bad-debt problem, but there is no plan yet,” he said in the report.

 

Eoin Treacy's view -

Concerns about the scale of nonperforming loans have been voiced by international investors on more than a few occasions over the years and yet very little has been done to tackle the issue. In fact the ham-fisted approach to market regulation under the Xi administration has probably exacerbated the problem. 



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May 05 2016

Commentary by David Fuller

Let Us Say It All Together: Nobody Knows Anything

In "Adventures in the Screen Trade," screenwriter William Goldman wrote that "nobody knows anything." It is a quote that is enjoying a second life these days.

The book’s first mention of that line, which is repeated throughout, referred to the many studios that passed on films that would go on to be blockbusters. Every studio in Hollywood but one (Paramount) turned down "Raiders of the Lost Ark." It became one of the highest-grossing films of all time, and was nominated for nine Academy Awards. "Star Wars" was passed on by the largest Hollywood studio at the time, Universal. It grossed $1 billion, and spawned a franchise with five films that are in the all-time top 100 in gross box office sales. Eventually, Walt Disney Co. purchased the Star Wars production company, Lucasfilm, for more than $4 billion.

Goldman was referring to the fact that, despite all of their research, experience, focus groups and smarts, no one in Hollywood has any idea how well a film will do before its release.

Whenever we try to figure out complex future outcomes -- like what movie might do well -- we enter a minefield. Start with a screenplay, which may or may not translate well from the page into a visual medium. How compelling is the director’s vision? How likeable are the character portrayals? And perhaps least known, what are the public’s tastes going to be in three to five years, when the film ultimately is released to theaters? 

There is an enormous degree of serendipity and good fortune that goes into a blockbuster movie. The same seems to be true of just about everything in life, from marriage to careers to stock portfolios. 

How easy is it to mistake good luck and randomness for skill? How readily do we convince ourselves we understand what is going on, that we are in control of our destinies, when nothing could be further form the truth? 

Consider this election cycle’s primary contests. Bernie Sanders, a 74-year old Jewish Socialist was widely expected to drop out of the Democratic race almost immediately. Despite the delegate math, he’s still in the race. And almost all of the pundits had proclaimed -- quite loudly, too -- that Trump had absolutely no shot at winning the Republican nomination. You were admonished to beware their calls of “Peak Trump” last year, because (say it with me, people) nobody knows nuthin’.

I know nothing, but at least I am aware of my own ignorance, and am willing to admit this publicly. Most of the rest of the commentary class has yet to learn this all-important lesson.

David Fuller's view -

I think Barry Ritholtz intentionally overstates his case for emphasis but there are some very important points that every investor and trader can take from this theme.

Those of us who are experienced investors know that we need the luck of the big trend, to make significant profits at an acceptable risk.  Price charts will help because we can monitor the momentum and consistency of a trend, even though we have no idea how far it will run. 

Looking for temporarily out of favour and relatively undervalued sectors and shares is a good starting point, even though there is a subjective aspect to this analysis.  However, we do not want to be solely focussed on value because the best moves become manias.  Identifying relative strength will tell you that the crowd is participating.  Charts will help you to see when that enthusiasm is overextended and beginning to wane.       

Common sense should tell you that when everyone is bullish, they are telling you more about what they have already bought, rather than what the market will do.  Conversely, exceptionally bearish sentiment tells us that the market is oversold and close to a reversal. 

Do not mistake a bull market for brains, if you wish to remain objective and keep your feet on the ground. 

Warren Buffett has reminded us once again that high management charges are too often better for the manager than the customer – shades of ‘Where are the Customers’ Yachts?’



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May 05 2016

Commentary by David Fuller

Paranoia or Justified Concerns Over Potential Social Unrest In Russia?

Putin remains popular and there has been no significant social unrest. However, in April, Putin announced the creation of a new National Guard, which will be accountable directly to him. The National Guard will take control of OMON, Russia’s riot police, and SOBR, the country’s SWAT forces. The creation of this new force under Putin’s direct control signals that the president is highly concerned about internal stability, and perhaps even about the reliability of Russia’s elites and security services.

 

David Fuller's view -

Leaders become less popular with time, and especially hard times.  Putin has been respected by Russians for creating order following the breakup of the Soviet Union and also the Yeltsin years.  However, as a tough leader with a KGB background he is more feared than respected, particularly by people with influential positions.  They dare not criticise Putin publicly, but widespread dissatisfaction is the likely cause for increased security forces under his direct control.  



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May 05 2016

Commentary by David Fuller

Turkey: Last Shreds of Balance Are Disappearing

Here is the opening of this worrying article from Bloomberg:

In the beginning, nearly 14 years ago, Recep Tayyip Erdogan chose a team of smart and qualified people to run Turkey with him. He now appears set to force out one of the last of that group -- Prime Minister Ahmet Davutoglu -- and replace him with someone more pliant. This is disastrous for Turkey, as financial markets have recognized.

To know why, look at the issues over which Erdogan and Davutoglu -- who is no rebel or hero of a Turkish secular democracy -- have sparred, fraying what was once the tightest and subservient of political relationships to breaking point.

The earliest split came soon after Davutoglu's appointment as Prime Minister, when he proposed an anti-corruption package in response to allegations of corruption made against Erdogan's family and closest political allies. Erdogan said the idea was premature and it was dropped.

Davutoglu was keen to preserve a measure of market confidence in the independence of Turkey's Central Bank, protecting it from Erdogan's curious beliefs about monetary policy (he has said that higher interest rates promote inflation, a theory refuted by several centuries of economic theory and empirical data). When a new central bank governor was to be appointed last month, Erdogan wanted someone more responsive to his demands for lower rates.

