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August 15 2016

Commentary by David Fuller

Vast National Gamble on Wind Power by Britain May Yet Pay Off

Wind power has few friends on the political Right. No other industry elicits such protest from the conservative press, Tory backbenchers, and free market economists.

The vehemence is odd since wind generates home-made energy and could be considered a 'patriotic choice'. It dates back to the 1990s and early 2000s when the national wind venture seemed a bottomless pit for taxpayer subsidies.

Pre-modern turbines captured trivial amounts of energy. The electrical control systems and gearboxes broke down. Repair costs were prohibitive.

Yet as so often with infant industries, early mishaps tell us little. Costs are coming down faster than almost anybody thought possible. As the technology comes of age - akin to gains in US shale fracking  - the calculus is starting to vindicate Britain's vast investment in wind power.

The UK is already world leader in offshore wind. The strategic choice now is whether to go for broke, tripling offshore capacity to 15 gigawatts (GW) by 2030.  The decision is doubly-hard because there is no point dabbling in offshore wind.  Scale is the crucial factor in slashing costs, so either we do it with conviction or we do not do it all. My own view is that the gamble is worth taking.

Shallow British waters to offer optimal sites of 40m depth. The oil and gas industry knows how to operate offshore. Atkins has switched its North Sea skills seamlessly to building substations for wind. JDR in Hartlepool sells submarine cables across the world. Wind power is a natural fit.

We live in a world that has just signed the COP21 climate deal in Paris. That implies a steadily rising penalty on carbon emissions. It also implies that those dragging their feet on renewables will ultimately be punished, as the Chinese have grasped.

David Fuller's view -

Many of us opposed wind farms well over a decade ago because they were expensive, nosy, inefficient eyesores and a devastating Cuisinart for birds.  Yes, costs are coming down rapidly due to size, mass production and especially accelerating technological innovation, unfolding before our very eyes.   

You would not want to live anywhere near these increasingly massive War of the Worlds machines, but they are now considerably more efficient.  Moreover, the evolution of batteries will largely resolve intermittency problems over the next five years.  Celebrate the increasingly important source of renewable energy from wind power but spare a thought for the birds lost and also the disturbance of sea mammals by offshore wind farms.   

A PDF of AE-P’s article is posted in the Subscriber’s Area.



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August 15 2016

Commentary by David Fuller

Is the Wild Ride In Commodities Over?

Congratulations if you called the path of commodity prices this year. You’re probably also among the 0.0001pc of people who guessed Leicester City would win the Premier League. And of course, you predicted Brexit.

In a topsy-turvy world, metals have shown surprising strength. After cratering in 2015, a basket of major commodities has soared in price this year, from the remarkable 36pc climb of iron ore, to the stellar performance of precious metals, with gold and silver up 25pc and 43pc respectively. Zinc, a mineral used to galvanise other metals to stop them rusting, has chalked up a 41pc rise.

One of the few analysts to call iron ore’s recovery was Jason Schenker, of Prestige Economics, who now thinks the metal – used to make steel – will probably extend its rally into the second half, averaging $55 a tonne. Some of the FTSE 100 miners would probably bite your arm off if you offered them iron ore at that price. BHP Billiton, Rio Tinto and Anglo American all produce the metal at far below that level, meaning they can comfortably bank cash at $55 a tonne and get on with paying down debt.

David Fuller's view -

We should never forget that the key fundamental variable in commodity prices is always supply.  Moreover, supply is notoriously volatile because miners produce all they can when metal prices are high.  That window eventually closes because expensive metals inevitably reduce demand.  As prices plummet, producers first try to sell even more to maintain revenue.  When that becomes counterproductive, marginal producers are forced to reduce supplies and even low-cost producers eventually realise that metal in the ground will be worth more to them if they reduce refined supplies.  Demand eventually increases for industrial commodities when prices remain low.  As they begin to recover a bull market emerges if commodity producers are slow to increase supplies and GDP growth strengthens.   

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



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August 15 2016

Commentary by David Fuller

August 15 2016

Commentary by Eoin Treacy

Emerging Markets Are Hot, Except for China

This article by Mia Lamar and Rachel Rosenthal for the Wall Street Journal appeared in Saturday’s edition but the authors might have wished they waited another day before publishing. Here is a section:

The wariness partly reflects how unnerved global investors remain by markets that have proved exceptionally unpredictable, even by emerging-market standards. After surging 60% in the beginning of last year, Chinese stocks tipped into a selloff that sent Shanghai’s benchmark index down as much as 41% from June to August. The index rebounded briefly last fall, then plunged 23% in January. The yuan, meanwhile, logged a 5% loss against the dollar in 2015, following an unexpected devaluation one year ago that helped to spur enormous outflows of money as panicked Chinese sent cash abroad.

Many investors say they are disturbed by steps China has taken to tame market convulsions, from heavy-handed currency intervention and the buying of shares by state-backed funds, to allowing widespread trading suspensions of shares and blaming “malicious” forces for stock-price falls.

Others say they remain concerned about China’s economic slowdown, and suspect conditions may be worse than official figures suggest.

Chinese officials have stressed measures by Beijing to address the concerns of global investors, and played down concerns about growth. “The Chinese economy is a ‘stability anchor’ for the global economy,” Premier Li Keqiang said last month. “Prophecy of China’s economy heading for a hard landing is rarely heard now.

Eoin Treacy's view -

Many of the limitations imposed on the Chinese market have been aimed at inhibiting speculation following a particularly tumultuous period in 2015. That is a condition which is in sharp contrast to the environment on a number of other international indices. 

Chinese regulators messed up the launch of options trading, and timing its debut with the opening of the Shanghai – Hong Kong connection only exacerbated the short term mania. In trying to avoid a crash they threw every measure available to stem the decline and there is plenty of evidence over the last six months that the 3000 level on the CSI300 is being defended. 



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August 15 2016

Commentary by Eoin Treacy

Give us EU visa freedom in October or abandon migrant deal, Turkey says

This article by Michelle Martin and Humeyra Pamuk for Reuters may be of interest to subscribers. Here is a section: 

Asked whether hundreds of thousands of refugees in Turkey would head to Europe if the EU did not grant Turks visa freedom from October, Cavusoglu told Bild: "I don't want to talk about the worst case scenario - talks with the EU are continuing but it's clear that we either apply all treaties at the same time or we put them all aside."

Visa-free access to the EU - the main reward for Ankara's collaboration in choking off an influx of migrants into Europe - has been subject to delays due to a dispute over Turkish anti-terrorism legislation, as well as the post-coup crackdown.

Brussels wants Turkey to soften the anti-terrorism law.Ankara says it cannot do so, given multiple security threats which include Islamic State militants in neighboring Syria and Kurdish militants in Turkey's mainly Kurdish southeast.

European Commissioner Guenther Oettinger has said he does not see the EU granting Turks visa-free travel this year due to Ankara's crackdown, which has included the round-up of more than 35,000 over alleged involvement in the coup.

Cavusoglu said the migration deal with the EU stipulated that all Turks would get visa freedom in October, adding: "It can't be that we implement everything that is good for the EU but that Turkey gets nothing in return."

 

Eoin Treacy's view -

It is a bit disingenuous of Turkey to say they get nothing in return when the EU is paying a multi-billion euro stipend to contain migrants in Turkey, instead of having to deal with them within the borderless EU. However the Turkish administration is understandably on edge and feeling defensive following the foiled coup and is probably looking for a win, internationally, to bolster confidence in its ability to govern successfully. 



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August 15 2016

Commentary by Eoin Treacy

China's Latest Leap Forward Isn't Just Great It's Quantum

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

“We’ve taken all the good technology from labs around the world, absorbed it and brought it back,” Mr. Pan told Chinese state TV in an interview that aired on Monday.

With state support, Mr. Pan was able to leapfrog his former Ph.D. adviser, University of Vienna physicist Anton Zeilinger, who said he has tried since 2001 to convince the European Space Agency to launch a similar satellite.

“It’s a difficult process, which takes a lot of time,” said Mr. Zeilinger, who is now working on his former student’s satellite.

Neither Mr. Pan nor the Chinese Academy of Sciences, which is directing the project, responded to requests for comment. The European Space Agency and the U.S.’s National Science Foundation, which provides federal funding for basic American science research, also didn’t respond to requests for comment.

China’s investment in the field is likely being driven in part by fear of U.S. cyber capabilities, said John Costello, a fellow at Washington, D.C.-based New America specializing in China and cybersecurity, pointing to 2013 disclosures that the U.S. had penetrated deeply into Chinese networks. He also noted that U.S. institutions are researching how to build powerful quantum computers theoretically capable of shattering the math-based encryption now used world-wide for secure communication. “The Chinese government is aware that they are growing particularly susceptible to electronic espionage,” Mr. Costello said.

However, quantum communication is defensive in nature, he noted, and wouldn’t benefit from what the U.S. has identified as China’s state-sponsored hacking program.

Quantum encryption is secure against any kind of computing power because information encoded in a quantum particle is destroyed as soon as it is measured. Gregoir Ribordy, co-founder of Geneva-based quantum cryptography firm ID Quantique, likened it to sending a message written on a soap bubble. “If someone tries to intercept it when it’s being transmitted, by touching it, they make it burst,” he said

Eoin Treacy's view -

Protecting quantum data from corruption from outside influences such as radio waves, light and electromagnetic fields represents a significant challenge to creating working prototypes. The result is that a great deal of research is going into different ways of using light to transport information. The launch of a satellite using quantum data is an interesting proposition and if it does indeed work it would represent a proof of concept for additional research which does have cybersecurity uses. 



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August 15 2016

Commentary by Eoin Treacy

Email of the day on bonds versus equities

Having read John Authers FT.com column today, I confess to a bit of confusion. Listening to your outstanding audios over past weeks and months (for which, many, many thanks), I had formed the impression that when the bond markets turns, it would be good for equities on the basis that money has to go somewhere, and it would flow in a large part to equities. Authers seems to be saying the opposite - see his last 3 paras today:

"Look at the chart of the S&P and this looks like a peak, and a bad time to buy. Look at the chart of how stocks have performed relative to bonds, and it looks like stocks should be ready to shine. This illustrates the paradox that has also lasted for years that stocks look expensive by almost any sensible historical measure — except when compared to bonds, when they look cheap. 

But there is a nasty problem with this. If bonds finally go into reverse, rates will rise, the support for stocks will be removed and the risk is more that stocks will start to fall. The bond market rally is extraordinary, it has gone on for a long time, defeating predictions by many (myself included) that yields had become unsustainable. US Treasury yields have been falling steadily for more than three decades. 

If bonds can somehow continue this, then stocks will probably continue to prosper (although they may fail to outstrip bonds). If bonds go into reverse, it would be bad news for both stocks and bonds. And either way, the record in the S&P 500, which has created genuine wealth for those who hold it, is a sideshow besides what is happening in bond markets."


Can you comment please and perhaps remove my confusion?

Thanks as always

Eoin Treacy's view -

Thank you for this topical email and snippet from John Authers’ article. Here is a pdf of the full article. 
If you had asked me a couple of years ago, before just about every central bank in the world was engaged in quantitative easing, I would have said that a peak in the bond market would have helped act as fuel for an additional rally in equities. However I’m not so sure now. 

 



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August 12 2016

Commentary by Eoin Treacy

Global Equity Strategy Who sells where in 2016

Thanks to a subscriber for this heavyweight 118-page report from HSBC covering the international exposure of major companies on a global basis. Here is a section:

 

European equity markets are by far the most global, more than their economies, and are most exposed to Emerging Markets (EM)

US equity market is the most closed of the Developed Markets (DM), a key ingredient to the US’s relative ‘safer-haven’ status

Japanese overseas revenues have grown sharply in recent years, but are now threatened by yen strength

EM stock markets are the most closed, accounting for the bottom seven countries in our ranking
Economies are not stock markets. DM and EM have similar exports/GDP levels, but DM stock markets are twice as global

Chinese corporates going abroad, but only generate 10% overseas today. Brazil corporates only 20% overseas after commodity slump 

Italy and India have ‘globalized’ the most in recent years

IT is the most global US sector; Healthcare the most global European sector. Utilities and telecom are respectively the most local

Overall overseas revenue contribution has stalled (at 44%) the last three years, as globalization has come under pressure

Looking at indices based on revenue rather than domicile transforms the investment universe: EM much larger, whilst US a lot smaller

 

Eoin Treacy's view -

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

With the growth of the global consumer base we began to pay attention to large international businesses that dominate their respective sectors from about 2011. I developed the list of Autonomies by looking at data similar to that compiled in this report; using it to identify companies that have global businesses. In perusing the report veteran subscribers will no doubt be familiar with many of the names. 



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August 12 2016

Commentary by Eoin Treacy

Theresa May may become one of the most radical western leaders of the century

Thanks to a subscriber for this article by Lawrence Solomon for the Financial Post which may be of interest to subscribers. Here is a section:

Under May’s approach, shale gas royalties that would ordinarily go to governments and quasi-governmental agencies will instead be directed to the residents in the communities hosting the developments. The BBC estimates individual households will be receiving as much as £10,000 ($16,800) under May’s plan; other estimates arrive at higher sums – as much as £65,000 per household lucky enough to be near large shale gas deposits. May’s plan is now expected to wash away local opposition to fracking and unleash the development of Britain’s massive shale gas resources, estimated by the British Geological Survey at 1,300 trillion cubic feet of shale gas, equivalent to a 500-year supply at current gas consumption levels.

This torrent of energy will benefit more than the local residents who until now saw only drawbacks to shale gas development in their community. The abundant supply of gas will lower energy costs throughout the country, relieving residential and business consumers alike and convincing British industries – which have been leaving Britain due to its high energy costs – to not only stay but also to expand their operations in the U.K.

The May approach isn’t limited to shale –  it will apply to developments of all kinds, whether other resource developments, industrial complexes or airport expansions. Through what she calls her blueprint for development projects, May will be converting the development delayer known worldwide as NIMBY (Not In My Back Yard) into PIMBY (Please In My Back Yard), a development accelerator. Residents will effectively become pro-development lobbyists whenever they determine a development personally benefits more than discomforts them.

 

Eoin Treacy's view -

By voting for change the UK has an unparalleled chance to literally throw out the rule book and adopt policies that would have been anathema to the Brussels bureaucracy. Royalties for landowners close to extractive industries has been a major enabler for the growth of the US energy sector and could have a transformative effect on the UK economy, not least because a great deal of its shale is in the north of the country which was particularly hard hit by the closing of collieries. 



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August 12 2016

Commentary by Eoin Treacy

Macy's is closing another 100 stores

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

Macy's closures come amid a sixth-straight quarterly decline in sales. However, sales fell less than feared and the company said it's "encouraged" by recent sales trends. Wall Street applauded the dramatic store closures, sending the stock surging 17%, its best day since 2008.

Macy's said its new strategy is to concentrate its financial firepower and talent on its best-performing locations. The department store plans to invest in strong stores by highlighting new vendors, increasing the size and quality of its staff and investing in new technology.

"We operate in a fast-changing world, and our company is moving forward decisively to build further on Macy's heritage," Macy's CEO Terry Lundgren said in a statement.

Macy's said the store closures could result in the loss of about $1 billion in sales, even after accounting for shoppers who would go online and to other Macy's locations. The company plans to offset that loss in sales by cutting costs, even beyond shutting down these stores.

It's not clear how many jobs will be impacted by these moves. Macy's told CNNMoney it won't detail layoffs until it finalizes its store closure list.

 

Eoin Treacy's view -

Macys, and a number of other big box retailers, have two problems. They rely on physical locations which tend to have a boring feel and their products are too expensive. Nevertheless they command sizeable, albeit shrinking shares of the consumer market and have impressive real estate holdings which have appreciated considerably since the credit crisis. 



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August 11 2016

Commentary by David Fuller

Dow, S&P500, Nasdaq Close at Records on Same Day for First Time Since 1999

Here is the opening of tonight’s interesting comparative report from The Wall Street Journal

Major U.S. stock indexes set records again Thursday, the first time since Dec. 31, 1999, that the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite have hit those milestones on the same day.

The rally was sparked by higher oil prices and earnings reports from U.S. retailers that weren’t as weak as feared.

Consumer-discretionary and energy stocks led broad gains across the market. The Dow industrials rose 118 points, or 0.6%, to 18614, above its previous record close of 18595 hit July 20. The S&P 500 gained 0.5% and topped its Aug. 5 record. The Nasdaq Composite added 0.5%, surpassing its previous high set at Tuesday’s close.

Investors are “into stocks because there’s nowhere else to go,” said Tim Rudderow, president of Mount Lucas Management, which oversees $1.6 billion.

Shares of Macy’s rose 17% as the department-store operator reported better-than-expected sales and said it plans to close 100 stores. Kohl’s gained 16% after reporting a surprise increase in profit even as it cut its earnings forecast for the year.

The two retailers were the S&P 500’s best performers Thursday, but they were still among the worst over the past 12 months. Retail-store owners have been hit in part by the growth of Internet-based competitors, and even Macy’s well-received results included a sharp drop in quarterly profit and another period of declining sales.

David Fuller's view -

Yearend 1999 was not the most auspicious time for Wall Street.  Veteran subscribers may recall that it was the beginning of the end of the last secular bull market.  However, the S&P 500 and the Nasdaq Composite carried higher into 2Q 2000 before commencing their bear market.

This item continues in the Subscriber’s Area, where a PDF of the WSJ article is posted.



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August 11 2016

Commentary by David Fuller

Holy Grail of Energy Policy in Sight as Battery Technology Smashes the Older Order

Here is the opening and also a latter section of this informative article by Ambrose Evans-Pritchard for The Telegraph:

The world's next energy revolution is probably no more than five or ten years away. Cutting-edge research into cheap and clean forms of electricity storage is moving so fast that we may never again need to build 20th Century power plants in this country, let alone a nuclear white elephant such as Hinkley Point.

