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October 25 2022

Commentary by Eoin Treacy

GM Rides Full-Size Pickups, Luxury SUVs to Big Earnings Beat

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

“We’re delivering on our commitments and affirming our full-year guidance despite a challenging environment because demand continues to be strong for GM products and we are actively managing the headwinds we face,” GM Chief Executive Officer Mary Barra said in a letter to shareholders.

Shares of the carmaker rose 2% to $36.45 as of 9:35 a.m. in New York. The stock is down about 38% this year. 

GM reported adjusted profit of $2.25 a share on Tuesday, surpassing analysts’ projection for $1.89 a share. It also maintained guidance for full-year adjusted earnings before interest and taxes of $13 billion to $15 billion, or $6.50 to $7.50 a share. 

“GM yet again affirmed the strong and until now mostly disbelieved full-year total company EBIT outlook it has maintained since introduction in February,” J.P. Morgan analyst Ryan Brinkman said in a research note. “GM is now well on the path to achieving its full year goals, despite the tougher consumer and cost backdrop.”

Eoin Treacy's view -

Auto manufacturers talk a good game of expanding EV production with stated expectations of massive increases in the number of electric vehicles manufactured. However, they continue to sell SUVs and pickup trucks. Companies like GM and Ford don’t sell large numbers of sedans so the commitment to selling EVs is moot.



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October 24 2022

Commentary by Eoin Treacy

October 24 2022

Commentary by Eoin Treacy

BOE Says Markets 'Remain Febrile' But UK Regaining Credibility

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

“Credibility is hard won and easily lost,” Ramsden said. “That credibility is being recovered. That has to be followed through. A return to the kind of stability around policy making and around the framing of fiscal events will be really important.”

He said the issue with the Sept. 23 statement was that “it had one side of the fiscal arithmetic in it” and that the decision to include forecasts from the Office for Budget Responsibility will help underpin the confidence investors have in assessing the UK budget due out next week.

“What we are going to get on Oct. 31 will be very important,” Ramsden said. “My sense is that will take account of all the statements on both the revenue and on the spending side.”

 

Eoin Treacy's view -

The bond market has become relevant in politics again for the first time in decades. Liz Truss was unfortunate to find that out in real time. Donald Trump demonstrated that you could engage in procyclical policies and manufacture a swifter expansion. Now most politicians think they can do the same thing. The problem is he did that before inflation took off. Now, the quantity of debt has multiplied, inflation is problematic and fiscal austerity is back on the menu.



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October 24 2022

Commentary by Eoin Treacy

China's Plunging Market Has Become a High-Risk Bet on Xi Jinping

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

Chinese stocks tumbled by the most since 2008 in Hong Kong and the yuan hit a 14-year-low after Sunday’s confirmation that Xi’s policies of stronger state control over the economy and markets will continue unchallenged for years.

Unlike in places like the US or UK -- where dramatic market reactions can force policy pivots or even overthrow entire governments -- it’s becoming apparent that investors are only an afterthought for Xi. That narrative was reinforced by Beijing’s move to delay the release of a raft of economic data without explanation, and risks further alienating money managers who are already leery of Chinese assets.

Investors have to decide if Xi’s policy objectives -- such as common prosperity and dual circulation -- are palatable, according to Hao Hong, chief economist at Grow Investment Group. “One has to examine whether these new sets of values align with your own” investment goals in the years ahead, he told Bloomberg TV on Monday.

Monday’s market reaction -- especially offshore -- suggests international investors are becoming increasingly leery of Xi, who has implemented tough curbs on one-time market favorites from Alibaba Group Holding Ltd. to education firms. With a new leadership team packed with his allies, analysts also expect little dissent against Xi’s Covid Zero strategy.

Eoin Treacy's view -

The ejection of Hu Jintao from the Party Congress over the weekend has been much discussed. The headline is that he was experiencing health issues. That’s reasonable from an octogenarian. However, there is an eerie historical comparison.



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October 24 2022

Commentary by Eoin Treacy

Texas Natural Gas Prices Drop Toward Zero as Supplies Boom

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

Insufficient pipeline capacity has actually been a long-term problem that has dogged Permian Basin gas producers for years. The choke points worsen when pipeline operators must perform repairs and preventative maintenance work that forces temporary reduction in pressure or halts to shipping. 

Permian pipeline constraints “have never been relieved,” making the region more susceptible to sudden gluts and price volatility, said Campbell Faulkner, chief data analyst at OTC Global Holdings LP.