Davutoglu has also been marginally less hawkish on the destructive war with militants from Turkey's large Kurdish minority, which was rekindled last year. He spoke out in support of hundreds of academics, who were arrested under anti-terrorism laws for writing a public letter critical of Erdogan's Kurdish policies.

David Fuller's view -

 

Recep Tayyip Erdogan has steadily reversed much that Mustafa Kemal Atatürk achieved when creating a secularized and westernized Republic of Turkey following the collapse of the Ottoman Empire.  Will we next be referring to Erdogan as the Sultan of an undemocratic and increasingly authoritarian Turkey?      



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May 05 2016

Commentary by Eoin Treacy

Negative Interest Rates: A Tax in Sheep's Clothing

Thanks to a subscriber for this article by Christopher J. Weller for the Federal Reserve Bank of St. Louis. Here is a section: 

But a negative interest rate is just a tax on the banks’ reserves. The tax has to be borne by someone:

The banks can choose not to pass it on and just have lower after-tax profits. This will depress the share price of banks and weaken their balance sheets by having lower equity values.

The banks can pass the tax onto depositors by paying a lower interest rate on deposits or charging them fees for holding the deposits. In either case, depositors have less income to spend on goods and services.

The bank can pass the tax onto borrowers by charging them a higher interest rate on a loan or higher fees for processing the loan. In either case, it is more costly to finance purchases of goods and services by borrowing.

None of this sounds very “stimulative” for consumer spending. But then, no tax ever is.
Negative Interest Rates in Other Countries

What has happened so far in countries that have tried negative interest rates? The figures below provide answers. As seen in the first chart, bank stock prices have definitely taken a hit. After initially continuing their downward trends, interest rates on mortgages have now risen in Germany and Switzerland (the second chart). Banks have been very reluctant to charge negative deposit rates for fear of a backlash from customers (the third chart).

At the end of the day, negative interest rates are taxes in sheep’s clothing. Few economists would ever claim that raising taxes on households will stimulate spending. So why would they think negative interest rates will?

 

Eoin Treacy's view -

The ECB announced a two-step shuffle, when it implemented its negative interest rate policy, in order to mitigate the effect it would have on the banking sector. However there is no getting around the fact that negative interest rates are going to be borne by someone and that consumers are unlikely to benefit in that scenario. 



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May 05 2016

Commentary by Eoin Treacy

Negative interest rates are the dumbest idea ever

This interview of Jeff Gundlach by Christoph Gisiger for Finanz und Wirtschaft may be of interest to subscribers. Here is a section:

Energy companies are playing an important role in the junk bond sector. What would oil at $ 38 mean for the credit markets?

Just like oil, the high yield market has enjoyed the easy rally. I think it’s basically over. I don’t see how you are supposed to be all fond off high yield bonds, since they are facing enormous fundamental problems. I thought people would learn their lesson but the issuance in the years 2013/14 was vastly worse than the issuance in 2006/07. Also, in the bank loan market covenant lite issuance rose to 40% in 2006/07. In this cycle it climbed to 75%. The leverage in the high yield bond market is enormous and you’re about to have a substantial increase in defaults. I wouldn’t be surprised if the cumulative default rate in the next five years were going to be the highest in the history of the high yield bond market.

What would be the consequences of that?
We are now in a culture of default. There is no stigma about defaulting anymore. During the housing crash, homeowners walked away from their mortgages. That was the beginning of a massive tolerance of default. Today, people talk about Puerto Rico defaulting like it’s nothing. But if Puerto Rico defaults why won’t some clever person in Illinois say: «Let’s default, too! » Constitutionally, Illinois is not allowed to default, but Puerto Rico wasn’t either. For Illinois it just seems impossible to pay their pension obligations. And then, what about Houston, what about Chicago, what about Connecticut? I am surprised that people have lost their focus on the enormity of the debt problem. Remember, in 2010 and 2011 there was such a laser focus on the debt ceiling in the US and we were worried about Greece. Nobody is worried anymore. People are distracted by this negative interest rate experiment. 

 

Eoin Treacy's view -

The first time I visited Boston was about four years ago and there was a sign from Prudential above the Charles which proclaimed “We have $1 trillion under management”. That’s an impressive number but what popped into my head was “What do they own?” The answer of course is that a great deal of that money is invested in bonds. In fact regulators insist conservative portfolios, aimed at the pensions market, have to own bonds in order to ensure some degree of security that future liabilities can be met. The fact bonds have been in a 35-year bull market has only bolstered the sector’s “risk free” credentials. 



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May 05 2016

Commentary by Eoin Treacy

The Value of Gold

Thanks to a subscriber for this bearish, or at least cautious report, on gold by John LaForge for Wells Fargo. Here is a section:

In February, we published a cautionary gold not titled “Not the Time to Buy More Gold” The title pretty much said it all. To be clear, we do not detest gold. Rather our long-standing guidance has been that gold should be a regular position in a diversified portfolio. Our beef is not with owning gold, but how much gold to own. 

Many signs point to underweighting gold in portfolios today. In February’s gold publication, we highlighted two vital negative trends 1) persistently poor price action, and 2) repeated performance losses to other major assets (stocks, bonds, housing). Both trends by the way are characteristics of commodity bear super-cycles.    