The US Energy Department is funding 75 projects developing electricity storage, mobilizing teams of scientists at Harvard, MIT, Stanford, and the elite Lawrence Livermore and Oak Ridge labs in a bid for what it calls the 'Holy Grail' of energy policy.

You can track what they are doing at the Advanced Research Projects Agency-Energy (ARPA-E). There are plans for hydrogen bromide, or zinc-air batteries, or storage in molten glass, or next-generation flywheels, many claiming "drastic improvements" that can slash storage costs by 80pc to 90pc and reach the magical figure of $100 per kilowatt hour in relatively short order.

“Storage is a huge deal,” says Ernest Moniz, the US Energy Secretary and himself a nuclear physicist. He is now confident that the US grid and power system will be completely "decarbonised" by the middle of the century.

And more on Hinkley Point:

Perhaps the Hinkley project still made sense in 2013 before the collapse in global energy prices and before the latest leap forward in renewable technology. It is madness today.

The latest report by the National Audit Office shows that the estimated subsidy for these two reactors has already jumped from £6bn to near £30bn. Hinkley Point locks Britain into a strike price of £92.50 per megawatt hour - adjusted for inflation, already £97 - and that is guaranteed for 35 years.

That is double the current market price of electricity. The NAO's figures show that solar will be nearer £60 per megawatt hour by 2025. Dong Energy has already agreed to an offshore wind contractin Holland at less than £75.

Michael Liebreich from Bloomberg New Energy Finance says the Hinkley Point saga will be taught for generations as a case study in how not to run a procurement process. "The obvious question is why this train-wreck of a project was not killed long ago," he said.

Theresa May has inherited a poisonous dossier, left with the invidious choice of either offending China or persisting with a venture that no longer makes any economic sense. She may have to offend China - as tactfully as possible, let us hope - for the scale of the folly has become crushingly obvious.

Every big decision on energy strategy by the British government or any other government must henceforth be based on the working premise that cheap energy storage will soon be a reality.

This country can achieve total self-sufficiency in power at viable cost from our own sun, wind, and waters within a generation. Once we shift to electric vehicles as well, we will no longer need to import much oil either. Rejoice.

David Fuller's view -

Modern energy industries are among the biggest beneficiaries of the accelerated rate of technological innovation.  The primary incentive is ‘needs must’.  For this reason the US Energy Department is currently, albeit belatedly, funding approximately 75 projects dedicated to improving electricity storage capacity.  Other countries with developed research capabilities are following a similar path.  Electricity storage costs are plummeting and forecast to reach $100 per kilowatt hour before long.  This will largely remove the ‘intermittency’ problem which is currently still the main downside for solar and wind power. 

Against this background, governments should reconsider proposals for 20th century energy programmes, of which the UK’s Hinkley Point project is a classic example.  It was hastily proposed on the basis that energy costs could only move higher - a dubious premise as we now know.  In fact, energy prices will plummet in the years ahead, for countries which develop modern and increasingly efficient energy policies including solar, modern nuclear and also natural gas which is readily available via fracking in many countries and the least polluting fossil fuel by far.  

The Hinkley Point project, far from providing a helpful source of energy, would saddle the UK with uncompetitive energy costs for at least 35 years, damaging economic prospects in the process.

A PDF of AE-P’s column is posted in the Subscriber’s Area.  



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August 11 2016

Commentary by David Fuller

The Strategic View: Not Too Hot, Not Too Cold

My thanks to Michael Jones, Chairman and Chief Investment Officer of RiverFront for his latest interesting report.  Here is a brief sample from the opening:

Last week witnessed a flurry of policy announcements and economic data releases.  We believe that on balance, the news from last week supports continued upward momentum in US, European and emerging market equity prices, accompanied by relatively stable interest rates.  In contrast, we believe that the Bank of Japan (BOJ) has made yet another policy mistake, and absent a stronger-than-expected fiscal stimulus package, Japanese equities could give back much of their recent gains.

David Fuller's view -

There are some interesting graphics in this report, from “Contributions to GDP growth” and “Crude Oil Production and Prices – US”.  RiverFront thinks the US economy is stronger than numbers indicate, particularly in terms of consumer spending.

This item continues in the Subscriber’s Area, where The Strategic View is also posted. 



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August 11 2016

Commentary by David Fuller

August 11 2016

Commentary by Eoin Treacy

Investment demand for gold jumps to all-time high

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

Juan Carlos Artigas, ?Director of Investment Research at the WGC, told MINING.com, the continued strong investment was  fuelled by increasing global economic and political uncertainty which was only exacerbated by the unexpected outcome of the UK referendum, looming elections in the US.
Worries about the impact of negative interest rates, ultra-loose monetary policies in many developed economies and the delays to the normalization of the interest rate regime in the US also drove investors to gold.

"Pent up demand among investors who have been looking for a way back in, found the necessary catalyst"

Artigas said the dollars flowing into investment products weren't necessarily "new money"  but much of it represented asset managers simply increasing existing allocations or re-entering the gold market. He believes these ETF investment are likely to be "sticky":

‘While there is some evidence of momentum buying, investors are primarily initiating or rebuilding strategic, long-term holdings after the wash-out of positions since early 2013.

"Pent up demand among investors who have been looking for a way back in, found the necessary catalyst to do so this year."

Artigas said gold ETF inflows are split about half-half among retail and institutional investors. In that sense ETF investment is "democratic" – whether you're an individual or large-scale hedge fund you pay the same price and are charged the same fees

 

Eoin Treacy's view -

No one knows what the eventual repercussions of negative interest rates or even helicopter money are likely to be but it appears sensible to have at least some form of hedge against an unruly outcome. 

So far we have evidence that quantitative easing is not particularly effective at boosting economic growth but it does wonders for asset prices namely stocks, bonds and property. Gold tends to perform more as a hedge against the debasement of currency on a grand scale or perhaps more accurately against government manipulation of markets. Therefore there is a clear argument for having at least some gold in one’s portfolio considering the political and monetary environment we now reside in.  

 



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August 11 2016

Commentary by Eoin Treacy

"Speedfactories" to the US

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

Group executive board member at Adidas Eric Liedtke acknowledges that the firm has been producing goods in Asia "for years," helping it to keep costs down. He explains, however, that a new business model based on the Speedfactories will allow it to "decentralize" production to regional locations – in this case the US.

“We're fueling design at the ground level of creativity in Brooklyn and reinventing manufacturing with the first adidas Speedfactory in Atlanta," says Liedtke. "This allows us to make products for the consumer, with the consumer, where the consumer lives in real time, unleashing unparalleled creativity and endless opportunities for customization in America."

New customization options brought to consumers will include fit, comfort and look. The facilities will also allow Adidas to source materials and produce goods locally, helping to reduce transport emissions.

 

Eoin Treacy's view -

Automation and full customisation are likely to represent an important part of the future of the garment industry and companies like Adidas and Nike are leading the way for sporting goods. For every person that can wear whatever they wish, there must be ten more that find it difficult to find clothing that fits just right. Customisation together with 3-d scanning will fix that issue and, from speaking with some of the people developing robot seamstresses, it could be with us in as soon as 3 years. 



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August 11 2016

Commentary by Eoin Treacy

Won Drops From 14-Month High as BOK Signals Room for More Easing

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

South Korea’s won fell from the strongest in more than a year after the Bank of Korea Governor signaled policy remains accomodative.

The dollar’s slide this week amid speculation U.S. borrowing costs will stay unchanged in 2016 has boosted emerging-market currencies. The Korean currency is the top performer in Asia this month after the Taiwanese dollar. The BOK held its interest rate at a record low as forecast by economists and Governor Lee Ju Yeol said the central bank “still has monetary, fiscal policy room.”

“Governor Lee’s comment that the BOK still has policy room reaffirmed its accommodative stance and the possibility of a rate cut in the near future,” said Chung Sung Yoon, a currency analyst at Hyundai Futures Corp. in Seoul. “The longer term direction will probably be determined by the policy stance of global central banks, particularly the U.S. and the Bank of Korea.”

The won dropped 0.5 percent to 1,099.72 per dollar at the 3:30 p.m. close of trading in Seoul. It snapped five days of gains that sent the currency to its strongest level since May 2015.

The currency’s level has become burdensome following the rally, Hyundai Futures’s Chung said, adding that speculations of a “government intervention” in the market “near 1,090 right before the close” on Wednesday fueled concerns over another one.

South Korean bonds were little changed, with yield on three-year note at 1.23 percent, and 10-year note at 1.40 percent.

 

Eoin Treacy's view -

The South Korean Won has been among the strongest currencies regionally so far this year but the Dollar has developed a short-term oversold condition and potential for a reversionary rally has increased.  



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August 11 2016

Commentary by Eoin Treacy

Alibaba's revenue beats estimates; mobile revenue soars

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

Alibaba's total revenue rose to 32.15 billion yuan, or $4.84 billion, in the quarter ended June 30 from 20.25 billion yuan a year earlier. Analysts on average had expected revenue of 30.17 billion yuan, according to Thomson Reuters I/B/E/S.

Mobile revenue from the company's China commerce retail business increased 119.3 percent to 17.51 billion yuan, while monthly mobile active users increased 39 percent.

"We passed an important milestone this quarter in achieving higher monetization of mobile users than non-mobile users for the first time," Chief Financial Officer Maggie Wu said.

The company said its gross merchandise volume (GMV) - the value of transactions carried out by third-party sellers on the company's platforms - rose 24.4 percent to 837 billion yuan.

Alibaba said in June it would in the future only release GMV figures on an annual basis. The change followed the disclosure that the U.S. Securities and Exchange Commission was looking into the company's accounting practices. 

 

Eoin Treacy's view -

Mobile is quickly becoming the dominant force in internet search, retail and advertising not least because of the heavy focus users of social media have on their handheld devices. That trend is even more pronounced in emerging markets; where many consumers first experience of the internet is via their mobile device. That represents a significant growth trajectory for companies that have dominant positions in the respective social media and mobile advertising markets. 



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August 10 2016

Commentary by David Fuller

Rare Brexit Optimist Calls for Pound to Climb Back Toward $1.50

Here is the opening and also a latter section from this topical article from Bloomberg:

The pound trading at $1.50 may seem like a distant memory, yet a few voices see it fully recovering from the Brexit sell-off.

A weaker pound will support growth and restore balance in the U.K. economy, while the country will be able to strike a deal in exit talks with the European Union that maintains its competitiveness, said Stephen Jen, chief executive of investment company Eurizon SLJ Capital Ltd. The pound may take a couple of years to return to a pre-Brexit level, he said.

“We will not lose sight of this view,’’ said Jen, a 20-year veteran of foreign exchange markets. “The U.K. is going to perform very well outside the European Union, but this is a long term view. Brexit could be a very interesting journey for the two parties involved.”

And:

U.K. Prime Minister Theresa May will face an array of demands from EU nations in negotiating Britain’s future relationship with the bloc, according to a Bloomberg analysis of the region’s 27 other members. Jen said the City of London did not attain its status because of the U.K.’s EU membership, but for its rule of law, transparency, use of English and labor market flexibility.

“How can Paris become a financial center if you can’t fire anyone there?” Jen said.

David Fuller's view -

I will quibble with the “Rare Brexit Optimist” opening in the headline above.  There are many Brexit optimists although they recognise the need for good governance in dealing with near-term challenges of uncertainty and also assisting the UK’s long-term GDP growth potential. 

As for Sterling’s performance, it is understandably acting as a safety valve during Brexit uncertainty.  Next year and beyond, its performance will vary against other currencies in line with relative economic expectations.

This item continues in the Subscriber’s Area.



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August 10 2016

Commentary by David Fuller

Even London Green Spaces Are Not Safe From Air Pollution

Here is the opening of this disturbing article from Bloomberg:

London is famous for its numerous parks and gardens, but even those green spaces aren’t safe from pollution.

The air in many city parks surpass legal limits for nitrogen oxide set by the European Union, according to data websiteAsiopendata.com. The pollutant is largely from vehicle exhaust.

The finding’s support Mayor Sadiq Khan’s effort to keep the issue at the top of the political agenda as officials in the central government’s Department for Environment, Food & Rural Affairs have sought to slow the pace of implementing EU pollution limits. The government has said it’s unable to meet 2010 rules until at least 2025.

“It’s shocking to learn that even in London’s supposedly green spaces, the air we breathe is unsafe,” said Sophie Neuburg, a campaigner at Friends of the Earth. “No-one suspects that when they have a summer picnic, they are actually breathing in fumes which are linked to heart disease and cancer.”

The issue is the most serious in central London, the website’s map showed, even in larger green areas such as Hyde Park, Green Park and Regent’s Park. High concentrations of nitrogen oxide also extend to an area bordered by Holloway to the north, Brixton in the south, Shepherd’s Bush westward and Blackwall to the east.

David Fuller's view -

Nitrogen oxide surged in the UK when poor research persuaded the government that diesel was a green fuel.  Numerous people switched to diesel vehicles because the fuel was cheaper over long distances and supposedly helped the environment.  In recent years we have learned that diesel poses a serious health hazard which will persist until the government reduces the supply of dies el vehicles on the road. 

I have certainly been affected by diesel and notice the improvement in my throat, lungs and ability to sleep comfortably when I head to Devon.  I worry far more about our grandchildren in London. 

The pollution problem can be considerably reduced at home or in an office with an air purifier.  I purchased a Dyson’s Pure Cool Link Purifying Desk Fan recently and leave it on most of the time.  It is too big to use on a desk so I keep it on the floor, mostly in our main bedroom at night and in the drawing room during the day.  However, it obviously cannot help when one steps outside. 

  See also this informative item from Wikipedia: Diesel exhaust.



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August 10 2016

Commentary by David Fuller

Email of the day

On negative interest rates:

Dear David, At a meeting with my banker last week he informed me that his bank has to pay 0.4% on all cash that customers hold at his bank. He said that the directors of the bank are thinking about charging customers for holding cash on their accounts.

David Fuller's view -

Thanks for mentioning this and many more savers will be in this position, as you know.

This item continues in the Subscriber’s Area. 



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August 10 2016

Commentary by David Fuller

August 10 2016

Commentary by Eoin Treacy

Musings from the Oil Patch August 9th 2016

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

Many of the nuclear power plants that were built in the 1960s and 1970s are now approaching the end of their commercial lives. The challenge is that nuclear power plants have the potential for very long operating lives, often on the order of 80 years, meaning that those older plants might have an additional 20 or 30 years of operating life remaining. The issue is that over their very long lives, these nuclear plants require extensive and costly periodic upgrades and repairs. In order to finance these modifications, the plants must generate significant profits during their operating lives. Low coal and now low natural gas prices have undercut the price of nuclear power, often making these plants the highest cost fossil fuel plants in utility company portfolios. These economic challenges ignore the fact that nuclear power plants have the highest operating ratios of all power plants, meaning that they produce power when people need it and that the power output is carbon-free. 

And

Low natural gas prices have seriously undercut the power prices for the nuclear power plants upstate, to the point that the owners – Exelon (EXC-NYSE) and Entergy – have threatened to shut down the plants. If that were to happen, New York State’s plan to have half its power coming from clean energy sources by 2030 would be doomed. In fact, the state has determined that if the nuclear power plants were shut, local utilities would have to rely on power from power plants fueled by dirty gas and coal. That would detract from the governor’s clean energy goal. That goal is why Gov. Cuomo has fought the use of hydraulic fracturing in the state to tap greater supplies of locally produced natural gas. Natural gas, although cheaper than the governor’s favored three sources of clean energy, would have released more greenhouse gases, but it is likely that the cost to consumers would have been less than what will happen in the future. Gov. Cuomo has championed a plan that was embraced by New York’s Public Service Commission and will force utility customers in the state to pay nearly $500 million a year in subsidies designed to keep the three upstate nuclear power plants operating. The Indian Point plant will not receive any subsidy funds because downstate power prices are sufficiently high that the plant can earn a profit.

According to the Public Service Commission, starting in 2017, the subsidies will cost utility ratepayers in New York State $962 million over two years. However, the overall cost of the clean energy program to utility customers would be less than $2 a month, according to the Public Service Commission. The chairman of the commission said that state officials had calculated the social and economic benefits of the program, including the reduction of carbon emissions, lower prices for electricity and more jobs in the electricity generation business, and that these benefits would be greater than the cost of the subsidies. Environmental groups are fighting back, claiming that while they supported the governor’s plan to mandate the purchase of renewable energy by utilities, they viewed the magnitude of the subsidies that could amount to several billion dollars over the 12 years to 2030 as a mistake. Exelon, the owner of two of the three up-state nuclear power plants applauded the Public Service Commission announcement and pledged to invest $200 million in the plants next year if the plan is approved.

Environmentalists who are serious about clean energy should pay attention to the comments of Michael Shellenberger, the president of nonprofit research and policy organization Environmental Progress. He said that nuclear power plants produce so much more energy than other forms that they can be more environmentally friendly than even renewables when all the mining, development and land disturbances are taken into account. As Mr. Shellenberger put it, “from the whole life-cycle analysis, it’s just better.” Of course, on the other side of the issue is someone such as Abraham Scarr, director of the Illinois Public Interest Research Group, a consumer advocate group, who said, “We should be building the 21st century energy system and not continuing to subsidize the energy system of the past.”

Eoin Treacy's view -

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

The above paragraphs highlight just how much of an influence low natural gas prices have had on the utility sector and the broader energy mix. Closing down nuclear plants because the cost of upgrades and repairs cannot be justified when competition with natural gas is so intense suggests demand for the commodity is going to intensify in coming years if nuclear is not subsidized. 