Eoin Treacy's view -

The world is not running out of natural gas. What we are dealing with at present is a supply bottleneck. These kinds of problem can be solved. It would be a lot worse if there was a genuine shortage of global natural gas supply. However, to bring prices back to acceptable levels significant investment in pipeline, LNG import and export facilities, and shipping will be required.



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October 21 2022

Commentary by Eoin Treacy

October 21 2022

Commentary by Eoin Treacy

Sluggish CLO Markets Hit by Departure of Major Japanese Investor

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

Nochu dominated the CLO market until 2019, when it exited amid regulatory and political scrutiny. The Japanese bank would buy all the top-rated securities in a deal. It returned to the US market in late 2021 and to Europe in recent months, but it was buying far fewer securities. 

But with Nochu backing out again, a critical buyer is gone, potentially slowing down CLO sales, money managers said. And others are buying existing deals in the secondary market.

“In a tight CLO liability market the loss of any buyer makes a difference,” said Dagmara Michalczuk, an investor at Tetragon Financial, in an interview. CLO issuance for the remainder of the year is likely to be more uneven than in the last quarter of 2021, she said.

Eoin Treacy's view -

Big institutional buyers will buy every day as long as they are making money. When a favoured strategy stops working it causes a crisis of confidence. Whole business lines have been developed to thrive from the trade. When it stops making money the best performing sector becomes an internal problem that requires a remedy.



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October 21 2022

Commentary by Eoin Treacy

Swiss Banks Seek Most Dollars Since 2008 in Bid for Easy Profit

This article from Bloomberg may be of interest. Here it is in full:

Banks in Switzerland sought the most dollars since 2008 using an emergency dollar swap facility provided by the Federal Reserve in what is likely to be a bid for easy profits.

In Wednesday’s auction conducted by the Swiss National Bank, 17 institutions took up $11.09 billion. That’s the most since October 2008, when the Global Financial Crisis was raging in the wake of Lehman Brothers’ collapse. 

This is the fourth week in a row when banks have accessed the facility. Last Wednesday, 15 banks took up $6.27 billion in funds. 

According to economists at Credit Suisse, Swiss banks swap the dollars into francs in order to generate a profit. The lenders can even sell the cash back to the SNB using its reverse repo auctions, or deposit it at the institution to benefit from a positive interest rate.

“We do not believe that the increased demand for US dollar liquidity by domestic banks reflects any liquidity issues in the Swiss banking system”, Credit Suisse economist Maxime Botteron wrote in a report last week.

The dollar swap facility was created during the crisis that began in 2007 as a lifeline to provide safe access to Greenback liquidity, while the SNB’s cash-taking repo auctions are designed to drain excess liquidity from the market. 

It’s not clear that Swiss officials are likely to act to stop banks from taking advantage of the facility. Conditions of the dollar auctions are controlled by the Fed, and the reverse repos are a core instrument in the SNB’s current tightening of monetary policy.

All Swiss and foreign banks which have a branch in Switzerland or are registered with Swiss authorities are entitled to participate in the dollar auctions. Credit Suisse expects predominantly smaller banks to take advantage of the profit play.

Eoin Treacy's view -

The world is dealing with falling supply of Dollars as rates rise and money supply shrinks. Tapping swap lines to source dollars which can then be sold for a profit is a handy money making exercise for banks. 



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October 21 2022

Commentary by Eoin Treacy

'Strikingly Tight' Copper Market Belies Price Drop, Miner Says

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

It’s “striking how negative financial markets feel about this market and yet the physical market is so tight,” said Richard Adkerson, chief executive officer of Freeport-McMoRan Inc.

“We’re not seeing customers scaling back orders. Customers are really fighting to get products,” Adkerson said Thursday during a conference call with analysts after the miner reported adjusted third-quarter per-share profit that exceeded estimates. 

The decline in copper prices this year reflects investor concerns about the global economy, weak economic data from top consumer China, the European energy crisis and a strong dollar, he added.

Such a pricing environment will defer new copper projects and mine expansions just when the world’s epic shift to electrification requires a massive amount of the metal, according to Adkerson.

Eoin Treacy's view -

The mining sector is expecting demand from the electrification sector to explode over the coming decade with the result that copper demand will double. That goal is impossible to achieve with investment in new mining infrastructure on a massive scale.



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October 20 2022

Commentary by Eoin Treacy

Video commentary for October 20th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: Yen carry trade doesn't work when yields are rising this fast. On the other hand lets remember that everything is priced off the 10-year. The discount rate all investments are compared against continues to rise.