Poor price and performance trends, while important, only tell part of the underweight story. The value of gold is a major concern of ours too. Said simply – gold does not look particularly cheap. This may sound odd with prices down $640 per ounce since 2011, but history argues for even cheaper relative prices in order for gold to begin a new bull market. As we will explain next, gold does not appear to a great bargain vs. stocks, bonds or housing. And gold is downright expensive compared to the average commodity, and especially other precious metals.

 

Eoin Treacy's view -

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

To balance this view of gold being expensive. Here is an interview with Jim Rickards who expects gold to move to new all-time highs. Gold is a market that tends to elicit extreme predictions so let’s stick to what I believe are the two most important factors concerning the market. It is a monetary metal and often seen as a safe haven during times of stress



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May 05 2016

Commentary by Eoin Treacy

Health Insurers Struggle to Offset New Costs

This article by Louise Radnofsky and Ann Wilde Mathews for the Wall Street Journal may be of interest to subscribers. Here is a section: 

Humana’s announcement follows a disclosure from UnitedHealth Group Inc. last month that, amid deepening losses, it will next year withdraw from all but a handful of the 34 states where it was offering exchange plans.

Anthem and Aetna Inc. were far more upbeat about their prospects on the health-law marketplaces in recent earnings calls, but both have also said they aren’t yet achieving their targeted margins and aim to improve results next year.

Insurers seeking rate increases—which include several other big plans in Oregon and Virginia—all cite the higher-than-expected medical costs incurred by their enrollees as factors in their decision.

In Oregon, regulators’ filings show Moda Health Plan Inc., once the largest insurer on the exchange, saying it needs to hike premiums there by an average of 32.3%. That is coming on the heels of an increase of around 25% last year; the insurer also said it would stop selling individual plans in Alaska.

 

Eoin Treacy's view -

For anyone outside the USA who wonders why people might be unhappy with Obamacare the simple answer is many middle class consumers are paying a lot more but for reduced service. This has translated into a great deal of dissatisfaction with the ruling elite which boosted the campaigns of both Donald Trump and Bernie Sanders in their respective primaries. 



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May 04 2016

Commentary by David Fuller

Here Is What Usually Happens to Stocks In Years Like 2016

Here is the opening of this topical article from Bloomberg:

Despite the huge comeback in the S&P 500, investors remain skeptical of the bull rally. If history is any guide, they shouldn't be so worried. 

Bespoke Investment Group took a look at previous years that closely resemble the big drop, and even bigger comeback, the S&P 500 has experienced since January, and it's good news for the bulls. "In terms of rest of year returns for the years highlighted [in the table below], the S&P 500’s average performance has been +3.8 percent with positive returns 80 percent of the time," the report stated. "This is pretty much right in line with the overall average for all years since 1930." In fact, the year with the least resemblance to 2016 was the only one in which the S&P was down by double digits through the rest of the year. 

The report isn't, however, good news for those hoping for a big year to the up or down side. Only three of the 10 years the firm looked at had double-digit moves by yearend. "In terms of extremes between now and year end, the S&P 500’s median maximum gain and loss are both equal at 7.9 percent, and in both cases this is actually less extreme than the median maximum gain and loss for all years since 1930," Bespoke said. 

David Fuller's view -

I would not be too reassured by this article, which states what for me would be a best-case scenario. 

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May 04 2016

Commentary by David Fuller

Mobius Says Buy Commodity Stocks as Rebound Is Just Beginning

Here is the opening of this interesting article from Bloomberg:

Here is the opening of this interesting article from Bloomberg:

Mark Mobius is piling into commodity stocks in China, saying that a rebound in raw-material markets is only getting started after prices sank too far and that gains may be extreme.

Templeton Emerging Markets Group will add more raw-material stocks from Asia’s top economy, according to Mobius, executive chairman of the group, who’s been investing in emerging markets for more than four decades. Many of them will be good holdings for the long term, he said in an e-mail interview, without identifying particular companies.

China’s commodity producers, which were the worst mainland equity investments over almost a decade, have led this year’s rebound as China boosted stimulus and local investors swarmed into the nation’s futures markets, with bets on everything from steel bars to cotton. The Bloomberg Commodity Index rallied for a second month in April, and assessments are stacking up that the worst of the rout is now over, including from industry veteran Tom Albanese, a former head of Rio Tinto Group.

‘Down Too Far’

“We have already seen how both commodity prices and the commodity stock prices went down too far, beyond realistic assessments,” Mobius said. “We can now expect movement on the upside to be extreme in percentage terms. If there is a move down, there is a good chance that we would increase.”

David Fuller's view -

Fuller Treacy Money concurs with this view and I do not think one needs to select shares in China to participate. 

There are plenty of recovering commodity shares trading in London and also the USA, as subscribers may have noticed from Eoin’s frequent reviews.  These offer speculative appeal and more, if one considers the sector leaders with substantial dividend yields.

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May 04 2016

Commentary by David Fuller

Email of the day

On the US Dollar and its influence:

Hello David and Eoin,

It struck me how different the dollar index looks over different time horizons. For instance, on the daily chart, we saw a key day reversal yesterday in an area of previous support and suggests rally potential in the shorter term. On the other hand, on a 5 year weekly chart, it looks like it has formed a top near the 100 level. If the latter is correct, that supports the medium term bullish case for commodities and emerging markets. It would need to break support around 88/89 to confirm that it has indeed topped. From a fundamental perspective, the strength in the euro and the yen this year argues that the trend in the currency markets has switched for now to current account balances from interest rate differentials which prevailed from 2013 to 2015. Both the euro zone and Japan have seen their current account surpluses swell over the past few years as a result of currency depreciation and a fall in commodity prices.