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August 10 2016

Commentary by Eoin Treacy

Palladium at Year High, Driving Precious Metals on Chinese Cars

This article by Eddie Van Der Walt and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

Palladium is up 19 percent in the past month, the best performing commodity. Chinese vehicle sales in July gained the most in 17 months, data showed this week. A weaker dollar since late July has also spurred precious metals.

That “highlighted a generally supportive backdrop to palladium demand, exacerbated by ongoing concerns that output from top producers Russia and South Africa may be under threat,” said Jonathan Butler, a precious metals strategist at Mitsubishi Corp. in London. “We could see a bit of profit taking from here, but the $700 level seems to have been recaptured convincingly.”

 

Eoin Treacy's view -

Chinese car sales coming in well ahead of expectations has been positive for palladium prices due to increased demand for catalytic converters but has also been a contributing factor in the outperformance of the German DAX Index.



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August 10 2016

Commentary by Eoin Treacy

Brazil's Messy Impeachment Drama Almost Over. Markets Can't Wait

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

After taking over in May, Temer has yet to drive through any major policy proposals amid concern that painful spending cuts or unpopular reforms could weaken Senate support for his administration ahead of the impeachment vote. His economic team is expected to propose changes to social-security laws immediately after the ruling, and support for that and other measures will be an important indicator of whether Brazil’s world-beating currency, bond and stock rallies have staying power.

Optimism about political change in Brazil “is somewhat being reflected in year-to-date momentum, but it’s not completely priced in,” said Sean Newman, a senior portfolio manager for emerging markets at Invesco Advisers in Atlanta.

Investors will likely remain bullish on Brazil’s corporate and government debt throughout August, and credit default swaps may extend this year’s gains once Rousseff is removed for good, he said. In the swaps market, the cost to hedge against losses on Brazil’s bonds has fallen by almost half since February. The currency, meanwhile, has rallied 26 percent against the dollar, the most in the world, and the benchmark Ibovespa index’s 68 percent increase in dollar terms in 2016 outperforms all other major benchmarks.

 

Eoin Treacy's view -

Foreign investors had been waiting for a catalyst to re-enter the Brazilian market and the prospect of a new reform minded president has seen the Real surge and the iBovespa challenge a six-year progression of lower rally highs. The big question is to what extent these rallies have already priced in much of the good news since none of the expected fiscal reforms have yet been passed.



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August 09 2016

Commentary by David Fuller

Negative Interest Rates Will End Badly

Here is the opening of this interesting speech by James Grant at the New York Society of Security Analysts’ (NYSSA) Annual Benjamin Graham Conference:

Negative interest rates are unsustainable, and once investors decide to stop paying for the privilege of holding government debt, a banking crisis could result, says James Grant.

The founder of Grant's Interest Rate Observer was one of several speakers at the New York Society of Security Analysts' (NYSSA) Annual Benjamin Graham Conference to remark on the ramifications of unprecedented loose monetary policy.

Central banks are treading in uncharted waters. Sidney Homer and Richard Sylla, the authors of A History of Interest Rates, found no instance of negative rates in 5,000 years. Now there are $11.7 trillion invested in negative-yield sovereign debt, including $7.9 trillion in Japanese government bonds and over $1 trillion in both French and German sovereign debt.

Grant posed a tongue-in-cheek question: "If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3,000 BC?"

This is not a bad economy by most measures. Household wealth in the United States has grown steadily since the Great Recession. If these gains were the result of greater productivity, interest rates would not need to stay at historic lows. Grant says they are "a sign of someone's thumb on the currency." Negative rates are propping up risk assets. He critiqued US Federal Reserve chair Janet Yellen's touting of the bull market in equities as a sign of prosperity by alluding to Brexit voters.

"Asset prices have failed to pacify the world's unprofitable voters," Grant said.

Investors have fallen into the trap of thinking that the future will be like the past, Grant says. The period of falling yields and rising bond prices that began in 1981 is entering its 35th year. He noted that a 35-year bear market preceded this. Yet the yield curve for Swiss bonds is sub-zero for the next 30 years, thereby implying that investors expect negative rates to persist for a long time.

Another reason to think rates must begin to rise: Bonds with negative yields are worse investments than cash. That has always been the reason for zero lower bound in monetary policy. So far, investors have been willing to pay for the convenience and security of storing wealth in banks and bonds, but if yields become sharply negative, some savers will no longer be able to accept guaranteed compounded losses. Then, conventional wisdom says, they will hoard cash, which returns 0%.

David Fuller's view -

The symmetry of a 35-year bull market for government bonds since 1981, following a 35-year bear trend, ought to be a wakeup call for bond investors.  However, one of the hardest investment decisions to make concerns when to sell a profitable position of many years duration, especially while it is still in form. 

Psychologically, a long winning streak creates overconfidence.  It also causes the holder to trust reassuring views for why the profitable trend should continue indefinitely, especially as many value investors and Cassandras will have turned bearish way too early.  Bubbles often inflate beyond rational expectations. 

This item continues in the Subscriber’s Area where a link to the article above and a very helpful chart for bond investors is also posted.  



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August 09 2016

Commentary by David Fuller

These Are the Red Lines Europe Will Not Cross in Brexit Talks

Here is the opening of this topical article from Bloomberg:

U.K. Prime Minister Theresa May faces a daunting array of demands from European Union nations when the time comes to negotiate Britain’s future relationship with the bloc, an analysis of the region’s 27 other members shows.

The Bloomberg survey, based on responses from ministries, public comments from government officials and interviews with policy makers, reveals European leaders are laying down their own red lines as May’s team weighs what it wants to seek in the Brexit talks.

The result is a complex patchwork of priorities -- from fishing to shipping, an insistence on freedom of movement to the sovereignty of Gibraltar -- that may run counter to what the U.K. wants to achieve. May will still have to seek to satisfy at least some of them if she is to meet her commitment of making a success of Britain’s withdrawal from the EU.

“Clearly there are going to be different issues raised by all the different sides,” said Stephen Booth, co-director of Open Europe, a London-based research group. “The EU is ultimately a compromise of national interests so whatever the U.K. gets in the end will be that.”

Seven weeks since voters in the U.K. chose to quit the EU, Bloomberg News reporters in each of the region’s capitals have compiled the first comprehensive look at the main topics the 27 other governments want to raise in the negotiations. Two years of formal talks won’t begin until May invokes Article 50 of the bloc’s Lisbon Treaty.

David Fuller's view -

The EU’s remaining 27 countries all have different views on Brexit and the equivalent of their own shopping lists for negotiations.  That is obviously a recipe for chaos. 

I hope the UK government decides to leave the EU quickly, in line with Patrick Minford’s views which I posted on Monday.  If Theresa May can avoid a row with Lords, I think she would then have a much stronger hand in dealing with the EU.  



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August 09 2016

Commentary by David Fuller

Britain Faces a Nasty Shock When the Global Energy Cycle Turns

Here is a middle section of this timely and informative article by Ambrose Evans-Pritchard for The Telegraph, which I managed to see while on holiday:

The BGS [British Geological Survey] thinks there are 1,300 trillion cubic feet (TCF) of gas resource in the Bowland, enough in theory to replace the North Sea and profoundly change British fortunes.

"Four or five years ago the recovery rate in the US was 10pc and now they are moving towards 20pc. I don't see why we can't do that in the Bowland," Stephen Bowler, the chief executive of IGas. Anything like that would be enough to meet Britain's entire annual consumption of 2.7 TCF through the 21st Century.

IGas is in partnership with Total, GDF Suez, and INEOS, expects initials flows in the Bowland in early 2017, building up to commercial output within two or three years.

Those on the cutting edge are exasperated by the static critiques of the hydraulic fracturing, typically five years out of date. The gains in technology, seismic imaging, computer data, and smart drills are moving at lightning speed.

New methods allow for three, six, or even ten wells to be drilled from the same pad,  greatly reducing disruption. Walking rigs move on the next spot without the need for the vast fleets of vehicles that bedevilled the early years of shale. Fracking remains 'dirty', but less than a decade ago. The BGS says that most early stories of water contamination have been false alarms.

British geologists are better prepared. They have already pre-collected readings on methane levels that will enable them to detect any leakage from fracking wells. "They never had that data in the US so we will have a much better handle," said Mr Gatliff.

Burning gas emits CO2 of course - albeit half as much as coal - but fracking is still a net plus for global warming if it displaces imports of liquefied natural gas (LNG) from places like Qatar. LNG must first be frozen to minus 160 degrees Centigrade and then shipped across the world. A study by Cambridge Professor David Mackay concluded that LNG's carbon footprint is 20pc higher than shale gas.

David Fuller's view -

The title of the article above would be redundant if Britain moved swiftly and competently to develop its fracking potential.  BGS is cautious to a fault in its forecasts for the UK’s shale gas recovery capability, but we know there is plenty of this important resource underground.  It would be madness not to use it, given the rapid development in fracking technology over the last ten years. 

See also: Britain Must Seize the Benefits of Fracking, an editorial from The Telegraph which I posted yesterday.    

A PDF of AE-P’s article is posted in the Subscriber’s Area.



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August 09 2016

Commentary by Eoin Treacy

Email of the day on cybersecurity threats

This article in the Guardian, on line, clearly demonstrates the sense in your focus over many articles and audios, on cyber security and why we need to pay attention to it - both for our own security and for the potential of a growth market.

If the cyber experts and hacker communities are worried, maybe we should very very scared - most of us are only suspicious, wary of ghosts in the cupboard because we are not really sure - these guys should know - and they are worried!

Take heed, and, maybe take profit! - following your advice from several comments in the last months at the very least.

 

Eoin Treacy's view -

Thank you for this interesting article but there is not a great deal that is new in its content. Ransomware is a growing global threat and the number of small businesses being targeted is expanding exponentially. The criminals concerned have a particular penchant for targeting hospitals and police departments because they have access to public cash and can’t function without their databases not least because lives are literally on the line. However they are also going after smaller targets. 



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August 09 2016

Commentary by Eoin Treacy

You're About to Find Out How Much Sugar is Added to Your Food

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

The U.S. Food and Drug Administration recently ordered up new nutrition labels for cereal boxes, candy bars, and every other packaged food item in the supermarket.

Soon, they will list not just how much sugar is inside, but whether that sugar was naturally occurring, as in raisins, or added later, as on the flakes that come with them. 

Though this additional information won’t be required until next year, health advocates predicted that such legally mandated disclosure would deliver less-sugary foods in its wake. They were right. 

Four Twizzler strawberry twists have the same sugar content as an apple, but clearly the fruit is a better choice—in no small part because it comes with fiber and Vitamin C. The FDA decision recognized that the source of sugar matters, and that listing “Sugars” alone doesn’t reflect that. The agency decision attempts to outsmart food manufacturers that commonly call added sugar ingredients by other names, such as high fructose corn syrup, agave, and fruit juice. Current-ingredients lists and nutrition-facts panels, the FDA was saying, can be surprisingly deceptive. 

Experts in both health and the food industry predicted that the new labels would lead to reformulated products, with those marketed as “healthy” likely to be the first to get makeovers.

Now that manufacturers would have to show in no uncertain terms how much sugar was being added, they would cut it, just as they did with trans fats when their disclosure became required.

 

Eoin Treacy's view -

This is a welcome development from the Food and Drug Administration not least because the number of ways sugar is defined on ingredient lists is dizzying to say the least. For school lunches my girls had been eating Clif bars until we realised brown rice syrup is the largest ingredient and is essentially 100% glucose. I make my own oatmeal bars now so I know what goes into them and blessedly my kids like them. 



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August 09 2016

Commentary by Eoin Treacy

August 09 2016

Commentary by Eoin Treacy

Email of the day- on financial repression

I just came across this article which was published a week ago by Bloomberg.   So, money market funds will become less safe for storing cash than they have been. One could see this as the US government wanting to attract billions into its own coffers by issuing 2 month bills that attract the money. Or maybe it's concern over the solvency of large money market funds if things go haywire during another crash. I wondered if you have any insights on this change.

Eoin Treacy's view -

Thank you for this article which highlights the continued trend of financial repression where governments, and not just the USA’s, are creating markets for their paper. They have little choice considering the quantity of debt that has been issued over the last decade and the outsized debt to GDP ratios we are presented with. The simple fact is investors are going to help out with the problem like it or not. I covered this issue in relation to another article focusing on the changes to money market fund holdings on August 2nd 



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August 08 2016

Commentary by David Fuller

To Save US All Time and Money, We [the UK] Should Walk Away From the EU Now

At the heart of the matter is our future trade framework; on it depends how far the UK can pursue the road of self-government – the control of laws and borders demanded by the Brexit majority. It is good to see Liam Fox getting off to a strong start negotiating draft free trade agreements, FTAs, with countries around the world. These countries will then lower their tariffs and trade barriers against us, and we ours against them.

Contrary to what is generally thought, however, the gain that we get from this does not come from their lowering their barriers against us.  No, the gain we get from these FTAs is that we lift our tariffs and other trade barriers on them; this means that our consumers pay less and so enjoy a rise in their standard of living.

Once these high-visibility trade agreements are signed we should make sure that we trade freely with all the rest of the world, however we can arrange it. Our ultimate aim should be to achieve unilateral free trade with all countries of the world. As this implies, we could actually short circuit all these FTAs [free trade agreements] and simply go at once to unilateral free trade, as has been done by countries such as New Zealand and Singapore; even China has unilaterally brought down its tariffs to aid its development.

It is this that lies at the heart of our EU trade relationship. The EU single market is highly protectionist, which of course is why there has been so much fuss about being outside it. This protectionism raises the prices of both food and manufactures by around 20 per cent to UK consumers, implying an 8 per cent rise in their overall cost of living. While this is nice for farmers and manufacturing firms, who make higher profits, the losses of consumers are far greater. When we leave the EU, protected prices will be replaced by world prices. This generates healthy competition which pushes up productivity, forcing firms to go “up the value chain” towards more hi-tech methods. We can also help our manufacturers enter the EU single market at zero cost by refunding them EU tariffs, which average some 2 per cent and cost some £2 billion.

The gain in GDP and living standards according to my standard world trade model is about 4 per cent; on top of that there are the gains from replacing EU regulation with our own and from regaining control of mass unskilled immigration, which is costly to the economy and politically toxic.

As for the City, it too will gain greatly from having its regulations made in free-market London instead of a Brussels hostile to “Anglo-Saxon finance”. The City fears EU protectionism but it need not worry. Suppose Brussels withdraws “passporting” and the ECB declares that euro-bonds must be cleared in Frankfurt – the result will be that, just as with an FTA, the City will sell less in the EU and more elsewhere.

The implication of all this is that the main remaining task of Brexit policy is for the Ministry of Brexit under David Davis to withdraw us from the single market and take us to unilateral free trade, to reap these huge gains from eliminating EU protectionism and regulation. Mr Davis would like to sign some broader FTA with the EU; I would like to wish him luck but the bald truth is that, as David Cameron found out, the EU has virtually no flexibility when each of 27 countries wields a veto. Mr Davis, and ultimately Theresa May, should save us all time and policy delays by simply walking away from the EU, lock, stock and barrel.

David Fuller's view -

The UK exercised its democratic right to leave the EU on Thursday 23rd June 2016, primarily because we wish to be an independent sovereign nation, rather than a state in Europe’s journey to become a federal nation. 

Following the Brexit vote, some bureaucrats have claimed that negotiations with the EU would be tortuous and could drag on for a decade, encountering obstacles from any of the other 27 countries able to veto innumerable points not perceived to be in their general interest.  This is both a fantasy and a bluff to deter other EU countries from following the UK’s lead.  Why should the UK accept this expensive and masochistic route? 

This item continues in the Subscriber’s Area, where there is a PDF of Patrick Minford’s column and a further article. 



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August 08 2016

Commentary by David Fuller

Is Now the Time to Switch British Mix of Economic Policies?

Listening to Mark Carney last week, you could be forgiven for thinking that the UK economy is in danger. In reality, we know remarkably little about what is now happening.

The GDP data for the second quarter, when businesses and consumers should have been suffering from the greatest Brexit uncertainty, turned out to be surprisingly strong.

Surveys have recently suggested marked weakness, but since these were conducted post-referendum, they may well be picking up a knee-jerk effect, as well as a reaction to the apparent paralysis of government, which has since been swiftly ended by Mrs May’s coronation. Admittedly, it is also possible that the economy is weakening. We simply don’t know.

Bear in mind, though, that after the pound’s ejection from the ERM in 1992, it was some time before Black Wednesday became referred to as Golden Wednesday. Although today’s circumstances are different, I think there is a pretty good chance that something similar will happen. This is not to say that last week’s package of measures from the Bank of England was wrong. On balance, I support it. But when it comes to the future, it is not clear that there should be more of the same.

First, the Bank should wait for information about the state of the economy. Thereafter, although it might make sense, in due course, to extend quantitative easing, the same does not necessarily apply to reductions in interest rates.

David Fuller's view -

I assume Mark Carney felt it was more important to err on the side of support for the UK economy in the face of Brexit uncertainty.  Additionally, the challenge of dealing with a deflationary Japanese-style slump - probably not more than a 20% risk - would be more difficult once it occurred than slowing inflation at a later date.    

A PDF of Roger Bootle’s column is in the Subscriber’s Area.



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August 08 2016

Commentary by David Fuller

August 08 2016

Commentary by David Fuller

Britain Must Seize the Benefits of Fracking

Here is the opening of this editorial from The Telegraph:

For a country as reliant upon imported energy as Britain, the discovery of substantial deposits of shale gas might seem a godsend. In America, the exploitation of shale has been transformative, with the country set to become self-sufficient in energy by 2020.