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October 20 2022

Commentary by Eoin Treacy

Stocks Pare Gains Amid Hawkish Fedspeak, Earnings

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

A rally in the S&P 500 faded after Philadelphia Fed President Patrick Harker said officials are likely to raise interest rates to “well above” 4% this year and hold them at restrictive levels to combat inflation, while leaving the door open to doing more if needed.

Traders also sifted through a mixed bag of corporate earnings, with Tesla Inc.’s sales disappointing and International Business Machines Corp. surging on a bullish forecast. Several market observers remarked that the bar has been lowered quite a bit ahead of the current earnings season, boosting the odds of upside surprises. It’s also worth pointing out that there’s been no shortage of warning signals about the economy when it comes to corporate outlooks.

Alcoa Corp. -- which is a dependable barometer of US economic health across industries including construction, automotive, aerospace and consumer packaging -- said demand for the world’s heavy industries is falling. Union Pacific Corp., the largest US freight railroad, cut its forecast for volume growth to reflect a “challenging year.”

As traders wade through corporate results, “with an extra eye on guidance, expect volatility to remain elevated,” said Mike Loewengart at Morgan Stanley Global Investment Office

Eoin Treacy's view -

Earnings are holding up but guidance is being lowered. CEOs are at their most bearish in years but investors have cash to burn and are eager to salvage a dire year for their performance. Appetite for buying the dip following upside key day reversals for mega-cap stocks last week is still evident.



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October 20 2022

Commentary by Eoin Treacy

Indonesia Raises Key Rate by Half-Point Again to Aid Rupiah

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

The central bank will defend the rupiah in line with fundamentals, Warjiyo said. It will monitor forex supply, and strengthen the currency stabilization policy, he added.

“The hike reflects less concern of inflation but more on the need to anchor FX stability,” said Wellian Wiranto, economist at Oversea-Chinese Banking Corp. in Singapore, who now sees a terminal rate of 5.25%. “Going forward, downside risks to growth will gain more prominence.”

A weakened rupiah threatens to fan imported inflation, adding to the risk posed by higher fuel costs that’s sent consumer price gains to a fresh seven-year high of 5.95%. Bank Indonesia expects inflation to climb further to 6.3% at the year-end before returning to its 2%-4% target next year.

The central bank retained its 2022 growth forecast for the economy, expecting it to be at the upper end of its 4.5%-5.3% target, while flagging risks from a slowing global recovery. For now, it expects to end the year with a current account surplus of 0.4%-1.2% of gross domestic product -- better than its previously estimated 0.5% of GDP.

Eoin Treacy's view -

The Indonesian Rupiah spent most of 2021 in a tight range relative to the Dollar but broke down in May and is now trending lower. The pass through of inflationary pressures from the developed world into ASEAN didn’t pick up until early this year. Many ASEAN countries did not engage in the same degree of monetary stimulus so effect was delayed. However, the surge in energy prices is increasing the cost of fuel subsidies and putting downward pressure on regional currencies.



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October 20 2022

Commentary by Eoin Treacy

Lula Losing Brazil' Biggest State Forces Urgent Campaign Rejig

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

Inside Lula’s campaign, the result in Brazil’s most populous state — the birthplace of his political career, and containing about 25% of the entire electorate — was compared to a plane crash, where a confluence of small factors leads to catastrophe. At his team’s first post-election meeting, the talk was of frustration and failure. 

Edinho Silva, the former president’s campaign coordinator, may have had an inkling of what was to come, saying in an interview on the eve of polling that Sao Paulo had become a center of hard-core support for Bolsonaro’s brand of right-wing identity politics. 

“We have a percentage of Brazilian society that, unfortunately, is racist, homophobic, sexist, xenophobic, and doesn’t accept the social ascent of the lower classes,” he said. “And a significant part of Brazil that thinks in this way lives in Sao Paulo.”

Eoin Treacy's view -

Here is a novel idea. Perhaps Brazilian voters are not prepared to install a man who squandered the bounty from the last commodity boom on vanity projects. As if that were not enough, he  led an administration that was the most corrupt in the country’s history, and that is saying something. Lula was jailed for corruption and was only allowed to run because he was offered a politically motivated dispensation.



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October 19 2022

Commentary by Eoin Treacy

Video commentary for October 19th 2022

October 19 2022

Commentary by Eoin Treacy

Battered Safe Credit Is Now a 'Screaming Buy' After Yield Jump

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

After historic losses this year, high-quality corporate debt has flipped the script to become one of the hottest asset classes in the market.