Looking at a 20 year monthly chart suggests yet a different path the dollar might take. This suggests that the dollar had paused near 100 and is now ready to try the upside again. This psychological level will be a stiff barrier to overcome, but if it were to be contained in a range of say, 88 - 100, commodities should still do well as they have other positive factors in their favour.  At the end of the day, no country wants a particularly strong currency, so the policy makers will strive to maintain a ranging environment.

I would welcome your comments.

Kind regards

David Fuller's view -

Many thanks for an interesting email.

Re the Dollar Index outlook, I think we get the most perspective from long-term charts, and I mainly use daily charts for occasional monitoring of short-term trading.  So, moving in reverse order from your sequence above, I will start with a 50-year semi-log chart.  It shows how incredibly cheap the Dollar Index was in 2008, following a climactic slump, mainly in two stages, which began in 2002.  I suspect no country or company which was borrowing in more liquid USD below 80 had looked at this chart.  Subsequently, the big upward dynamic to almost 90 confirmed that an important floor had been reached and that potentially lengthy base formation development was likely, as we had seen previously.  Yes, I am now commenting with hindsight but the post 2008 analysis of the Dollar Index was less challenging than usual, as a search of the archive will show, because it was occurring following an extreme move and we often commented on it.  Determining the timing of the completion of this big Type-3 base, with its churning time and size characteristics as detailed at The Chart Seminar, was more difficult because we had a lower low in 2011.  However, the subsequent steadying above 79 showed a much higher low, confirmed by the persistent move above 85.

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May 04 2016

Commentary by Eoin Treacy

China Rolls Up Welcome Mat

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

No, China isn’t closing for business. Compared with many other developing countries, it remains wide open. It is the world’s largest manufacturer, biggest trader and a magnet for foreign investment. About three-quarters of China’s high-tech exports come from foreign-invested companies.

China’s antiforeign turn is driven by several related trends. First, President Xi Jinping has a much lower tolerance than Deng for the unwelcome intrusion of foreign ideas about democracy, press freedom and individual rights that come along with trade and investment—what Deng called “flies and mosquitoes.”

The other day, Mr. Xi was railing against “Western capitalist values” invading the Communist Party’s own training schools.

Second, Mr. Xi is pushing ideology harder than any leader in decades. Increasingly, China sees itself in ideological confrontation with the West. In addition to stressing Marxism, Mr. Xi’s administration is seeking to revive traditional Chinese culture to counter Western ideas—thus, the hostility to crosses.

And Mr. Xi is promoting a strident form of nationalism. One aspect of this is much greater Chinese assertiveness in territorial disputes with neighbors, including Japan, Vietnam and the Philippines. Another is an explicit set of government policies aimed at helping Chinese firms replace their foreign rivals in the domestic market.

All of this adds uncertainty to the outlook for foreigners who have landed on China’s shores. The 2010 census put their number at almost 600,000, not including residents from Hong Kong, Macau and Taiwan.

 

Eoin Treacy's view -

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

“Governance is Everything” has been a mantra at this Service for decades. China made massive steps in opening up to foreign investment and became the world’s factory floor in a very short period of time; creating massive wealth along the way. Co-operation with the wider world always came on China’s terms such as requiring domestic partners and technology sharing but there was the quid pro quo in terms of access to the growing Chinese consumer base. 



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May 04 2016

Commentary by Eoin Treacy

Turkish Crisis Deepens as Premier Said to Demand Autonomy

This article by Onur Ant, Firat Kozok and Selcan Hacaoglu for Bloomberg may be of interest to subscribers. Here is a section: 

The power struggle at the top of Turkish politics may come to a head later on Wednesday, with Prime Minister Ahmet Davutoglu planning to tell President Recep Tayyip Erdogan he needs to respect the premier’s office and let him get on with the job, a person familiar with the matter said.

Davutoglu is considering calling an emergency convention of the ruling AK party, in which delegates would vote on the leadership, should he not receive a favorable response, the person said, asking not to be named due to the sensitivity of the matter. Davutoglu has been facing intensifying opposition within the party from a group of hardline Erdogan supporters, the person said.

A party summit could be held in about 45 days should Wednesday’s meeting not end in agreement, the person said.

Tensions between the two men, and the rift among their supporters in the party, are more explosive than generally acknowledged, the person said.

Erdogan, who served as prime minister for more than a decade until 2014, has transformed the typically ceremonial role of the president to a new center of power and is seeking to formalize that by rewriting the constitution. Davutoglu, his handpicked successor, is seeking to establish his own credentials as an independent policy maker.

 

Eoin Treacy's view -

There is no evidence to contradict the view that Erdogan is an aspiring despot. The increasingly assertive position taken by the prime minister is a medium-term positive subject of course to whether he is successful. 



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May 04 2016

Commentary by Eoin Treacy

Gasoline Demand Is A Red Herring For The Oil Market

Thanks to a subscriber for this article by Art Berman covering US gasoline demand. Here is a section:

Meanwhile, net gasoline exports are at record high levels. Exports have increased 1,443 kbpd since June 2005.

So, consumption has increased but remains far below pre-2012 levels. Production is again approaching earlier peak levels but most of the increased volume is being exported. The belief that U.S. consumption is approaching record highs is simply not true.

Americans Are Driving More But Using A Lot Less Gasoline

Americans are driving more than ever before. Vehicle miles traveled (VMT) reached an all-time high of 3.15 trillion miles in February 2016 (Figure 2).

VMT have increased 97 billion miles per month (3%) since the beginning of 2015 and gasoline sales have increased 187 kbpd (2%). The rates of increase are not proportional.