Here, by contrast, nothing much has happened beyond the drilling of a number of test wells, every one greeted by objections from green campaigners and local residents.

The Government recognises the potential and has offered favourable tax treatment to shale gas producers and a fast-track planning procedure to get projects under way. But the biggest barrier to a commercial fracking programme remains public opposition. In order to counter this, wealth funds from the proceeds of fracking were proposed, to pay for new community amenities in affected areas.

David Fuller's view -

The UK economy would be a lot stronger in future decades if we had cheaper energy.  This would benefit just about every household in the country.  Yes, the extraction process is messy but fracking is considerably safer, cleaner and more efficient than ten years ago.  The government is right to reward households in the regions subject to fracking as compensation for any inconvenience.

This item continues in the Subscriber’s Area where a PDF of the Editorial is also posted. 



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August 08 2016

Commentary by Eoin Treacy

The surplus cash will go to shareholders

This interview with DRD gold’s CEO Niel Pretorius may be of interest to subscribers.

Eoin Treacy's view -

Gold miners are increasingly focusing on free cash flow. As the gold price recovers and they demur from massive expenditures on expansion. the potential for dividends to increase is a major positive development for investors and is contributing to the positive performance of related shares. This is particularly noteworthy when interest rates are so low and investors are hungry for yield. 



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August 08 2016

Commentary by Eoin Treacy

Bond Market's Big Illusion Revealed as U.S. Yields Turn Negative

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

It’s been a “no-brainer since forever,” said Sekiai, a money manager at Tokyo-based DIAM Co., which oversees about $166 billion.

That truism is now a thing of the past. Last month, yields on U.S. 10-year notes turned negative for Japanese buyers who pay to eliminate currency fluctuations from their returns, something that hasn’t happened since the financial crisis. It’s even worse for euro-based investors, who are locking in sub-zero returns on Treasuries for the first time in history.

That quirk means the longstanding notion of the U.S. as a respite from negative yields in Japan and Europe is little more than an illusion. With everyone from Jeffrey Gundlach to Bill Gross warning of a bubble in bonds, it could ultimately upend the record foreign demand for Treasuries, which has underpinned their seemingly unstoppable gains in recent years.

“People like a simple narrative,” said Jeffrey Rosenberg, the chief investment strategist for fixed income at BlackRock Inc., which oversees $4.6 trillion. “But there isn’t a free lunch. You can’t simply talk about yield differentials without talking about currency differentials.”

 

Eoin Treacy's view -

With interest rates so low there is very little cushion left in a foreign investment dependent on harvesting low yields. Therefore it is unsurprising that Japanese and Euro denominated investors are losing money on investments in Treasuries. With Euro/Dollar volatility at 18-month lows, the low return for Euro investors on investing in Treasuries is truly a testament to how low rates are.



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August 08 2016

Commentary by Eoin Treacy

Biotechnology update

Eoin Treacy's view -

I spent a few hours last night greatly increasing the number of shares in the biotechnology section of the Chart Library so it would be easier for subscribers to examine the commonality evident within. 

Clicking through the constituents, the return to outperformance of immuno-oncology related shares was something that caught my attention. 

 



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August 08 2016

Commentary by Eoin Treacy

August 05 2016

Commentary by Eoin Treacy

Payrolls Surge as U.S. Hiring Broad-Based for Second Month

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

Payrolls climbed by 255,000 last month, exceeding all forecasts in a Bloomberg survey of 89 economists, following a 292,000 gain in June that was a bit larger than previously estimated, a Labor Department report showed Friday. The jobless rate held at 4.9 percent as many of the people streaming into the labor force found jobs.

The rate of hiring is more than enough to whittle away at the jobless rate over time and gradually eliminate labor-market slack, a goal of Federal Reserve officials who’ve kept interest rates low to spur growth. The strong employment readings, which propelled stocks toward a record, also come as the U.S. heads toward the presidential election, which could give Democrat Hillary Clinton a positive talking point.

“Labor demand is holding up pretty well,” said Jesse Edgerton, an economist at JPMorgan Chase & Co. in New York. “The labor market is firming up. Wages are starting to pick up. It’s a positive for consumer spending. This will reinforce the Fed’s view that improvement in the labor market is likely to continue.”

 

Eoin Treacy's view -

By taking swift action to force banks to write down non-performing loans, foreclose on underwater properties and raise capital requirements the USA ensured that the banking sector returned to some sense of normality within a few years of the financial crisis. By concurrently flooding the market with liquidity the Fed delivered higher asset prices which has helped banks rebuild their balance sheets. Very low interest rates and tight lending conditions might not be the best recipe for growth in bank profitability, but US banks are no longer the epicentre of risk in the global financial sector. That mantle has passed to the Eurozone banking sector. 



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August 05 2016

Commentary by Eoin Treacy

August 05 2016

Commentary by Eoin Treacy

Companies Routinely Steer Analysts to Deliver Earnings Surprises

This article by Thomas Gryta, Serena Ng and Theo Francis for the Wall Street Journal may be of interest to subscribers. Here is a section: 

A federal rule bars companies from selectively disclosing material nonpublic information but doesn’t prohibit private conversations in which companies can gently push analysts in helpful directions, as AT&T did.

An analysis by The Wall Street Journal found that earnings estimates often decline steadily after the end of a quarter. That can turn what might have been an embarrassing “miss” for the company into a positive surprise.

The Journal examined daily changes in analysts’ estimates at S&P 500 companies since the start of 2013, comparing the estimates with what the companies ultimately reported for each period.

Nearly 2,000 times from the start of 2013 through this year’s first quarter, companies would have missed the average earnings estimate if analysts hadn’t changed their numbers in the 40 trading days before the company’s quarterly earnings report.

In about one-fourth of the instances where companies would have missed the average earnings estimate, the average projection fell enough that the company wound up meeting or beating analysts’ expectations instead, the Journal’s analysis shows. The 40 trading days cover the period from when companies typically have a good sense of the quarter’s performance to the day before earnings are announced.

Lowered earnings forecasts helped 66 companies, including Citigroup Inc., Coca-Cola Co. and Viacom Inc., each meet or exceed earnings expectations during at least three of 13 quarters examined by the Journal. CBS Corp., U.S. Bancorp and seven other companies met or beat reduced estimates in about half the quarters.

 

Eoin Treacy's view -

One of the worst sins for an institutional analyst is to be wrong on one’s own. Abiding by the guidance supplied by companies is a sure way to ensure one’s view is in line with market expectations which removes the risk of getting the call horribly wrong. 



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August 05 2016

Commentary by Eoin Treacy

Bristol-Myers Plummets as Drug Misses Key Lung-Cancer Goal

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

“This is a major surprise -- possibly the biggest clinical surprise of my career,” Evercore ISI analyst Mark Schoenebaum, who recommends holding Bristol-Myers stock, wrote in a note. “Investors had high expectations for this trial.”

The results reflected a risky but potentially lucrative bet by Bristol-Myers, highlighting a difference in strategy with Merck. By designing its study to include patients with lower levels of a key biomarker thought to predict response to the drug, Bristol-Myers was aiming at a far larger market for Opdivo. Merck’s Keytruda trial, meanwhile, focused on a smaller subset with high levels of the biomarker, called PD-L1 -- fewer patients, but a better chance of success.

Opdivo didn’t meet its primary goal of lengthening progression-free survival in patients with previously untreated advanced non-small cell lung cancer, compared with chemotherapy, Bristol-Myers said in a statement. The New York-based company is working on completing an evaluation of the late-stage trial’s results.

Bristol-Myers Chief Executive Officer Giovanni Caforio said the company is now focused on combination therapies, which could potentially create a better outcome for the group of patients that don’t get results on drugs like Opdivo alone.

“We have a very broad development program in lung cancer and we are answering a number of very important questions,”

Caforio said in a phone interview Friday. “The role of monotherapy might be limited to a very small subset of patients in the first-line setting, which makes our program now ideally suited to address the next question, which is: ‘What is the role of combination therapy?”’ That will come from a study that analysts said would likely read out in 2018.

 

Eoin Treacy's view -

As a major Biotechnology company Bristol Myers Squibb benefitted enormously from being in a position to acquire promising research in the aftermath of the TMT bubble in the 1990s. That has led it to develop a broad spectrum product range that is cash flow positive and has allowed the share to hold a progression of higher reaction lows despite the turmoil that has affected the biotech sector from last year. 



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August 04 2016

Commentary by Eoin Treacy

Bank of England's 'Exceptional' Stimulus: Winners and Losers

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

U.K. bank stocks as a group headed for their highest level since the Brexit vote in part because the BOE mitigated the pain of lower rates with a 100 billion-pound loan program. Standard Chartered Plc led the rally, set to close at its highest price since November, with a 5.6 percent jump. HSBC Holdings Plc, up 2.5 percent, was poised for its highest close since January. Both Standard Chartered and HSBC have international businesses which should benefit from the weaker pound. Still, HSBC said beforehand that it would lose $100 million of net interest income from 2016 from a 25-basis point cut, while Lloyds Banking Group Plc said such a move would cost it 100 million pounds over the next 12 months.

3)  Homebuilders
The Bloomberg U.K. Homebuilder Index rose as much as 3 percent on expectations that lower borrowing costs will feed through to mortgage rates and boost demand. Persimmon Plc, Redrow Plc and Taylor Wimpey Plc all gained. The rate cut “can only be positive for the U.K. Property market,” said Ben Madden, managing director of London estate agents Thorgills.

 

Eoin Treacy's view -

Here is a link to the full statement from today’s press release. 

£70 billion Pounds in quantitative easing (£60 billion Gilts + £10 billion corporate bonds) is a substantial number and represents the beginning of an open-ended purchase program that is likely to remain in place until the Bank of England (BoE) has proof the UK has emerged from the uncertainty surrounding the renegotiation of its relationship with the EU.

 

 



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August 04 2016

Commentary by Eoin Treacy

This Time, 3D Printer Makers Think They Found a Sweet Spot

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

HP’s technology may usher in a new era for the industry. Production applications for 3D printing could eventually grab at least 5 percent of the worldwide manufacturing economy, and translate into $640 billion in annual sales, according to Wohlers Associates, which has tracked the 3D printing market for 28 years.

Evolving Business
“It’s one of our anchor businesses we’ll divert money on,” HP Chief Technology Officer Shane Wall said in an interview. “It’s a very high strategic value for us.”

3D Systems Chief Executive Officer Vyomesh Joshi, who joined the Rock Hill, South Carolina-based company in April after more than three decades at HP, said on a conference call Wednesday that his business is evolving from prototyping to “light production.” The shares rallied 18 percent after the company posted second-quarter earnings that beat analysts’ estimates and said its profit margin increased from a year earlier partly as it shifted away from consumer products.

A few years ago, the industry had banked on putting a 3D printer in every home -- yet that market never materialized as consumers found the devices fragile, expensive and snail slow. That bet proved torturous to 3D Systems and Stratasys, both of whose shares plunged about 85 percent since the beginning of 2014. More recently, the stocks have been under pressure by a slowdown in sales for prototyping applications as customers delay purchases to evaluate new products from companies like HP, said Robert Burleson, an analyst at Canaccord Genuity.

 

Eoin Treacy's view -

3-D Systems and Stratasys went on a buying spree between 2012 and 2014 that saw them become the dominant players in the sector. It also left them with the problem of how to integrate all the competing pieces of technology into a cohesive product offering. At same time rapid demand growth for their products from the retail segment has not evolved as quickly as anticipated and their shares collapsed. The entry of much larger companies like HP and Autodesk represent additional threats.  



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August 04 2016

Commentary by Eoin Treacy

Brazil Real Rises to One-Year High as High Yields Lure Investors

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

Emerging-market currencies rallied after the Bank of England cut its key rate for the first time in more than seven years, boosting speculation that policy makers around the world will continue to ease monetary conditions and the U.S. Federal Reserve will delay rate increases. After keeping its Selic rate at 14.25 percent at a meeting last month, Brazil’s central bank said there is no room for monetary flexibility, citing the need for further fiscal adjustment and an unfavorable climate that is harming global food production.

"The real is gaining momentum as most central banks across the globe continue to ease further their monetary policy," said Arnaud Masset, an analyst at Swissquote Bank SA in Gland, Switzerland. "Investors are desperately chasing higher returns, while volatility in the FX market is at multi-month low, which creates an enabling environment for carry trade and definitely drove the real higher over the last few months."

Buying the real with borrowed dollars in a carry trade has returned 32 percent this year, the most among 42 currencies tracked by Bloomberg.

Bank of England officials voted to reduce the benchmark rate to a record-low 0.25 percent and also to expand quantitative easing, as they slashed economic growth forecasts by the most ever.
"The BOE actions help foster expectations that other central banks might follow and improve liquidity worldwide," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo. "And when the general market mood improves, the search for returns causes the high yielding real to outperform."

 

Eoin Treacy's view -

Brazil has an overnight deposit rate of 14.15% which is attractive to investors, particularly those residing in negative interest rate jurisdictions, despite the obvious issues the economy is subject to that require such a high rate. 

Governance is Everything has been a mantra at this service for decades. Brazil represents another great example of how a failure to improve standards of governance during the good times means the drawdown during the bad times is often worse than anyone might have expected. 

 



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August 04 2016

Commentary by Eoin Treacy

August 03 2016

Commentary by Eoin Treacy

India Passes Landmark Tax Reform in Modi's Biggest Win Yet

This article by Vrishti Beniwal and Abhijit Roy Chowdhury for Bloomberg may be of interest to subscribers. Here is a section:

Today is indeed a historic day," Finance Minister Arun Jaitley told reporters after the vote, noting it was significant that the vote passed unanimously. In a series of tweets, Modi congratulated lawmakers on a “path-breaking decision" and said “together we will take India to new heights of progress."

For answers to all your questions about GST, click here

The tax stands to benefit companies in the world’s fastest-growing major economy, where internal barriers to trade increase logistics and compliance costs. Indian equities climbed last week near the highest level since August 2015 as optimism increased that the measure would finally pass.
“GST is the poster child of the Modi government’s reform agenda,” said Nilang Mehta, senior investment analyst at HSBC Global Asset Management, which oversees assets of about $429 billion. “Pushing this through will provide a major boost to the credibility of the reform process in India.”

Plaudits rained in from India Inc. as it became apparent that the measure would pass on Wednesday evening. The country’s main business group hailed it as “one of the most awaited reform measures by the industry." PwC India called it “a momentous occasion." Microsoft India said it was a “positive development." Wal-Mart India praised it as an “extremely progressive step."

 

Eoin Treacy's view -

The Modi government has been criticised for the modest pace of reform since winning a landslide in the 2014 election. However, as he said at the time, there are a large number of small changes that can be made which can have a big impact and he has been delivering on as many of these small successes as was possible. Successfully rationalising the myriad sets of, often competing tax rates, within the economy by imposing a general sales tax is a major accomplishment and further emphasises that despite the heretofore slow pace governance is improving in India. 



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August 03 2016

Commentary by Eoin Treacy

HSBC Climbs Most Since April on $2.5 Billion Stock Buyback Plan

This article by Stephen Morris and Alfred Liu for Bloomberg may be of interest to subscribers. Here is a section: 

HSBC Holdings Plc. rose the most since April after it announced a $2.5 billion stock buyback for this year and said it plans more share repurchases while keeping its dividend at the current level for the foreseeable future.

Chief Executive Officer Stuart Gulliver is returning half the equity freed up from selling the bank’s Brazil unit, with the rest boosting the firm’s capital ratio to 12.8 percent. That outweighed concerns about profitability, as pretax earnings fell 45 percent to $3.61 billion from a year earlier, and the bank removed a target of surpassing a 10 percent return on equity by the end of next year.

“There is absolutely an intention to be in a position to do further buybacks,” using capital no longer needed by its shrinking U.S. operations, Finance Director Iain Mackay said on a conference call with analysts. The Federal Reserve approved the firm’s U.S. unit returning “substantial” capital to the parent company next year, which “could lead to another buyback,” he said.

 

Eoin Treacy's view -

HSBC does what very few lenders can do at present; it pays a substantial dividend. By keeping the level unchanged, the 12-month yield of 6.86% will be maintained for another year which ensures investors at least three more dividend payments before the rate is next questioned. 



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August 03 2016

Commentary by Eoin Treacy

Bitcoin worth $72 million stolen from Bitfinex exchange in Hong Kong

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

"The bitcoin was stolen from users' segregated wallets," he said.

The company said it had reported the theft to law enforcement and was cooperating with top blockchain analytic companies to track the stolen coins.

Last year, Bitfinex announced a tie-up with Palo Alto-based BitGo, which uses multiple-signature security to store user deposits online, allowing for faster withdrawals.

"Our investigation has found no evidence of a breach to any BitGo servers," BitGo said in a Tweet.
"With users' funds secured using multi-signature technology in partnership with BitGo, a lot more is at stake for the backbone of the bitcoin industry, with its stalwarts and prided tech under fire," said Charles Hayter, chief executive and founder of digital currency website CryptoCompare.

The security breach comes two months after Bitfinex was ordered to pay a $75,000 fine by the U.S. Commodity and Futures Trading Commission in part for offering illegal off-exchange financed commodity transactions in bitcoin and other digital currencies. 

 

Eoin Treacy's view -

Even the biggest lock in the world can be opened if you have the key. What’s inside is not influenced by that simple fact and neither is the supply of whatever it is. At over $500 per bitcoin the cryptocurrency has value and the blockchain equation solving process which mints bitcoins has real world applications because it is so difficult to tamper with. However the warehouses people use to trade in bitcoins do not appear to have solved the problem of securing client accounts and access keys. With such rich pickings they are targets for criminals, which represent a problem for investors seeking to participate directly in the market. 