For example, VMT was fairly flat from mid-2011 until oil prices collapsed in September 2014 yet gasoline sales fell more than 1 million barrels per day during the same period. Americans traveled the same number of miles but used a lot less gasoline. Even with the VMT increase since 2015, sales are still 539 kbpd less than in January 2009.

 

Eoin Treacy's view -

Generally speaking energy demand represents a constant long-term growth trajectory because so much of the global economy depends on energy consumption to fuel growth. However the evolution of electric and CNG vehicles, as well as increasingly stringent emissions regulations reflect an additional consideration that was not so much of a factor previously.



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May 03 2016

Commentary by David Fuller

Put Buffett Advice Into Action With These Two ETFs

Here is the opening of this informative article from Bloomberg:

Warren Buffett's advice may now extend beyond the grave.

When the Oracle of Omaha went out of his way to trash hedge funds and endorse low-cost index funds, it wasn’t just a case of "do as I say, not as I do." He had already laid out plans to allocate his personal fortune this way. Here's what Buffett wrote about his last will and testament in a letter to shareholders about 2013 results (pdf):

“My advice to the trustee could not be more simple. Put 10% of the cash in shortterm government bonds and 90% in a very lowcost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, individuals—who employ high fee managers.”

While there is no exchange-traded fund that does this per se, investors might easily put Buffett's advice into practice with a mini-ETF portfolio--let's call it the "Buffett Special." Simply allocate 90 percent of your money to the Vanguard S&P 500 ETF (VOO) and 10 percent to the iShares 1-3 Year Treasury Bond ETF (SHY).

The Buffett Special portfolio comes with a near invisible blended fee of 0.06 percent, which is only 1/12th the asset-weighted average for active mutual funds. It's less than 1/30th of the typical 2 percent charged by a hedge fund (and that isn't counting performance fees, which are usually 20 percent on any profit). 

And what about the returns?

The Buffett Special has a 10-year annualized return of about 7.5 percent through the end of June 2015. That's better than the average endowment return of 6.3 percent through the same time period, according to the National Association of College & University Business Officers. 

It also bests the average pension return of 6 percent, according to the Wilshire Trust Universe Comparison Service. So Buffett's not kidding when he says this miniportfolio will beat even the most sophisticated institutions. It's not entirely a fair comparison, though, because some of these big players have very different goals, and mandates, than individual investors. Still, many of them take a long and expensive route, guided by active managers and consultants, to get to the same place they'd arrive at if they just listened to Warren.

The Buffett Special easily bests the average hedge fund return, as well. Below is a chart of VOO’s index, SHY, and the Hedge Fund Research HFRI Fund Weighted Composite Index. (VOO itself isn’t 10 years old, so the chart shows its underlying index.)

David Fuller's view -

There is not a sensible investor alive who has not learned or is capable of learning something very useful from Warren Buffett.  It starts with diversification, low fees if someone else is managing your money, and buy-low-sell-high. 

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May 03 2016

Commentary by David Fuller

Why Robots Are Coming For US Service Jobs

When Andy Puzder, chief executive of restaurant chains Carl’s Jr and Hardee’s, said in March that rising employment costs could drive the spread of automation in the fast-food sector, he tapped into a growing anxiety in the US.

From touchscreen ordering systems to burger-flipping robots and self-driving trucks, automation is stalking an increasing number of professions in the country’s service sector, which employs the vast majority of the workforce.

Two-fifths of US employees are in occupations where at least half their time is spent doing activities that could be automated by adapting technology already available, according to research from the McKinsey Global Institute. These include the three biggest occupations in the country: retail salespeople, store cashiers and workers preparing and serving food, collectively totalling well over 10m people.

Yet evidence of human obsolescence is conspicuous by its absence in the US’s economic statistics. The country is in the midst of its longest private-sector hiring spree on record, adding 14.4m jobs over 73 straight months, and productivity grew only 1.4 per cent a year from 2007 to 2014, compared with 2.2 per cent from 1953 to 2007. Those three big occupations all grew 1-3 per cent from 2014 to 2015.

David Fuller's view -

Service industries will understandably avail themselves of whatever helps them to cut costs, while also improving the speed and accuracy of the services which they provide.  In restaurants, I imagine most of the robots will be out of sight, helping in the back office and the kitchen.  In anything other than chain restaurants, the appeal of knowledgeable service will outweigh other considerations for some time.    

Nevertheless, the ability of intelligent robots to rival humans in providing useful services is limited only by the technical ability of their developers.  



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May 03 2016

Commentary by David Fuller

May 03 2016

Commentary by David Fuller

A Vote to Stay in the EU Is Not a Vote for Europe

Here is the latter section of this topical article by Clive Crook for Bloomberg:

In the longer term, Britain retains its blocking power over treaty changes: It can’t steer the broader project, but it can stop anybody else steering it. Other EU governments aren’t interested in revising the treaties just now anyway, because the union is unpopular elsewhere too, which would make it hard to get the changes ratified by national parliaments. Still, a point will come when treaty changes are needed to fix what’s broken in the EU economy. The reformers will have to deal with Britain.

In the meantime, the U.K. could be more deliberate about dragging its feet. It could follow the example of many other EU governments, which regard a commitment (such as a fiscal target) as binding only if they feel like being bound. Brits are a bit priggish about seeing promises to other governments as undertakings rather than aspirations.

Having refused to adopt the euro, the U.K. is already semi-detached from the EU’s main economic project. It has opt-outs in other areas of policy too. This distance is going to widen under the pressure of heightened euro-skeptic sentiment following a vote to stay. Over time, as the euro area pursues closer integration in fiscal and financial policy, Britain will become even more of an anomaly -- and demands for Brexit won’t subside.

Eventually, the EU might come to agree that Brexit makes sense. I’ve argued before that Britain’s best bet in Europe is to be exasperating. Sure, it’s been pretty exasperating already, but it can do better. Remember, the biggest risk in Brexit is that the EU will punish Britain for leaving. The answer is obvious. Vote to stay -- then bring the EU to the point where it will pay Britain to go.

David Fuller's view -

I doubt that the floundering EU will be paying any country to leave.  Instead, it appears that the entire developed world wants the UK to maintain its current role within the EU, for various reasons mostly involving their perceptions of global security rather than any clear understanding of the UK’s best interests. 

Fair enough and it would not help the UK if it was cited as the trigger for the EU’s eventual breakup.  The EU’s collective mentality is similar to investors who refuse to change course and cut their losses caused by unsuccessful speculations.  



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May 03 2016

Commentary by Eoin Treacy

Musings from the Oil Patch May 3rd 2016

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

This time around, the discussion seems to be heading in a slightly different direction. Mr. Kibsgaard believes that the downturn will result in a “medium for longer” pricing scenario in which the national oil companies of OPEC can still generate significant returns for their owners due to the low cost base of their conventional resources. With this cost advantage and a desire to play for market share in a world of minimal demand growth, cost issues for producers will become very important. In his view, the procurement-driven contracting model is the main obstacle to creating the performance improvement desired by the customers. The problem comes from producer procurement professionals who believe the service companies don’t bring much to the engineering aspect of projects thus the only way the companies can be compared is by price, which means comparing them on the basis of their more commodity-oriented products. 

In Mr. Kibsgaard’s view, the procurement-driven model leads to suboptimal technical solutions and correspondingly poor project performance from both a design and executional standpoint. That also means financial returns will be negatively impacted. In light of this outlook, Schlumberger has been undertaking a revamping of how it competes based on collaboration and commercial alignment between the operators and the largest service companies. This preparation can be seen through their acquisition strategy during the past few years as Schlumberger has filled holes in its technology suite and extended its ability to do more of what was often contracted to others, which has become more important for retaining complete control of projects. 

Schlumberger is close to putting five prototype drilling rigs into the field to test its new drilling system that will capitalize on its downhole instruments to help guide and evaluate the formations being drilled and render information to the drilling equipment and the people at the surface. By automating the drilling process based on the downhole intelligence, wells can be drilled faster, cheaper, safer and with a greater productivity outcome. It is possible fewer workers will be needed on the rigs further reducing the cost of drilling wells and potentially helping both the operator and service company improve returns.

Competitors will be watching Schlumberger closely. Initial successes will pressure competitor management teams to consider broadening their product and service offerings followed by how to make them more integrated and profitable. Producers will be watching the experiment as they wrestle with how to increase their profit margins if oil prices remain in the $40-$55 per barrel range for a number of years. If producers cannot grow production because of low industry growth, they will need to strive to become more profitable in order to be rewarded by investors.

Eoin Treacy's view -

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

Big declines in oil prices put enormous pressure on drillers to innovate. As exploration budgets are slashed customers demand more for less and new technology is the only way that can be achieved. Companies like Schlumberger have to constantly push the barrier of what is possible so they can gain market share and ensure a place for themselves when the oil majors come under cost pressure. 



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May 03 2016

Commentary by Eoin Treacy

Dollar Rises From 1-Year Low as Lockhart Says June Meeting Live

This article by Rachel Evans and Taylor Hall for Bloomberg may be of interest to subscribers. Here is a section: 

A precipitous decline in the greenback, almost 2 percent in the past week, looks to be running out of steam. A measure of dollar momentum is near a level that signals to some analysts it has fallen too far, too fast and is set to reverse direction.

The U.S. employment report on May 6 may also support Fed plans to raise rates.
“We’ve come a long way quite quickly and there was a sense that we were a little bit stretched,” said Daragh Maher, New- York-based head of U.S. currency strategy at HSBC Holdings Plc.

“The Fed has tried to stress throughout that the door remains open to June. We’ve still got data to come in terms of the employment report, but I don’t think they want to rule it out.”

 

Eoin Treacy's view -

As I mentioned in yesterday’s Subscriber’s Audio, the Dollar Index was testing the August reaction low and that represented the lower side of the medium-term range. If it was going to reassert demand this was the area. Today’s impressive rally off of the intraday low suggests at least near-term support and a clear downward dynamic would be required to question current scope for an unwind of the short-term oversold condition. 



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May 03 2016

Commentary by Eoin Treacy

May 03 2016

Commentary by Eoin Treacy

Email of the day on how best to utilise the trend mean (200-day MA)

Some recent research concludes, 

“that the 200-day moving average — like most trend-following rules — is in reality little more than expensive disaster insurance. That doesn’t mean it’s worthless. But it comes at a price — in contrast to those who heretofore have claimed that you can both increase returns and reduce risk by following the indicator. “ and 

“it’s possible — but unlikely — that NASDAQ stocks [having crossed the 200MA line]will continue going down a lot further than they have already.

The full report is here: 

As an elderly novice on a steep learning curve, I have found it advisable to give due consideration to all the indicators, technical and fundamental.  On this basis, it seems that, in the present circumstances, the NASDAQ 200MA may be a very useful indicator.