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August 03 2016

Commentary by Eoin Treacy

China's 'mosquito factory' aims to wipe out Zika, other diseases

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

In the laboratory, mosquito eggs are collected from breeding cages containing 5,000 females and 1,600 males and injected with the wolbachia bacteria. Xi's facility has the capacity to breed up to five million mosquitoes a week.

While a female mosquito that acquires wolbachia by mating is sterile, one that is infected by injection will produce wolbachia-infected offspring. Dengue, yellow fever and Zika are also suppressed in wolbachia-injected females, making it harder for the diseases to be transmitted to humans.

Xi set up his 3,500 square meter (38,000 sq ft) "mosquito factory" in 2012 and releases the males into two residential areas on the outskirts of Guangzhou.

Xi said the mosquito population on the island has been reduced by more than 90 percent.
One villager on the island, 66 year-old Liang Jintian, who has lived there for six decades, said the study was so effective he didn't have to sleep with a mosquito net any longer.

"We used to have a lot of mosquitoes in the past. Back then some people were worried that if mosquitoes were released here, we would get even more mosquitoes," he said. "We have a lot less mosquitoes now compared to the past."

 

Eoin Treacy's view -

Zika virus has been making headlines because it poses a risk to unborn children but yellow fever, dengue, West Nile virus and especially malaria all kill and/or debilitate more people and have been with us for eons. There have been headlines recently to the effect that malaria is the biggest killer in human history. When looked at in those terms, the efforts to control the spread of these diseases represent a major contributing factor in the potential for economic growth in high population countries residing in prime mosquito breeding territories. 



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August 02 2016

Commentary by Eoin Treacy

It's Called Financial Repression, and Governments Around the World Are Doing It

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

All money funds also will be given an option to restrict or impose a fee on withdrawals when a fund’s easy-to-sell assets are depleted. This makes explicit that in times of stress it might be impossible to access one’s money. This has prompted assets in prime funds to drop below $1 trillion for the first time this century.

So far, so sensible. But there is a wrinkle. Money funds that buy government paper are exempt from the new rules, on the basis that Treasury bills are always easy to sell and there is no risk of default. The rule makers seem to have forgotten the near default in 2010 and the downgrade of the U.S. debt rating, not to mention the accidental failure to pay some Treasury bills in April 1979 due to paperwork backlogs.

The effect of the exemption is that money has poured in to government funds as investors worry that they might not always be able to access cash in prime corporate funds.

Carmen Reinhart, a finance professor at Harvard University’s John F. Kennedy School of Government, says governments across the developed world are interfering more with private flows of cash as their financing needs soar. Directing money to the state at the same time as the central bank keeps interest rates below inflation to boost growth amounts to a subsidy of the government by savers, a hidden tax.

“The way we have revamped regulation has clearly favored government debt,” she said. “The regulation creates the captive audience, and the monetary easing creates the ‘tax.’ ”

Outside Iceland, Greece and Cyprus, the West remains far less financially repressed than in the 1950s or 1960s, when capital controls meant Britons couldn’t take more than £50 ($66) out of the country, while Americans were still forbidden from investing in gold.

 

Eoin Treacy's view -

Financial repression might not be as restrictive today as it was in the 1960s but there is no denying that it has become a more relevant factor for investors over the last decade. Tinkering with money market funds is a further iteration of government policy to ensure they have a market for the paper they are printing and this is as equally true for both short and long maturity paper. Europe in particular has been proactive in forcing insurance companies and banks into holding long-dated government paper as security against future perils. 



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August 02 2016

Commentary by Eoin Treacy

Email of the day on gold share benchmarks

Here's a link to an educative article by Adam Hamilton - an explanation and comparison of the gold benchmarks, HUI and GDX. I thought it might be of interest to subscribers: Warm regards and great appreciation to you and David for all you do.

Eoin Treacy's view -

Thank you for your kind words and the link to a history of gold share benchmark indices. The financial repression referred to in my first piece above, where governments are creating a ready market for their paper harks back to a time when gold was considered a powerful hedge against too much government interference in one’s financial affairs. Here is a section on some of the primary differences between the GDX and HUI:

A big advantage GDX has over the HUI is its component list is actively managed by expert analysts. So while HUI component changes are rare to nonexistent, GDX's are constantly being shuffled around. I see this on a quarterly basis as I analyze the top GDX component stocks' quarterly operating results. There's no doubt GDX is a more-accurate ongoing reflection of this dynamic sector than the static HUI.

But GDX has other disadvantages in addition to extreme over-diversification. By virtue of including so many stocks in such a small sector, GDX also has to include plenty of primary silver miners. While their stocks generally mirror gold-stock action, the substantial silver weighting among GDX's top components makes it more of a precious-metals-stock benchmark than the pure gold-stock one it is often advertised as.

For many contrarian investors gold stocks and silver stocks are synonymous and interchangeable, they own both. While gold price action overwhelmingly drives silver, occasionally silver disconnects from gold and its miners' stocks follow. Such divergences weaken GDX's gold-stock tracking, and I've heard from plenty of investors not happy their "gold-stock ETF" also includes most of the major silver miners as well.

The HUI on the other hand is a pure gold-stock benchmark, including no silver miners that dilute its core mission. Ideally gold-stock benchmarks should only include primary gold miners since that's what they are supposed to track. Silver stocks can go into other silver-stock ETFs. This separation helps investors more easily tailor their specific gold and silver exposure via their respective miners exactly how they want it. 

 



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August 02 2016

Commentary by Eoin Treacy

Carney Quantifies Gloom With BOE Stimulus Debate at Crunch Point

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

The Brexit result is rippling out into the economy, with potentially contrasting effects on demand, supply and sterling, which has dropped about 9 percent on a trade-weighted basis since the referendum. Almost every economist in a Bloomberg survey sees the MPC cutting its growth forecasts through 2018, while raising its inflation and unemployment projections.

If officials are anywhere as pessimistic as economists, they could slash their GDP outlook by the most since the financial crisis, Clarke said. In July, economists lowered their own forecasts, with the median in a Bloomberg survey falling to just 0.6 percent from 2.1 percent before the June 23 referendum.

In May, the BOE expected growth next year of 2.3 percent, which would have been the fastest since 2014.

While the initial starting point for the MPC’s forecast will be the stronger-than-expected second quarter that data also showed a definite loss of momentum over the three months. 

The backdrop has worsened since the Brexit vote, with Markit saying its industry surveys in July suggest a 0.4 percent contraction this quarter. A final reading for services, which account for three quarters of the economy, will be published Wednesday

According to Carney, the MPC estimated in May that the pickup in uncertainty it had seen up until then would lower GDP by around 0.7 percent after a year. But that assumption was based on “Remain” winning the referendum and uncertainty fading away, meaning the hit could be much larger now. As well as outstanding questions about the U.K.’s new trade relationship with the EU, the new government has yet to outline its fiscal plans.

While some, including Goldman Sachs Group Inc., forecast a short-lived recession, others are less pessimistic. Bloomberg Intelligence U.K. economist Dan Hanson says the BOE will not go this far in its central forecast, though it will raise the possibility.

“We suspect that as yet, there is insufficient information to be too definitive,” said Philip Shaw, an economist at Investec Securities in London. “The Inflation Report will highlight a risk of a recession, but not adopt it as its baseline scenario.”

 

Eoin Treacy's view -

Mark Carney can hardly be blamed for wanting a quieter life when he made his statements warning that Brexit would result in a UK recession. He and the monetary policy committee are now faced with a difficult juggling act as a result of the population’s decision to in fact vote for change. 



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August 02 2016

Commentary by Eoin Treacy

From Brexit to CANZUK A call from Britain to team up with Canada, Australia and New Zealand

Thanks to a subscriber for this article from the Financial Post highlighting how many countries see the UK’s decision to leave the EU as an opportunity to foster tighter relations and boost trade. It is posted without further comment but here is a section:

Thanks to a subscriber for this article from the Financial Post highlighting how many countries see the UK’s decision to leave the EU as an opportunity to foster tighter relations and boost trade. It is posted without further comment but here is a section:

At US$6.5 trillion in combined GDP, the CANZUK countries would constitute the fourth-largest group in the world, behind the U.S., EU and China. At nearly two-thirds the combined GDP of China, no one could deny that a CANZUK economic grouping would be economically significant. Total global trade of these four countries would be worth more than US$3.5 trillion, versus around US$4.8 trillion for the U.S., US$4.2 trillion for China, or US$1.7 trillion for Japan. These are big numbers by global standards.

What might be the elements to a new partnership? The first step might be a new trade deal, perhaps encompassing all four countries together. Then we could add free movement of people — i.e., the automatic right to move to work. A special defence partnership might follow, perhaps including the U.K. providing a nuclear shield to Australia (more credible today than U.S. guarantees) and naval support to Canada to enforce its claims on the increasingly important Northwest Passage. We could develop mutual recognition of our economic, environmental and health and safety regulations, along with our labour standards. Perhaps we might agree to committees or other institutions to develop future regulation together.

Eoin Treacy's view -

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August 02 2016

Commentary by Eoin Treacy

Interesting charts August 2nd 2016

Eoin Treacy's view -

All but one bank met the ECB’s stress test parameters yet Commerzbank and Deutsche Bank moved to new lows today highlighting how much pressure the Eurozone banking sector is under as result of the negative interest rate environment that is eating into their profitability at just the time they need to be bolstering their balance sheets. 



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August 01 2016

Commentary by Eoin Treacy

Amazon Takes on Alibaba With Japan Portal for Chinese Shoppers

This article by Grace Huang and Reed Stevenson for Bloomberg may be of interest to subscribers. Here is a section: 

“The opportunity is huge,” said Jasper Cheung, president of Amazon Japan. “We have already increased the selection that we can export by the millions over the last several weeks.”

Chinese shoppers are looking for authentic Made-in-Japan products, spooked by tainted baby milk and fake merchandise proffered on web stores in China. While that’s helping to drive an influx of shoppers to Japan -- 3.08 million Chinese tourists have visited the archipelago so far this year, up 41 percent -- it’s also boosting demand for Amazon.co.jp, Wandou and other web outlets featuring Japanese goods.

Rakuten Inc., the Japanese online store, also lets people shop for stuff from Japan in Chinese, as well as in Korean and English. Amazon’s Japan website has been available in English for years.

The new iteration of Amazon Japan’s shopping portal, in simplified Chinese, offers millions of products with more coming, the company said. Consumers in Asia’s biggest economy are demanding access to authentic brands and quality, from clothing and cosmetics to baby products and health goods. That’s why Costco Wholesale Corp. has a shop on Alibaba’s Tmall.com, while Macy’s Inc. and other U.S. retailers are tapping into China’s dominant online-payments system by accepting Alipay on their sites.

 

Eoin Treacy's view -

For billions of new consumers entering the middle classes their first taste of consumerism is likely to be via their mobile phones where they are aggressively marketed to via Wechat, Facebook, Instagram and a host of other social media sites. That puts dominant online marketplaces like Amazon, Alibaba, Ebay and Rakuten in a favourable position to compete for their business and China represents a major battleground. Uber’s experience in China highlights the difficulty of doing business in that country where one is competing with a domestic copycat operation. Amazon’s strategy of building out its Japanese operation may act as a hedge to domestic Chinese operations where it competes directly with JD.com and Alibaba.  



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August 01 2016

Commentary by Eoin Treacy

Saudi Arabia Cuts Oil Price to Asia as Iran Battle Heats Up

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

Iran has boosted crude production 25 percent this year and aims to reach an eight-year high for daily output of 4 million barrels by the end of the year. Customers in Asia account for the largest share of Iran’s new sales, according to shipping data. The nation dropped to fourth-biggest OPEC producer after international sanctions that restricted its supplies in 2012. It has since returned to third place after the sanctions were eased in January. Saudi Arabia has responded by boosting its crude and refined products exports.

“The market share battle between them and Iran is back on in a big way,” John Kilduff, partner at Again Capital LLC in New York, said by phone on Sunday. “This is a throwdown challenge that I’m sure the Iranians will match.”

Asian demand for crude is stalling as refineries from Singapore to China and South Korea are cutting operating rates amid a slump in margins and rising supply from state-owned giants, which can draw on large crude inventories that have built up over the past two years of low prices.

 

Eoin Treacy's view -

With most Western headlines focusing on the ramifications of the refugee crisis on EU, it might be easy to forget that the war in Syria is a venue for Saudi Arabia and its allies to fight Iran and its allies. Napoleon said an army marches on its stomach, but funding is just as important as supply lines and the protagonists in this conflagration are heavily dependent on oil. By engaging in a price war Saudi Arabia is taking direct aim at Iran and other producers might be considered collateral, or perhaps convenient, damage.  



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August 01 2016

Commentary by Eoin Treacy

South Korean Stocks Could Break Free From Bargain Hunters

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

Not everyone is optimistic of Korean companies’ earnings prospects.

Kee Ho Sam, a Seoul-based fund manager at Dongbu Asset Management who helps oversee 13 trillion won, said it’s still too early to trust earnings estimates, as analysts could downgrade them for year-end annual earnings. For the Kospi index rebound, sales growth is necessary, he said.

Last month, South Korea’s central bank held its benchmark interest rate at a record low and lowered its estimate for gross domestic product expansion this year to 2.7 percent, from an April projection of 2.8 percent. The government announced a 10 trillion won ($8.7 billion) supplementary budget in June, mainly to create jobs and aid regional economies that will be hurt by corporate restructurings.
Shinyoung’s Huh remains optimistic.

The “extreme pessimism” that’s plagued Korean equities for years was overdone, he said. “It will easily break free from the trap when there is market consensus that it can.”

Eoin Treacy's view -

There was widespread optimism that attractive relative and absolute valuations would spur outperformance by major Asian markets last year but the concurrent relative strength of the Dollar acted as a headwind which sapped demand from foreign investors. That might now be changing as expectations for Fed rate hikes have been scaled back.



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July 29 2016

Commentary by Eoin Treacy

Platinum takes limelight from gold with best month in four years

This article by Eddie van der Walt and Ranjeetha Pakiam appeared in Mineweb. Here is a section:

The two lesser-known precious metals, used in devices that control toxic car emissions, are benefiting from better auto sales in China, concern over labour in South Africa and loose monetary policy from central banks around the world.

“Platinum and sometimes palladium occasionally get dragged along by gold, but here we’re also seeing internal market dynamics playing in their favour,”  David Wilson, an analyst at Citigroup in London, said by phone.

Analysts have speculated that stricter legislation on vehicle pollution in China will raise demand in the long term. On the supply side, miners in South Africa, one of the biggest producers of the metals, are in wage talks with unions. In the past, labour strikes in the country curbed output.

Platinum rose 0.9% to $1 146.40 an ounce by 11:59am in London, touching the highest in more than a year. It now leads gold for the year with a 29% gain compared with bullion’s 26%.

Palladium added 0.1% to $702.15 an ounce on Thursday. It has risen in all but one of the last 17 sessions.

Net-long positions held by managed money on the Comex exchange have climbed for at least the past three weeks in both metals, exchange data showed as of last Friday.

Eoin Treacy's view -

Platinum hit a medium-term low near $800 in January and has rallied impressively since, to at least partially close an historic undervaluation relative to gold. Platinum is denser than gold which helps to explain why platinum jewellery is more expensive; you need more of it to create the same piece. The fact it is rarer than the yellow metal also contributes to its appeal. 



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July 29 2016

Commentary by Eoin Treacy

Email of the day on the investment outlook for the Eurozone

The failings of the IMF described in this article read as if an unfriendly journalist is lashing out, but the criticisms were made by the IMF's own oversight committee. Here are some extracts: "The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory." "This is the lacerating verdict of the IMF’s top watchdog on the fund’s tangled political role in the eurozone debt crisis.." and "the whole approach to the eurozone was characterised by ‘groupthink’ and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the Eurozone” or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen." None of this surprises me and I guess many subscribers living outside the eurozone will have the same reaction. I/we do not expect any better from the IMF when the next Eurozone crisis strikes the continent. So what do we do to protect ourselves? Here are my thoughts For those living within the eurozone some form of currency hedge would appear wise (gold, other currencies, other stock markets). I live and invest outside the eurozone (thankfully) so I am wary of eurozone stocks for currency loss reasons and I am rather expecting money to flow to the US dollar and US stocks in coming years (and maybe UK to some extent). But that is speculation so I watch the charts carefully. I would love to know, if you had foresee the future is your thinking very different?

Eoin Treacy's view -

Thank you for this educational article. When I first became interested in crowd psychology 20 years ago the aspect that most intrigued me was crowds become more emotional and less rational as they grow and as a result are tolerant of contradiction. I think if we are honest with ourselves each of us has had a self-destructive episode at some point in our lives. We might even have been aware of it at the time and yet we do it anyway. 



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July 29 2016

Commentary by Eoin Treacy

Kuroda Leads BOJ to a Policy Crossroads as Pressures Intensify

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

Governor Haruhiko Kuroda, 71, and his colleagues declared it was time to assess the impact of their policies, which have variously spurred strong criticism from bankers, bond dealers and some lawmakers and former BOJ executives. The next gathering, on Sept. 20-21, offers a chance to either provide greater evidence that the current framework should continue, head further into uncharted territory, or scale back.

Regardless of the decision, this isn’t where one of the world’s most aggressive central bankers wanted to be in his fourth year in office. In early 2013, he expressed confidence the BOJ had the power to ensure its 2 percent inflation target could be reached within about two years. This year, with the shock adoption of a negative interest rate policy backfiring through a welter of warnings from commercial banks, there’s a growing perception monetary policy is losing effectiveness.

Eoin Treacy's view -

The Bank of Japan signalled today that they accept the conflict between the inflation bias of increasing money supply and the deflationary bias of negative interest rates. A rethink of their strategy is truly required but we do not yet know if they have the appetite for a helicopter money strategy which would surely create the inflation they desire. If Japan does indeed go down that route, it will likely offer a template for the ECB to follow a similar project. 



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July 29 2016

Commentary by Eoin Treacy

Colombia Is Charting a New Path Forward After a Brutal Civil War

This article by Jean Friedman-Rudovsky for Bloomberg may be of interest to subscribers. Here is a section:

There’s also politics. What set the stage for the peace negotiations was, in part, the creation of the office of land restitution. The nation has always had a drastically unequal distribution of land, and displacement exacerbated that trend. Today, less than 1 percent of the Colombian population owns more than 60 percent of the land, one of the world’s most inequitable ratios. When the government showed a willingness to address this issue, FARC came to the negotiating table.

The government now says that giving back their land may make its citizens less restless, less inclined to support radical forces. This stability would help attract foreign investment. Unlike other Latin American countries, Colombia has been a loyal U.S. ally and reliably market-friendly. “What’s held back development has been the security situation. The war made many parts of the country ungovernable and, thereby, untapped,” Colgate University’s Ballvé says. With a peace agreement forthcoming, that will change. “The country has vast mineral and oil reserves in areas that will be newly coming online—in part, thanks to initiatives like the land restitution program.”

Although land restitution is key to long-term stability, it’s causing turmoil in the short term. Leading international human-rights organizations have documented intimidation campaigns targeted at those trying to return home. Families going back to their land have received death threats, and in 2015, 105 activist leaders were killed, a 35 percent increase from the previous year. Judges who issue land restitution decisions are given personal security details, says Sabogal, the director of the government office. Colombia’s landed elite used to employ right-wing paramilitaries to enforce their claims. Now they’re colluding with drug trafficking groups.

Eoin Treacy's view -

The evolution of chemically based narcotics such as fentanyl might be the best news to hit countries like Peru and Colombia in years. The cultivation of coca for processing into cocaine helped fuel civil unrest and funded rebel groups like FARC. With the increasingly legal availability of cannabis and the ability of Mexican cartels to manufacture both opioids methamphetamines the market for cocaine must be evolving. 



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July 28 2016

Commentary by Eoin Treacy

Biotechnology

Eoin Treacy's view -

This sector was the darling of the investment community until about a year ago when Biogen had a disappointing quarter, Valeant’s business model blew  up shortly afterwards and despite the fact it is not a biotech company, the sector was hit by the same selling pressure. When politicians took aim at the high charges of drugs and new treatments, it contributed to additional selling pressure. 



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July 28 2016

Commentary by Eoin Treacy

3 Trends in Wastewater Treatment

Thanks to a subscriber for this article by Ralph Exton at GE. Here is a section:

It is critical that we seek to spur increased adoption of water reuse – a strategy that allows the world to take advantage of a water source constantly replenished every day regardless of drought or climate change. Treated municipal wastewater is a virtually untapped resource. In North America, 75 percent of wastewater is treated (16 trillion gallons of water every day), but less than 4 percent of that water is reused. It’s a gap that needs to be closed.

The vast majority of treated municipal effluent is discharged into a local receiving stream. Technology exists to take this wastewater and treat it to a quality suitable for other, non-potable purposes: agricultural needs, groundwater recharge, industrial applications. In fact, wastewater can be treated to a quality suitable for drinking (if we can get past the “ick” factor of the toilet-to-tap water recycling concept).

Historically, policy has focused on effluent quality, pushing for discharge limits to protect the environment. This is important – and necessary. However, policy and regulation need to catch up with the growing acceptance of water reuse and begin to structure guidance around its implementation. It’s starting to happen in several corners of the world. For example, Saudi Araba increased its water tariff to encourage water reuse. The United Arab Emirates is opting for stronger conservation and reuse rather than investing in desalination technologies, which are effective but expensive.

Eoin Treacy's view -

Fresh water is a precious commodity and, as with any naturally occurring resource, is unevenly dispersed globally. Nevertheless it is an expensive resource to develop infrastructure for and, because of its integral role in fostering life, the care that needs to go into making it potable means water represents a cost for the majority of households. 



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July 28 2016

Commentary by Eoin Treacy

Macau's Chief Sees 2017 Economy Returning to Growth on Casinos

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

“Macau’s gaming industry and the whole economy will continue to adjust, but the decline may shrink to 7.2 percent this year and even resume growth in 2017,” Chief Executive Fernando Chui said in a televised session of the city’s legislature Wednesday. “It’s a good time for Macau to re-position after a 25-month gaming revenue drop.”

Gross domestic product in Macau declined 20.3 percent in 2015, worsening from the 0.9 percent drop the year before, as the world’s largest gambling hub was hurt by China’s anti-corruption campaign that scared off high-rollers. The casino industry, which accounts for half of Macau’s GDP, is in the midst of a casino building boom to boost revenue from mainstream gamblers and tourists.

Recreational Gamblers
Macau’s government is working with its six casino operators to “improve synergies” between gaming and non-gaming pursuits, Chui said. The city is trying to reduce its reliance on gambling and is targeting to raise the proportion of casinos’ non-gaming revenue to 9 percent by 2020 from 6.6 percent in 2014.

 

Eoin Treacy's view -

The outlook for the gaming sector and China are inextricably linked. Macau represents a much larger gambling market than even Las Vegas and that city also depends on the largesse of Chinese high rollers to drive profitability. With the outlook for growth improving in Macau that may be an initial sign that the Chinese tourist market is still healthy. 



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July 27 2016

Commentary by Eoin Treacy

PM Abe's plan for $265 billion stimulus puts pressure on BOJ to ease

This article by Leika Khara and Stanley White for Reuters may be of interest to subscribers. Here is a section: 

Japan's prime minister unveiled a surprisingly large $265 billion stimulus package on Wednesday to reflate the world's third-largest economy, adding pressure on the central bank to match the measures with monetary stimulus later this week.

The earlier-than-expected announcement to boost the flagging economy sent Japanese and other Asian stock markets higher while it weighed on the safe-haven yen, but lacked crucial details on how much of the package would be direct government spending.

The size of the package, at more than 28 trillion yen ($265.30 billion), exceeds initial estimates of around 20 trillion yen and is nearly 6 percent the size of Japan's economy. It will consist of 13 trillion yen in "fiscal measures," which likely includes spending by national and local governments, as well as loan program.

"We need to take steps to support domestic demand and put the economy on a firmer recovery path," Shinzo Abe said in a speech in southern Japan on Wednesday. "I want to use various measures to increase our escape velocity from deflation."

The market expects the Bank of Japan to produce some fire power of its own at its rate review ending on Friday.

Eoin Treacy's view -

In last night’s Audio I discussed the likelihood that the ¥100 represents something of a Rubicon for the Japanese as they decide how next to try and re-instil an inflation bias in economic activity. Today’s announcement of fresh fiscal stimulus is likely to be accompanied by additional measures from the BOJ; in a further iteration of the fiscal/monetary partnership that is the primary attribute of Abenomics. 



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July 27 2016

Commentary by Eoin Treacy

Email of the day on the importance of a global perspective

I want to say thanks for all your interesting charts from all over the world. You both give us a fantastic view from around the globe! Some examples, Valeant, Kinder Morgan, Orocobre and metals. They have all recently helped me pay my expenses and more. And last but not least, Thank you for not bringing Brexit up every day, I suppose you have a lot of customers living outside England and Wales and a few of us do not think Brexit is the center of the world. A Swedish Citizen, and FM for more than 25 years. (With an international portfolio.) Keep up your good work.

Eoin Treacy's view -

Thank you for your kind words and congratulations on seizing opportunities as they have presented themselves. It’s a big world out there and while the political ramifications of Brexit remain a major topic of conversation, not least in the UK and Europe, I believe we have a responsibility to focus on the investment ramifications of the event and also the fact that there are a great many asset classes for which the referendum has been a non-event.



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July 27 2016

Commentary by Eoin Treacy

Musings From the Oil Patch July 26th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which contains an interesting discussion on the longevity of products but here is a section on the liquefied natural gas market:

In recent months, two LNG cargoes from Cheniere Energy’s (LNG-NYSE) Sabine Pass export terminal in Louisiana have been delivered to Kuwait and Dubai. So far, since it began shipping LNG in February, Cheniere has sent cargos to seven countries, including Argentina, Chile, Brazil, India, Portugal, Dubai and Kuwait. The shipments to the Middle East reflect the soaring demand for energy in these countries. (As a testament to the nation’s energy demand issue, Saudi Arabia recently disclosed it has been drawing on its domestic oil inventories to meet the summer energy demand surge and to avoid having to further boost oil production above the country’s current 10.5 million barrels a day rate.) As all he countries in the Middle East have rapidly growing populations, their domestic demand is growing and tends to soar during the hot summer months. Most of these countries have large natural gas resources, but other than Qatar, which is currently the world’s largest LNG exporter, they are less developed. We expect the rest of the countries in the region will step up the pace of their natural gas resource development.

In order to appreciate the market potential for cheap U.S. natural gas, Kuwait’s LNG imports exploded from one million tons in 2012 to 3.04 million tons last year, according to the Middle East Economic Survey. We know that Saudi Arabia has been ramping up its drilling for natural gas in order to power more of the country’s water desalination plants and electricity generators. By using more domestic natural gas, Saudi Arabia will be able to reduce the volume of crude oil burned to power these facilitates. That will enable Saudi Arabia to have more of its crude oil output available for export and to generate income for the government, rather than burning it under utility boilers. For the meantime, we expect more U.S. LNG cargos will find their way to the Middle East. Those LNG exports will help to tighten the domestic gas market and send natural gas prices higher as we move into 2017, but we are not sure that the Middle East will become a long-term U.S. LNG export market. But the industry will take whatever demand it can find it now.

Eoin Treacy's view -

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

For much of the last century natural gas was in such abundance that it had no economic value and was burned off as a by-product of oil drilling. With increasing demand for less polluting, but energy dense resources, to provide heating, cooling and cooking natural gas has experienced a renaissance. 



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July 27 2016

Commentary by Eoin Treacy

Security Landscape Continues to Evolve

Thanks to a subscriber for this report from Level 3 Communications which may be of interest. Here is a section:

431 million new malware variants seen in 2015, an increase of 36% Source: Symantec Internet Security Report, April 2016

The mean number of days to resolve cyber-attacks is 46, with an average cost of $21,155/day (global, standardized into U.S. dollars) Source: Ponemon 2015 Global Cost of Cyber Crime Study, October 2015

9 breaches in 2015 with more than 10 million identities exposed: a total of 429 million exposed Source: Symantec Internet Security Report, April 2016

The mean annualized cost of cybercrime to global organizations is $7.7 million/year (standardized into U.S. dollars) Source: Ponemon 2015 Global Cost of Cyber Crime Study, October 2015

Eoin Treacy's view -

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

The growth of cybercrime is nothing short of exponential not least because it is comparatively cheap to develop, it is global in nature, prosecution rates are woefully low and the rewards are highly attractive. Combatting the threat requires a war footing to be adopted by corporations and outside of the high tech sector many companies have proven ill-equipped to deal with the challenge. 



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July 26 2016

Commentary by Eoin Treacy

Gold miners back in the game

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

Our favourable view of gold is based on the following factors:

Challenging global economic growth;

Prevailing low to negative interest rates and easy monetary policies. Central banks with negative deposit rates incl. ECB, Japan, Switzerland, Denmark and Sweden. Correlated against the US 2-year real rate (r2 is 0.73), the implied gold price is ~$1460/oz (Figure 2);

Lingering uncertainty in the Eurozone since the Brexit vote;

Risks associated with China’s debt and debt: GDP ratio at ~$30 trillion and >200% which could force the People’s Bank of China to mobilize selling additional US treasuries to support the yuan and reduce capital outflows; and

Risks to the US dollar as balanced with the upside from potential modest rate hikes offset by potential instability post US elections. Call this the Trump factor! Although the US dollar is broadly inversely correlated with gold (r2 is 0.54), the (inverse) correlation with real rates is a better predictor for gold.

The conditions noted above have driven investors back to gold as an alternative safe-haven with no opportunity holding cost when compared to almost one third of global sovereign bonds trading at negative yields. Global ETF holdings are at a level last seen in May 2013 (Figure 4). In addition, COMEX net speculative positions in gold are at a multi-year high, which poses some risk of sell-off liquidations (Figure 5).

It is worth noting that the recent pullback in gold from this year’s near-term high of $1,360 is due to a certain level of political stability in Britain, but more importantly stronger US economic data triggering a reversal in bond yields and US dollar. Gold initially shrugged off the strong June employment data but last week’s manufacturing and retail sales data led to an acceleration in expectations of a fed funds rate hike by December (currently 45%). Nonetheless, we see this pullback as healthy and would look to accumulate gold equity exposure on weakness.

Eoin Treacy's view -

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

The gold mining sector is offering leverage to the gold price for the first time in a decade following a painful process of rationalisation that squeezed management expansion plans and forced a return to a focus on cash flow. It is being helped by the fact that gold and gold miners are among the few sectors not hitting new all-time highs and therefore represent relative value and potentially catch up potential. 



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July 26 2016

Commentary by Eoin Treacy

US to create nationwide network of EV charging stations

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

The US government has announced "an unprecedented set of actions" to pump up the country's plug-in electric vehicle market, including US$4.5 billion in loan guarantees to create a nationwide network of commercial scale and fast charging stations. The initiative to push for greater electric car adoption calls for a collaboration between federal and state agencies, utilities, major automakers and other groups.

The initiative will identify zero emission and alternative fuel corridors across the country, to determine the best locations to put in fast charging stations, as part of the Fixing America's Surface Transportation (FAST) Act.

As part of a partnership between the US departments of energy and transportation, a 2020 vision for a national fast charging network will be developed, with potential longer-term innovations that include up to 350 kW of direct current fast charging. According to the administration, a 350 kW DC system could charge a 200-mile-range battery in less than 10 minutes. For comparison, Tesla just boosted some of its Superchargers' power capacity to 145 kW, which is claimed the fastest currently available.

Eoin Treacy's view -

Governments are getting behind the need for a jump in the efficiency of batteries. If electric vehicle range anxiety is truly to be overcome batteries that can power a car all day, with the air conditioning on, while charging my phone and iPad as I listen to the radio are required. Many people feel they need a workhorse that can fulfil just about any task rather than just commuting. Continued high demand for light trucks is testament to that which is probably why Elon Musk gave a nod to heavier vehicles when announcing his latest growth plan last week. 



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July 26 2016

Commentary by Eoin Treacy

Pension Returns Slump, Squeezing States and Cities

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

“Many states and local governments may be facing difficult choices if investment returns remain low,” said Keith Brainard, research director at the National Association of State Retirement Administrators. “The money has to come from somewhere.”

Connecticut now allocates 10% of its budget to pay down unfunded pension liabilities that more than doubled in size over the past decade. Chicago’s $20 billion pension-funding hole prompted its credit rating to tumble to junk, a rare low mark for an economically diverse city.

A reminder of how long-term fortunes have turned came last week as two pension bellwethers reported their worst results since the 2008-09 financial crisis.

Weak annual gains for the California Public Employees’ Retirement System and California State Teachers’ Retirement System dropped their 20-year returns below 7.5% investment targets, to 7.03% and 7.1%, respectively. The two funds, known as Calpers and Calstrs, are the largest public pensions in the U.S. by assets and oversee a combined $484 billion for 2.6 million public workers and retirees.

Eoin Treacy's view -

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

The underperformance of public pensions that invest primarily in bonds highlights the difference in returns between playing the market from a momentum perspective versus a yield-to-maturity buy-and-hold strategy. Pension funds tend to manage duration by reinvesting maturing bonds because that helps to marry future liabilities to predictable returns but in an environment where yields are low the premium paid for new issues is so high that long-term returns are impugned. 



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July 25 2016

Commentary by Eoin Treacy

Brexit is already proving to be a huge victory for global free trade

Thanks to a subscriber for this article by Lawrence Solomon for The Financial Post may be of interest. Here is a section:

Canada has long wanted free trade with the United Kingdom, a fellow G7 country that became the world’s fifth-largest economy in 2014 after overtaking France. According to the Centre for Economics Business and Research, a premier U.K. consultancy, the fast-growing U.K. will overtake Germany over the next two decades to become Europe’s largest economy and the world’s fourth largest.

But until Brexit, Canada was shut off from this economic powerhouse, our only path to profitable U.K. trade wending through the EU bureaucracy in Brussels, which controls trade access to every EU country. And as a frustrated Canada knows only too well from almost a decade of interminable, ongoing jockeying in aid of sealing a Canada-EU trade deal, the EU is the world’s largest closed shop. No one gets to trade with the EU on preferential terms without either joining the union or trading away national sovereignty for the privilege.

Now the world, Canada included, is beating a direct path to the United Kingdom. U.S. Secretary of State John Kerry, after talks this week with U.K. Prime Minister Theresa May, declared it was imperative that the U.S. move “as fast as possible” to “maximize the economic opportunities” of Brexit. Kerry’s views echoed those of Australian Prime Minister Malcolm Turnbull who, after his own discussions with May, stated: “So as Britain leaves the EU, what we will need to do is negotiate direct arrangements with Britain … we need to get moving on that quickly.”

 

Eoin Treacy's view -

It’s an awfully big world out there. While the EU represents a powerful trading bloc and affluent internal market, the price of abiding by the rules necessary to gain access to it means that trade with much of the rest of the world needs to be ignored. By choosing to plot a new path the UK has the potential to revitalise the Commonwealth as a trade network in a way that has not been possible for decades. In fact that would be much more in keeping with the country’s global ambition and history as a major trading nation. 