 

Eoin Treacy's view -

Thank you for a topical question and this is a subject I discuss at length in Crowd Money but let me summarise here. We define the 200-day MA as the trend mean. It’s is the average price traded over the last 200 sessions and is most useful when a consistent trend is evident. Another way to think about is that it is a mobile trend line and therefore of most use when a clearly defined trend is evident.

Overextensions relative to the mean generally suggest either prices are going to revert to the mean or will go sideways which allows the mean to catch up. In the course of a trend that can happen on a number of occasions and, because we are dealing with volatile crowds, prices can overshoot in both directions. Therefore while prices often find support in the region of the MA during trends, the level of the MA is not in any way sacrosanct.  

 



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May 02 2016

Commentary by Eoin Treacy

Echoes of 1999: The Tech Bubble and the "Asian Flu"

This article by rob Arnott for Research Affiliates may be of interest to subscribers. Here is a section:

In the first quarter of 2016, each of the four trends reversed. Recent weeks have brought rebounds in inflation hedges, emerging market currencies, diversifying markets, and global value stocks relative to growth. Do these last few weeks represent “the turn”? Perhaps. The question, however, is irrelevant because the answer is simply impossible to know. But what we do know is that if we want peak exposure to these markets when the turn comes, we must begin to “average in” in the face of adversity. 

We also know that these out-of-favor markets average a 3.0% yield premium versus a U.S.-centric 60/40 portfolio, which represents a powerful performance advantage to those who can patiently wait for mean reversion’s inevitable grip on the market. Once the market turns, history has shown the upswing will be fast and vigorous.  

Real Potential
In the 5 and 10 years following December 1998, assets other than U.S. and developed-market equities and U.S. notes and bonds outperformed 60/40 by an annualized 8.8% and 6.2%, respectively. Developed value stocks also outperformed their growth counterparts by nearly 6% a year in the 5 years following December 1998. Are these markets poised to repeat this strong outperformance? Only time will tell, but we believe the potential is very real. Our view today is that real return–diversifying asset classes5 could improve on a traditional 60/40 allocation by approximately 3.5% a year over the next 10 years. Real return–oriented diversifiers and value strategies may not experience the same magnitude of outperformance as they did starting in 1999, but we’re confident they will outperform in the years to come. Now is the time to rotate into these markets.  

 

Eoin Treacy's view -

The MSCI Emerging Markets Index is market cap weighted so it is heavily influenced by what happens to Chinese, South Korean, Taiwanese, Indian and South African shares. These five countries account for 67.25% of the Index. It’s an awfully big world out there and the emerging market universe is much more diverse than these five countries which raises the question of how good a barometer it is. 



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May 02 2016

Commentary by Eoin Treacy

The Real Story Behind the U.S. Dollar's Decline

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

The return of real yields as a driver of the greenback is a consequence of the long period of zero and negative interest rate policy across the major G3 central banks.

"What’s important now is that with rates so low, there’s more information in long-term than short-term rates, and real rates matter more because nominal ones can’t move that much," the strategist wrote in an email. "Inflation expectations can move more."

An extended span of central bank stimulus has left short term nominal rates especially sticky relative to longer-term real rates, asserts Juckes.

Even in the aftermath of liftoff from the Federal Reserve, U.S. real rates have been collapsing—a trend that explains the drop-off in the U.S. dollar spot index (DXY) over the past three months:

This decline has left the U.S. dollar index "perilously close to key technical support," says Juckes, which if breached, will effectively constitute a bear market for the greenback.

For the greenback to find its wings once again, other central banks will need to find a way to put more downward pressure on real rates in their respective economies, according to the strategist.

"What it means: the Fed is not the dollar’s friend," concludes Juckes. "A stronger dollar only comes when others get their real rates/yields lower, and over the last three months, U.S. real yields have fallen by more than in other major economies and indeed, Japanese real yields have risen."

 

 

 

Eoin Treacy's view -

The actions of the Bank of Japan in not meeting the market’s expectations for additional stimulus have unleashed a powerful short covering rally in the Yen. The Dollar has held a progression of lower rally highs since June last year and an increasingly short-term oversold condition relative to the trend mean is evident. A break in that sequence will however be required to question medium-term scope for additional Dollar weakness. 
 

 



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May 02 2016

Commentary by Eoin Treacy

The Science of Fat: After The Biggest Loser, Their Bodies Fought to Regain Weight

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

Slower metabolisms were not the only reason the contestants regained weight, though. They constantly battled hunger, cravings and binges. The investigators found at least one reason: plummeting levels of leptin. The contestants started out with normal levels of leptin. By the season’s finale, they had almost no leptin at all, which would have made them ravenous all the time. As their weight returned, their leptin levels drifted up again, but only to about half of what they had been when the season began, the researchers found, thus helping to explain their urges to eat.

Leptin is just one of a cluster of hormones that control hunger, and although Dr. Hall and his colleagues did not measure the rest of them, another group of researchers, in a different project, did. In a one-year study funded by Australia’s National Health and Medical Research Council, Dr. Joseph Proietto of the University of Melbourne and his colleagues recruited 50 overweight people who agreed to consume just 550 calories a day for eight or nine weeks.

They lost an average of nearly 30 pounds, but over the next year, the pounds started coming back.

Dr. Proietto and his colleagues looked at leptin and four other hormones that satiate people. Levels of most of them fell in their study subjects. They also looked at a hormone that makes people want to eat. Its level rose.

“What was surprising was what a coordinated effect it is,” Dr. Proietto said.
“The body puts multiple mechanisms in place to get you back to your weight.
The only way to maintain weight loss is to be hungry all the time. We desperately need agents that will suppress hunger and that are safe with long-term use.” 