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July 25 2016

Commentary by Eoin Treacy

Thought Leadership

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

The real problem I believe for the European Union is the banks. If we compare Bank of America stock performance leading up the credit crisis and Deutsche Bank stock performance from July 2013 through last week, we see a very similar situation where the performance is very stable, slightly appreciating and then a total collapse. Deutsche Bank has really accelerated to the downside, not at $14. When it gets into single digits you’re going to see a similar concern about the European baking system. We have seen talk from Italian officials about the need for a bailout and eve n from German officials saying there may be a EUR150 billion bailout required to get the German bank in order. The response to these banking insolvencies will probably be things that are bond unfriendly in terms of inflationary or fiscal pressure and will catch most people by surprise. It could completely change the game. 

The need for real stimulus in either bank bailouts , helicopter money or large fiscal stimulus will be deemed to be massive. And this will be a preferable solution, based upon negative interest rate experiments which have not worked. In fact they have produced the opposite of the desired effect. They have not helped stock markets and have weakened the currencies both the Yen and the Euro are stronger now than when their central banks first went negative. 

 

Eoin Treacy's view -

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

The European banking sector has not had the write downs that were such a prominent feature of the USA’s response to the credit crisis and as a result remain considerably weaker than might otherwise have been the case. The USA learned from the Savings & Loan crisis in the early 1990s that the cost of delaying the write-off and recapitalisation process multiplies the eventual cost rather than reduces it. Europe would appear to be experiencing a similar problem today. The question remains whether they will learn from it. 



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July 25 2016

Commentary by Eoin Treacy

Macro Morsels

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

Another important change in recent years involves the creation of municipal bond markets and the expansion of a debt swap program that allows localities to trade costly, fast-maturing outstanding loans for cheaper, slower-maturing bonds. The program reduces the risk of local government debt defaults in the near term by pushing back the maturity date for outstanding debts and lowering borrowing costs. In addition, it marks a first step toward giving local governments greater autonomy (and responsibility) over financing and making the process by which local governments raise capital more transparent and easier to measure.

Local governments in China pay for upward of 90 percent of all infrastructure construction while taking home a much smaller fraction of tax revenue. In the past, local governments covered the cost through a combination of land sales and loans taken out on their behalf by poorly regulated private entities called local government financing vehicles.

In 2015, after the rise of bond markets, local governments issued bonds worth 3.5 trillion yuan, nearly all of which took the form of debt swaps that cut local government interest payments by some 200 billion yuan, according to a government report released in March. The government plans to expand municipal bond issuance to as much as 6 trillion yuan by 2017 and 15 trillion yuan before 2020.

Neither those changes nor other ones underway in China's financial system amounting to the broad and ambitious reforms long promised by the country's leadership. These are tools for managing a crisis, not reconfiguring an economy. As such, they are sure to disappoint observers in and outside China who hoped that President Xi Jinping would move boldly to reduce the economy's dependence on the state. But given the scale of debt accumulated during the struggle to maintain macroeconomic stability in the past eight years, and considering the complex knot of political interests that exacerbated the excesses of that period, the financial tools and the policy approach they represent are reasonable and unsurprising. After all, their goal is not to produce a "rational" economy per se, but to preserve the state, even if doing so means accruing innumerable and perhaps insurmountable economic "irrationalities" in the meantime.

 

Eoin Treacy's view -

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

The stability of the economy and by extension, the stock market, remain both political and financial objectives of the Communist administration. Considering the ambitions China has on the international stage it is no exaggeration that domestic stability also has geopolitical characteristics. 



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July 22 2016

Commentary by Eoin Treacy

Hong Kong Bears Pile Record Short Bets on China Consumer Stocks

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

Chinese consumer stocks are in the cross- hairs of Hong Kong’s short-sellers.

Bearish bets on Tingyi (Cayman Islands) Holding Corp. and Want Want China Holdings Ltd. soared to record highs since May, data compiled by IHS Markit Ltd. show. The instant noodles and snacks manufacturers, together with sanitary-napkin maker Hengan International Ltd., make up three of the four most-shorted stocks on Hong Kong’s benchmark index. Hengan this month spun off its food business into a separately listed unit that’s down 27 percent from its first close through Thursday.

Bears are betting that China’s shift toward an economy driven by middle-class spending will leave some consumer stalwarts behind. Even after valuations on Tingyi and Want Want fell to all-time lows at the start of the year, the stocks are still too expensive as Internet retailing helps foreign brands grab market share in China, according to Ample Capital Ltd.

Shoppers are showing a preference for healthier food, UOB Kay Hian Holdings Ltd. says. “Consumers have been changing their pattern to more nutritional products so their business growth is declining,” said Johnson Hu, a Shanghai-based analyst at UOB Kay Hian. “We don’t see that changing in the foreseeable future.”

Short interest in Want Want and Tingyi has risen to 7.6 percent and 4.9 percent of their outstanding shares as of Tuesday, Markit data show. Bearish bets in Tingyi surged to a record level this month, and those in Want Want are close to all-time highs last seen in May. The average of similar wagers for the 50 Hang Seng Index members was about 1.3 percent.

 

Eoin Treacy's view -

The evolution of online retail has had a dramatic effect on the ability of bricks and mortar stores in North America and now that pattern is likely to be repeated elsewhere as the convenience of online shopping trumps the toil of driving and walking to a store only to have to carry home the goods afterwards. The additional fact that diabetes is a major problem in both China and India suggests the potential for concerted drives to eat healthier more nutritious foods is more likely than not. 



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July 22 2016

Commentary by Eoin Treacy

Apple Watch Sales Fall 55% in Second Quarter, IDC Report Says

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

Apple Inc. sold 1.6 million watches in the second quarter of this year, down from 3.6 million units a year earlier, IDC said. Global smartwatch sales fell 32 percent to 3.5 million units.

While Apple held on to its position as the industry leader, with 47 percent of the market, it was the only company in the top five to see a decline. Samsung Electronics Co. saw its market share more than double to 16 percent.

“Consumers have held off on smartwatch purchases since early 2016 in anticipation of a hardware refresh, and improvements in WatchOS are not expected until later this year, effectively stalling existing Apple Watch sales," IDC analyst Jitesh Ubrani wrote in the report. “Apple still maintains a significant lead in the market and unfortunately a decline for Apple leads to a decline in the entire market.”

Apple Watch is the company’s first new hardware product since the iPad’s 2010 debut and is a key part of Chief Executive Officer Tim Cook’s strategy to find new areas of growth as sales of the iPhone slow. Apple is expected to introduce an updated operating system and an Apple Watch 2 this fall, promising new features and better performance.

IDC said despite Apple’s sharp drop it expects growth in 2017, as continued development appeals to a broader market.

“Every vendor faces similar challenges related to fashion and functionality, and though we expect improvements next year, growth in the remainder of 2016 will likely be muted,” said Ubrani.

 

Eoin Treacy's view -

Smart watches can measure steps, constantly record heart rate, display text messages, alert us to incoming calls and act as payment mechanisms when we don’t have our wallets. While each of these functions might have been the preserve of a single company when they were debuted most providers now offer some variation on all of them. That suggests the premium price point commanded by Apple Watch isn’t justified not least as a widely expected reboot of the product is expected later this year. That is likely to at least include enhancements to battery life that might allow for some of the more ambitious health related apps to be introduced.



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July 22 2016

Commentary by Eoin Treacy

Fracklog in the Biggest U.S. Oil Field May All But Disappear

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

Crude in the $40- to $50-a-barrel range may wipe out most of the fracklog in Texas’s Permian Basin and as much as 70 percent of the inventory in its Eagle Ford play by the end of 2017, according to Bloomberg Intelligence analyst Andrew Cosgrove. While bringing them online is the cheapest way of taking advantage of higher prices, the wave of new supply also threatens to kill the fragile recovery that oil and gas markets have seen so far this year.

“We think that by the end of the third quarter, beginning of the fourth quarter, the bullish catalyst of falling U.S. production will be all but gone,” Cosgrove said in an interview Thursday. “You’ll start to see U.S. production flat lining.”

Drillers that expanded operations in U.S. shale fields found that sidelining wells was the easiest way to cut costs when oil and gas prices plunged. Since then, these wells have been “just sitting around, basically waiting for a better price to come along,” said Het Shah, an analyst at Bloomberg New Energy Finance.

U.S. oil producers extended the biggest shale drilling revival since last summer as rigs targeting oil and gas in the U.S. rose by 7 to 447 last week, according to Baker Hughes Inc. Dave Lesar, chief executive officer of Halliburton Co., the world’s largest provider of hydraulic-fracturing work, said Wednesday that the market in North America has turned and that he expects a “modest uptick” in drilling in the second half of the year.

 

Eoin Treacy's view -

Unconventional wells are much more expensive than conventional wells but come with some interesting advantages that protect producers from volatility. They have very prolific early production rates which helps to quickly pay off the multi-million dollar cost of setting them up. They then enter a period of time when production falls precipitously. If prices are not high enough to invest in boosting production through fresh drilling then it drillers have the luxury of time as they wait for prices to recover, after all the oil isn’t going anywhere. 



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July 22 2016

Commentary by Eoin Treacy

Speech by Rabbi Lord Jonathan Sacks on Receiving the 2016 Templeton Prize

Thanks to a subscriber for this educative and common sense speech which may be of interest to subscribers. Here is a section:

There is, though, one form of outsourcing that tends to be little noticed: the outsourcing of memory. Our computers and smartphones have developed larger and larger memories, from kilobytes to megabytes to gigabytes, while our memories, and those of our children have got smaller and smaller.

In fact, why bother to remember anything these days if you can look it up in a microsecond on Google or Wikipedia?

But here, I think, we made a mistake. We confused history and memory, which are not the same thing at all. History is an answer to the question, “What happened?” Memory is an answer to the question, “Who am I?” History is about facts, memory is about identity. History is his-story. It happened to someone else, not me. Memory is my story, the past that made me who I am, of whose legacy I am the guardian for the sake of generations yet to come. Without memory, there is no identity. And without identity, we are mere dust on the surface of infinity.

Lacking memory we have forgotten one of the most important lessons to have emerged from the wars of religion in the sixteenth and seventeenth century and the new birth of freedom that followed. Even to say it sounds antiquarian but it is this: A free society is a moral achievement. Without self-restraint, without the capacity to defer the gratification of instinct, and without the habits of heart and deed that we call virtues, we will eventually lose our freedom.

That is what Locke meant when he contrasted liberty, the freedom to do what we ought, with licence, the freedom to do what we want. It’s what Adam Smith signalled when, before he wrote The Wealth of Nations, he wrote The Theory of Moral Sentiments. It’s what Washington meant when he said, "Human rights can only be assured among a virtuous people.” And Benjamin Franklin when he said, “Only a virtuous people are capable of freedom.” And Jefferson when he said, “A nation as a society forms a moral person, and every member of it is personally responsible for his society.”

 

Eoin Treacy's view -

Another killing, this time in Munich, is part of a litany of terrorist attacks which directly target civilians and expose the soft underbelly of European and US security. This tactic is taken straight from the terrorist playbook which is to keep control of the domestic population through strong arm tactics and instil fear in the target population through ferocious and seemingly random attacks. Liberal democracies in the West face an identity crisis and some means of addressing both internal and external challenges. The rise of populism is a direct response to this development not least since established parties have failed to so far address these issues. 



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July 21 2016

Commentary by David Fuller

Draghi Signals ECB May Boost Stimulus Later This Year

Here is the opening of this report from Bloomberg:

Mario Draghi signaled that the European Central Bank will consider adding fresh stimulus later this year when it has a clearer picture of the economic impact from the U.K.’s vote to leave the European Union.

“Over coming months, when we have more information including staff projections, we will be in a better position to assess the underlying macroeconomic conditions,” the ECB president told reporters in Frankfurt on Thursday after a meeting of the Governing Council. “If warranted to achieve its objective, the Governing Council will act by using all instruments available within its mandate.”

The risk for the euro area is that its recovery might prove too fragile to cope with any downturn in trade and investment as a consequence of the Brexit vote. Even so, after calming market volatility with pledges of liquidity, officials have bought themselves time to judge how much further they can push their unprecedented easing, especially in the absence of more support from government policies.

David Fuller's view -

This is another sobering assessment by the European Central Bank (ECB) president.  In mentioning Brexit, he also comments on the lack of both structural reforms and fiscal spending in the EU.  We have heard this before and Mario Draghi remains the prime source of stimulus within the EU, while frequently mentioning in previous discussions that the ECB’s efforts, on their own, are insufficient to revive GDP growth.  In the Audio within Bloomberg’s article above, Draghi also says: “Risks to the Euro area growth outlook remain tilted to the downside”.

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July 21 2016

Commentary by David Fuller

July 21 2016

Commentary by David Fuller

Can Republic of Turkey Survive Erdogan Purge?

Here is the opening of this sobering report by Bloomberg Business Week, posted without further comment:

On the afternoon of May 6 the Turkish journalist Can Dundar was speaking to a television reporter outside Istanbul’s Caglayan courthouse when he noticed a man with a mustache and a navy-blue windbreaker walking toward him, holding a handgun. Dundar (pronounced DOON-dar) is editor-in-chief of the newspaper Cumhuriyet, one of the few Turkish media outlets still openly critical of the government. He and Cumhuriyet colleague Erdem Gul were awaiting their sentences after a month’s long criminal trial. Dundar’s bodyguard had remained inside during the court’s recess. Seeing the gun, the TV reporter said, “Run.”

The man with the mustache fired two shots, shouting, “Traitor!” Dundar hopped to one side, his shoulders hunched, and ducked behind his interviewer, who moved to shelter him. Dundar’s wife, Dilek, grabbed the assailant’s right arm, and a parliamentarian who had been standing nearby bear-hugged the man from behind. Dundar ran a few steps off, then slowed and looked back. He was unscathed, though one bullet had grazed the leg of the TV reporter. Seconds later the attacker was kneeling, with the guns of three plainclothes police officers and the cameras of more than a dozen TV crews trained on him. Then Dundar and Gul went back into the courthouse to receive their sentences: five years in prison for Gul, five years and 10 months for Dundar. (They remain free while their case is on appeal.)

A trim man with a broad face and a springy mane of gray hair, Dundar, 55, becameCumhuriyet’s editor-in-chief in February 2015. His conviction this May—Dundar says he’s the defendant in so many concurrent cases he’s all but lost track—was the result of a story he published a year earlier detailing how Turkey’s national intelligence agency smuggled weapons into neighboring Syria, most likely for Islamic rebels fighting the forces of President Bashar al-Assad. After the story came out, Turkey’s president and former prime minister, Recep Tayyip Erdogan, went on television and promised that the parties responsible for the story “will pay a heavy price.” Six months later, Dundar and Gul were charged with aiding a terrorist organization, attempting to overthrow the government, espionage, and revealing state secrets. So far, the two have been convicted only of the last offense. They’ve already spent three months in pretrial detention, inhabiting adjoining cells in Istanbul’s Silivri Prison until Turkey’s constitutional court ordered their release.

Turkey has never had a truly free press. It has a long tradition of censorship, especially around the combustible politics of its religious and ethnic minorities. And that was before the bloody coup attempt of Friday, July 15, which began with fighter jets buzzing Ankara and military units in Istanbul closing both bridges across the Bosporus. Battles among civilians, police officers, and soldiers left 290 dead and 1,400 wounded. The putsch also showcased the courage of Turkish journalists: The staff at CNN Turk defied a helicopter full of putschist soldiers who showed up to take over their studios, and a photographer for the pro-government daily Yeni Safak was shot dead in the street.

David Fuller's view -

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July 21 2016

Commentary by David Fuller

Email of the day

On Brexit and 'the Osborne pivot':

Dear David I thought this was a rather good article. It's fascinating to now hear so many who threatened they would leave the UK now sounding a different tune after Brexit is now a reality. Maybe we could call it 'the Osborne pivot'. I hope someone soon publishes an even more detailed account of the costs for businesses in the EU centres vying to steal UK business. Let's have a detailed comparison of labour laws, employment costs to companies, taxes to individuals, limitation on earnings and bonuses, corporation tax, inability of companies to let staff go etc etc. The reality is beginning to strike home!

David Fuller's view -

Thank you for this good article by Paul Blanchard, with which many of us will agree, and I like 'the Osborne pivot'.

How we fare, as I have said before, depends on top-down governance in the UK.  We are very fortunate to have Theresa May at the helm and the Conservatives in charge for the next several years, because there will be plenty to do.  We do not need a Lib/Dem coalition or any variation of Labour trying to emulate the EU’s ‘progressive socialism’. 

I wish Europe well but the EU has yet to prove that it can save itself.  



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July 21 2016

Commentary by Eoin Treacy

Email of the day on Chinese international acquisitions

Have a look at this deal:    

My son is COO of this business.  Keith is 35 years of age with a PhD in Molecular Biology plus a number of years at Merrill Lynch.

I understand the sale price was very sweet. Seems to be yet another example of many eager buyers when "money has no cost". I am told the Chinese are eager to access Genesis IP. The buyers are also discussing ambitious new business targets for Genesis going forward.  I understand these new business opportunities have already been identified.    

This deal is not one of our Prime Minister's new sexy IT business opportunities.  A message our PM incessantly preaches to the electorate. Perhaps our PM should stop trying to pick winners. There are many areas of the local economy where Australia demonstrates very competitive global business skills.  This includes but is not exclusive to medical services. Sadly this message from our business leaders has been repeatedly and firmly ignored by both the Canberra bureaucracy and our nation's political elite.

 

Eoin Treacy's view -

Thank you for this email and congratulations to your son on playing a pivotal role in such a successful company. I agree we would likely all be better off if politicians left running companies to the companies themselves rather than assuming they have specialist knowledge in areas they have no experience of. 



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July 21 2016

Commentary by Eoin Treacy

Komatsu Signals Mining Optimism in $2.9 Billion Joy Takeover

This article by Simon Casey, Masumi Suga and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

The deal creates a competitive landscape with two matching global peers, Stephen Volkmann, a New York-based analyst at Jefferies LLC, said Thursday by phone.

“This deal allows Komatsu to compete toe-to-toe everywhere with Caterpillar,” Volkmann said. “There’s just two major players and each one basically does everything.”

Joy is the largest independent maker of underground-mining equipment and has long been viewed as a potential target for Komatsu, which manufactures dump trucks and large excavators for companies such as Rio Tinto Group. Komatsu looked at Joy as recently as 2012 but rejected a deal after concluding there were few cost savings.

Conditions in the mining industry have deteriorated since then. Tumbling metal and coal prices spurred producers to cancel projects and rein in spending, reducing demand for everything from underground tunneling kit for copper mining to big shovels used to extract coal. Joy has posted a net loss in each of the last three quarters and its share price is down by more than half over the last five years.

The pullback contrasts with the mining-machinery industry’s boom during 2000-2010 on the back of surging commodity prices.

Back then, miners complained of shortages and long lead times to secure equipment. Companies such as Joy were able to raise prices, benefiting from both increased demand and higher margins.

 

Eoin Treacy's view -

Low interest rates and the potential for additional monetary stimulus have boosted M&A activity right around the globe and with rebounding commodity prices the resources sector is ripe for similar activity. 

Komatsu’s takeover of Joy Global is opportunistic but gives it the potential to compete in sectors that were not previously open to it. Whether it is successful will depend largely on the continued relative strength of the commodity sector. 



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July 21 2016

Commentary by Eoin Treacy

Started from the Bottom Now We're Here

Thanks to a subscriber for this report from Clarus Securities. Here is a section: 

POSITIONING FOR BETTER PRICES: We are of the opinion that we have seen the worst of both the crude oil and natural gas markets and that prices should further improve as we enter 2017. We are currently forecasting ~US$50/bbl WTI for H2/16, which is a level where most producers fail to grow on a per share basis. In our updated growth tracker, we now expect average production per share to decline by 8% (-12% growth on a median basis); this compares to our estimates of -3% (median -8%) and 5% (median -3%) during Q2/16 and Q1/16, respectively. The decline in per share growth has been a result of dispositions to reduce debt, equity financings without concurrent M&A, or some combination thereof. Ultimately, only a few select companies are able to generate consistent per share growth. Most are natural gas operators but some oil-weighted names, chiefly RRX and SPE, continue to grow on a per share basis. 

IMPLIED OIL PRICES: Despite the ~US$5/bbl pullback in WTI prices, there has not been panic selling of the equities. This benign response is attributed to the belief that the worst is behind us and that any weakness in oil prices will be short lived. However, with equities not pulling back, it is important to estimate the implied oil price by name. We looked at each company’s historical multiple relative to its current trading level in order to back out the oil price needed. Based on our analysis, very few names are pricing in US$50/bbl oil, with most between US$55/bbl and US$65/bbl. Companies with cheaper implied pricing generally possessed higher than average debt, which weighed on valuation. 

IMPLIED GAS PRICES: Using the same methodology with the gas weighted names results in implied prices mostly ranging between $2.25/mcf to $3.50/mcf. The valuation for the gas names is generally a bit more difficult to assess because some producers are promising very high rates of growth which may be difficult to achieve (versus oil producers, where growth profiles are much lower and more manageable). Regardless, we see some opportunities for investors who are bullish on natural gas going into H2/16.

 

Eoin Treacy's view -

Optimism about a recovery in oil prices has improved following an almost 100% rally since January. This is despite the fact higher prices ensure a great deal of marginal production is now approaching economic viability. At the lows it was difficult to impress upon anyone that a rally was possible. Now that marginal supply can once more be produced economically many analysts anticipate additional upside. 



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July 20 2016

Commentary by David Fuller

The Future of Big Oil? At Shell, It Is Not Oil

Here is the opening of this interesting article from Bloomberg:

At Australia’s Curtis Island, you can see Big Oil morphing into Big Gas. Just off the continent’s rugged northeastern coast lies a 667-acre liquefied natural gas (LNG) terminal owned by Royal Dutch Shell, an engineering feat of staggering complexity. Gas from more than 2,500 wells travels hundreds of miles by pipeline to the island, where it’s chilled and pumped into 10-story-high tanks before being loaded onto massive ships. “We’re more a gas company than an oil company,” says Ben van Beurden, Shell’s chief executive officer. “If you have to place bets, which we have to, I’d rather place them there.”

Van Beurden is betting on gas projects such as Curtis Island to address the central challenge facing all oil giants: how to survive in a world moving ever faster toward new ways of producing and consuming energy. A crucial element of Shell’s pivot toward gas was its $54 billion takeover of BG Group. The deal, which closed in February, gave the company Curtis Island, other massive LNG plants, and gas fields from the U.S. to Kazakhstan. It now has a 20 percent share of the global LNG market, scores of giant gas tankers prowling the seas, and double the production capacity of its closest competitor, ExxonMobil.

David Fuller's view -

People of my generation grew up with the seemingly secure ‘miracle’ of cheap and abundantly available crude oil.  However, from the mid-1970s onwards this vision faded into increasing anxiety over finite resources which were rapidly being depleted.  We were told by visionaries, energy experts, scientists, religious leaders, political parties and national governments that we faced a grim future in which the lights would go out against a background of declining GDP growth and economic collapse.  These views were still widely held beyond the turn of the century.    

This 20th century version of Malthusian catastrophe theory is no longer credible today, thanks to our accelerating rate of technological innovation which is arguably mankind’s greatest achievement. 

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July 20 2016

Commentary by David Fuller

Email of the day 1

On George Osborne and pensions:

Dear David Re: George Osborne Whatever else you may think about him, I and many others will be eternally grateful to him for abolishing the compulsory purchase of annuities at age 75. In 1998, when he was Shadow Chancellor, I wrote to him asking what his view was about compulsory purchase. I received a courteous reply saying it was his intention to abolish the requirement, which of course he did shortly after coming into office and just in time for my 75th birthday ! I wrote a similar letter to the then Chancellor, Ed Balls, and got no reply. But in a later speech he scornfully referred to it as a problem that only concerned "a few rich people" ( his exact words ) !

David Fuller's view -

Well, you are certainly one of my heroes for having had the foresight to write to George Osborne in 1998.  Many of our generation remember worrying about the insanity of compulsory purchase of annuities at the age of 75.  His reply was gracious and Labour Shadow Chancellor at the time, Ed Balls, replied in a manner all too familiar.  



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July 20 2016

Commentary by David Fuller

Email of the day 2

On a missing PDF for Tuesday’s leader:

In yesterday's copy, the lead article on IMF growth forecast doesn't have the link to the full article mentioned by David in his opening comment. Is it possible to send it to me?

Many thanks.

David Fuller's view -

My apologies, and thanks for letting me know.  The PDF for Tuesday’s leader article from The Telegraph has now been posted.



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July 20 2016

Commentary by David Fuller

Britain Needs A Can-Do Attitude revolution, With Solutions Rather Than Whining

The challenge for the optimists is to reunite the two Britains. They need to inspire and assuage the angry Remainers, showing all but the most die-hard that the future can be rosy; and they must reach out to those Leavers who feel that they haven’t benefited enough from globalisation.

All groups in society have a responsibility to take part in this project to rebuild Britain for a post-Brexit 21st century. Entrepreneurs and firms need to propose the reforms they believe are required to allow our economy to prosper outside of the EU: we need to hear solutions, not whining, from business. The same is true of other professionals, from university administrators to architects to the police forces, as well as from the charitable sector. Britain needs a “can‑do” revolution, with as many positive ideas as possible from all quarters and perspectives. The question is no longer whether or not to Brexit – it’s how to make it work as well as possible for the whole country.

The Government, for its part, needs to unveil a three-fold programme to woo the sceptics. The first pledge should be to turn Britain into the nation that is the most open to trade of any Western economy in five years’ time. To reach this target, the Government would seek to limit the reimposition of tariff or non-tariff barriers with the EU, while urgently pursuing as many free-trade deals as possible with faster-growing economies worldwide.

The second pledge should be to make the UK the most entrepreneur-friendly country in the West by 2020. This would include tearing up red tape, cutting tax, making it easy for tech firms to continue to hire skilled migrant talent, and encouraging universities to become incubators for start-ups.

Last but not least, the Government should make an explicit promise to Britain’s poorer groups and regions that their opportunities will drastically improve. The free school programme should be turbo-charged by allowing for-profit companies to open new ones, starting in the north of England and Wales before being rolled out nationally; new selective schools should be opened, as part of an extension of parent choice; much more land should be made available for building in the south of England; and expensive green energy rules should be ditched. Britain is also in desperate need of several low-tax, low-regulation new enterprise zones near universities in poor parts of the North and Wales, with a vision and management structure similar to London’s Canary Wharf.

David Fuller's view -

Governance is Everything, as this service never tires of saying.  Britain is fortunate to have a Prime Minister as intelligent, experienced and increasingly respected as Theresa May.  There are also plenty of other successful leaders, some in Parliament and many more from all professions and backgrounds across the country.  Britain has a proud history of entrepreneurial spirit and will relish the independence that Brexit promises.   There is no external obstacle in the path of this country’s future success.

A PDF of Allister Heath's column is posted in the Subscriber's Area.



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July 20 2016

Commentary by Eoin Treacy

Brazil Real's Volatility Falls to One-Year Low on Temer Optimism

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

Volatility in Brazil’s real dropped to the lowest level in a year as the central bank acts to limit gains in the world’s best-performing currency amid speculation that a new government will pull the nation from its deepest recession in a century.

Three-month implied volatility on the real declined 0.05 percentage point to 16.78 percent, the lowest level since July 22, 2015, at 12:25 p.m. in Sao Paulo. The currency advanced 0.3 percent to 3.2393 per dollar.

Brazilian assets have led gains globally this year amid speculation that Acting President Michel Temer will trim a budget deficit, end credit-rating downgrades and restore confidence. Concern that the currency’s rally would hamper exports at a time when Latin America’s largest economy already faces its worst recession in a century has led the central bank to sell almost $50 billion of reverse swaps to stem gains. While the offerings are unlikely to change the direction of the real, they can mute volatility, Morgan Stanley strategists led by Gordian Kemen wrote in a report published last week.

“The domestic reform narrative in Brazil is an important qualifier for the currency and for the decrease in its volatility," said Mike Moran, the head of economic research for the Americas at Standard Chartered Plc in New York.

Eoin Treacy's view -

The Brazilian Real is the best performing currency this year; gaining over 30% year to date. The chronic mismanagement of the economy that prevailed under Dilma Rousseff’s administration is now in the past and the new government has the opportunity to introduce unpalatable reforms early in its tenure so that it might benefit from the results by the time the next election needs to be called. Whether that eventually translates into improving governance and a sustained reduction in corruption and graft is an altogether different question, but we can conclude that at least for now governance is improving from a low base.

 



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July 20 2016

Commentary by Eoin Treacy

TerraForm Global Rises amid Talks with SunEdison to Sell Stake

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

TerraForm Global and SunEdison are in talks regarding “a jointly managed sales process and accompanying protocol for managing the marketing process,” according to a presentation posted on TerraForm Global’s website Tuesday. SunEdison is currently involved in the biggest ever sale of clean energy assets after filing for bankruptcy protection in April with $16.1 billion in liabilities. It has not announced a process for selling its controlling stake in TerraForm Global or its sister yieldco TerraForm Power Inc.

TerraForm Global, a yield company formed by SunEdison to buy clean power plants built by SunEdison outside of the U.S., owns 917 megawatts of solar and wind energy plants, mostly in southeast Asia and South America. The company had revenue of as much as $52 million in the first quarter, according to the presentation.

It also reported preliminary losses of as much as $350 million for the second half of last year, and a preliminary loss of as much as $8 million for the first quarter of this year.

TerraForm Global has not filed results since the third quarter because it relies on SunEdison for some accounting systems, and the parent company’s results are also delinquent.

Eoin Treacy's view -

Financial engineering contributed to SunEdison’s demise because it divested itself of income producing assets while holding onto liabilities. That worked fine while oil prices were high, demand for solar plants was surging and credit was easy to come by. The decline in oil, natural gas and particularly coal prices questioned the profitability of solar plants and the share collapsed. 



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July 20 2016

Commentary by Eoin Treacy

Email of the day on the Dollar and Yen

I very much enjoyed last Friday's and yesterday's audio recordings. I think too that we are close to entering the final phase for this bull run notwithstanding a potential pull-back first. The expected further liquidity injections by the global central banks has intensified the hunt for yield. Emerging markets should do well as they offer both yield and the potential for large capital gains. Incidentally, if as David suggests, the $ index (developed markets) rises towards 100 again, will the EM currencies also weaken? Or as they have already fallen substantially in recent years, the dollar's rise against the developed market currencies will not impact EMs much? Your thoughts would be appreciated. I'm also interested in your views on $/Yen on a medium term basis.

 

Eoin Treacy's view -

Thank you for your kind words and I agree the strength of the Dollar is a major consideration in assessing the outlook for global markets.

It is worth considering that the Dollar Index is composed of Euro (57%), Yen (13.6%) and Pound (11.9%), none of which one is likely to consider a strong currency at present. 



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July 20 2016

Commentary by Eoin Treacy

July 20 2016

Commentary by Eoin Treacy

Email of the day on acronyms

I am a pre-subscriber, but wish to raise a point which I am sure will resonate with at least some of your regular subscribers. I get very frustrated when a jargon acronym is used in an article, and I cannot fathom out what it stands for. I don't really wish to be subjected to an IQ test (it is too embarrassing!). I realise that this is a topic that applies to financial and commercial sites generally, but as a highly-enlightened example of the genre, Fuller Treacy Money might be prepared to make some adjustments in this direction?! A recent example was AR, in an article extract on the latest video-gaming technology. It has me stumped. Perhaps a glossary might be provided? (I realise this would be (rightly) inaccessible to pre-subscribers). I remember in a "communications course" many years ago being told we should never ASSUME (prior knowledge in an audience or listener), as it makes an "ass" of "u" and "me"! (Please forgive the u/c, as it seems as if I am shouting - but I do not have the luxury of using italics for emphasis.) I have been reminded of that on so many occasions since. I am a private tutor, and it is very relevant in that area of work.

Eoin Treacy's view -

Thank you for this note and we take a great deal of care to avoid acronyms in our own copy for exactly the reasons you outline. I hope you will understand that we post snippets from a wide variety of both institutional and retail sources and have no control over how they impart their information. Composing a glossary of all acronyms is beyond our capability I’m afraid but in this case AR stands for augmented reality while VR is virtual reality. 

 



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July 19 2016

Commentary by David Fuller

IMF Slashes UK Growth Forecasts After Brexit but Britain Will Still Outstrip Germany, France and Italy

Here is the opening of this topical article by Peter Spence for the Daily Telegraph: 

The International Monetary Fund (IMF) has slashed its forecasts for UK growth following the vote to leave the European Union, yet the British economy is still expected to grow faster than that of Germany, France and Italy next year.

UK GDP growth is now expected to slow to 1.3pc in 2017, some 0.9 percentage points below what had been pencilled in in the IMF's previous round of forecasts. With the exception of Nigeria, the UK’s 2017 growth forecast received the sharpest downgrade of any of the 16 economies assessed by the IMF.

Maury Obstfeld, the IMF’s chief economist, said that the UK’s decision to withdraw from the EU had added “downward pressure to the world economy at a time when growth has been slow”.

He said that “the direct effects specifically due to Brexit are greatest in Europe, especially the UK”.

Despite the downgrade, economic growth in Britain will still outstrip Germany and France, whose economies are expected to expand by 1.2pc next year. The UK will also beat Italy, where GDP is forecast to rise just 1pc.

The figures were part of a wider IMF report on the global economy. The fund's economists said the result of the EU referendum would contribute to slower global growth both this year and next. Economists now anticipate world GDP growth of 3.1pc this year, and 3.4pc in 2017, having shaved 0.1 percentage points off both estimates.

David Fuller's view -

IMF forecasts have the virtue of being frequently revised.  Nevertheless, this opening premise above makes sense to me.

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July 19 2016

Commentary by David Fuller

Email of the day 1

On George Osborne:

I agree with you David. It's easy today in this relatively benign environment to forget how it felt in 2010. The bond market was waiting: if Gordon Brown had been elected I strongly suspect that UK government debt would have been a 'sell' on a huge scale. The ramifications for government spending, for debt, for interest rates and the pound would have been devastating. The economy was on the edge and George Osborne's reassuring words (perhaps as much as his actions) stabilised the country and prevented economic disaster. What a pity he threatened so foolishly over Brexit. A reputation ruined.

David Fuller's view -

Yes, I will remember George Osborne as an excellent Chancellor until he let political ambition blind him during the Brexit debate. However, politics at the top is a difficult, stressful occupation and so many go a bit mad towards the end. I wish Osborne well but am happy to have a new Chancellor.



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July 19 2016

Commentary by David Fuller

Email of the day 2

On the ways to invest in gold:

Just to add to David's comment, bullion can be held and traded conveniently through Bullionvault which provides allocated and audited bullion held in a choice of locations around the world. This is 'physical' gold but able to be traded in small quantities electronically around the clock. I have used the service for a number of years but obviously do your own due diligence.

David Fuller's view -

Thank you.  This is a welcome addition to what I wrote yesterday.



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