 

Eoin Treacy's view -

As someone who has seen their weight fluctuate by as much as 15kgs on a number of occasions over the last twenty years I can identify with the difficulty many people have in keeping the weight off. When I saw that my second daughter (age 8) was also having trouble with her weight I read and the whole family implemented the routine outlined in “Ending the Food Fight” by Dr. David Ludwig. She has dropped two dress sizes since then and is a much happier and energetic child as a result. One of the key points he covers in the book is the importance of replacing high calorie foods and carbohydrates with vegetables which tend to inhibit leptin resistance. . 



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April 29 2016

Commentary by Eoin Treacy

U.S. Corporate Profits on Pace for Third Straight Decline

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

P&G has trimmed its predictions for overall growth in its markets to about 3% world-wide this fiscal year, down from earlier projections as high as 4%. More than 10% of sales at P&G come from tumultuous regions, like Russia, Ukraine, the Middle East, Turkey, Brazil and other parts of Latin America, Chief Financial Officer Jon Moeller said in the company’s Tuesday earnings call.

“There are more flashpoints across the globe than at any time in recent memory with significant economic and political instability impacting incomes and consumption in many large and important markets,” he said.

Ultimately, despite the resilience of the U.S. consumer, economic growth is likely to remain sluggish given continuing woes in emerging markets, sizable inventories, a still-strong dollar and still-weak capital investment, says Joseph LaVorgna, chief U.S. economist for Deutsche Bank.

“It’ll be hard to get a whole lot of corporate profit growth,” Mr. LaVorgna said. “It’s hard to get really bullish.”

 

Eoin Treacy's view -

Bloomberg listed the date for the latest data point on the Bureau of Economic Affairs Corporate Profits chart as April 28th but that changed overnight to May 28th and from what I can see it is updated quarterly in arrears so it is more likely that we will get the data point for the first quarter at end of June.  Nevertheless from the below chart a loss of momentum is evident since the end of 2014 and while profits are still close to record highs the outlook for continued expansion is waning. 



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April 29 2016

Commentary by Eoin Treacy

Commodities Overtake Stocks, Bonds With Best Rally Since 2010

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section: 

The gains come after five straight years of annual losses when slowing Chinese demand and rising output produced a global supply overhang for most commodities. The rout hurt producers including Exxon Mobil Corp., Freeport-McMoRan Inc., Glencore Plc and Anglo American Plc, who boosted production following a decade-long so-called super cycle of rising consumption and higher prices.

“I believe with what we’ve witnessed early in 2016 will be the trough for the commodity markets,” Albanese said on a conference call after Vedanta reported quarterly earnings.

Oil prices in New York are up about 19 percent this month in New York, the largest increase since April 2015. U.S. crude output declined for a seventh week, according to data Wednesday from the Energy Information Administration. Futures traded at $45.60 at 11:45 a.m. on the New York Mercantile Exchange.

 

Eoin Treacy's view -

Crude Oil is by far the largest, most liquid commodity market and represents a significant cost in the production and transportation of other commodities. The falling cost of energy was a major enabler for marginal producers remaining in business so the subsequent rally has been a catalyst for increased interest right across the commodity spectrum. 



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April 29 2016

Commentary by Eoin Treacy

Goldman Sachs Calls Bonds Expensive as Morgan Stanley Is Bullish

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

The firms, which are among the 23 primary dealers that trade with the Fed, are at odds as investors decipher the central bank’s views on the economy in its statement this week. Morgan Stanley called the comment “slightly dovish.” Goldman forecasts rate increases in June, September and December. U.S. consumer spending rose less than forecast in March, Commerce Department figures showed Friday, after data Thursday showed the economy growing at its slowest pace in two years.

Looking for Growth
Central bankers used their statement to indicate growing confidence in the world economy while suggesting they’re still looking for the signs of growth, inflation and global stability to justify a move.

 

Eoin Treacy's view -

This divergence between the opinions of Goldman Sachs and Morgan Stanley with regard to Treasuries has been an open bone of contention for months. There is a lot at stake not least since the bond market has been in a secular bull market for 35 years and has been supported in spectacular fashion by the extraordinary measures employed by central banks to avoid a depression. 



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April 28 2016

Commentary by David Fuller

U.S. Stocks Drop as Dollar Plunge Boosts Commodities to Bonds

Stocks fell from Tokyo to New York as central banks showed little will to step up support for flagging economies amid disappointing corporate results. The dollar tumbled the most in six weeks.

While U.S. equities briefly overcame early losses sparked by the Bank of Japan’s surprise decision to refrain from adding to stimulus, the Dow Jones Industrial Average ended Thursday down the most since Feb. 23 as investor Carl Icahn said he sold his stake in Apple Inc. The greenback’s decline sparked gains in commodities, while haven assets jumped, driven by the yen’s steepest advance since 2010. Treasuries extended gains.

“I’ve certainly been surprised by the ability of the market to hang in there with as many mediocre earnings as we’ve seen so far and I think it was too many,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee. “As a bull, you don’t want to see a late-day selloff after some good morning action. It’s a market that’s just a little worn out.”

David Fuller's view -

Wall Street’s influential stock market indices have been losing upside momentum in regions of previous resistance, as this service has been pointing out over the last two weeks.  We saw a good rally from the mid-February lows, helped by some favourable developments.  These included the weaker Dollar Index, now somewhat oversold, and sufficient recoveries in most commodities to suggest their bear markets are over. 

What happens next?

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