Investors are increasing allocations to investment-grade corporate bonds as the yield they can get just by holding the debt to maturity has reached its highest level since the global financial crisis. At 5.6%, global high-grade yields now exceed where junk-rated debt was trading at the start of the year, according to Bloomberg indexes.

It’s a major shift for the $10 trillion global high-grade market, which has suffered massive losses this year amid aggressive central bank rate hikes. The steep losses in investment-grade bonds, despite their near-zero probability of default, has created one of the most favorable entry points in years for some investors.

“High quality is a screaming buy,” said Eric Vanraes, head of fixed income investments at Banque Eric Sturdza SA. “The big difference between high yield and investment-grade is that in high yield you have to cope with default rates.”

Eoin Treacy's view -

There is a point where higher yields will be a good buying opportunity in fixed income. To buy at today’s levels is certainly preferable to paying all-time highs and many investment managers have a mandate to hold some fixed income so they don’t have much choice.



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October 19 2022

Commentary by Eoin Treacy

FBI misled judge who signed warrant for Beverly Hills seizure of $86 million in cash

Thanks to a subscriber for this article from the Los Angeles Times which may be of interest. Here is a section:

Eighteen months later, newly unsealed court documents show that the FBI and U.S. attorney’s office in Los Angeles got their warrant for that raid by misleading the judge who approved it.

They omitted from their warrant request a central part of the FBI’s plan: Permanent confiscation of everything inside every box containing at least $5,000 in cash or goods, a senior FBI agent recently testified.

The FBI’s justification for the dragnet forfeiture was its presumption that hundreds of unknown box holders were all storing assets somehow tied to unknown crimes, court records show.

It took five days for scores of agents to fill their evidence bags with the bounty: More than $86 million in cash and a bonanza of gold, silver, rare coins, gem-studded jewelry and enough Rolex and Cartier watches to stock a boutique.

The U.S. attorney’s office has tried to block public disclosure of court papers that laid bare the government’s deception, but a judge rejected its request to keep them under seal.

The failure to disclose the confiscation plan in the warrant request came to light in FBI documents and depositions of agents in a class-action lawsuit by box holders who say the raid violated their rights.

Eoin Treacy's view -

The war on cash is an ongoing program by governments to control and tax every Dollar, Euro, Pound, Yen, Renminbi and Rupee in existence. The Reaganism “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” It is as true today as ever. In an effort to further that aim, governments want to know exactly where every unit of currency resides and to control how it moves. 



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October 19 2022

Commentary by Eoin Treacy

Work From Home And The Office Real Estate Apocalypse

This report from the NBER may be of interest to subscribers. Here is a section:

We study the impact of remote work on the commercial office sector. We document large shifts in lease revenues, office occupancy, lease renewal rates, lease durations, and market rents as firms shifted to remote work in the wake of the Covid-19 pandemic. We show that the pandemic has had large effects on both current and expected future cash flows for office buildings. Remote work also changes the risk premium on office real estate. We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 45% decline in office values in 2020 and 39% in the longer-run, the latter representing a $453 billion value destruction. Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability.

Eoin Treacy's view -

San Francisco commercial real estate occupancy is below 40% while New York and Los Angeles are just higher than that figure. This is a looming issue for the owners of vacant properties, many of whom are pension funds and other private investors. 



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October 18 2022

Commentary by Eoin Treacy

Video commentary for October 18th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: alternative assets under pressure from rising rates and escalating yields, 10-yr-3mth spread close to inverting, pricing in a recession. dollar eases, gold stable, bitcoin inertia will not last. 



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October 18 2022

Commentary by Eoin Treacy

Guide to the Markets Australia

Thanks to a subscriber for this chartbook from JPMorgan which may be of interest.

October 18 2022

Commentary by Eoin Treacy

White House to Tap Oil Reserve Again Amid High Fuel Prices

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

The Biden administration is moving toward a release of at least another 10 million to 15 million barrels of oil from the nation’s emergency stockpile in a bid to balance markets and keep gasoline prices from climbing further, according to people familiar with the matter.  

The move would effectively represent the tail end of a program announced in the spring to release a total of 180 million barrels of crude from the Strategic Petroleum Reserve. About 165 million barrels has been delivered or put under contract since the program was put into effect.

The Biden administration also is set this week to provide details on plans to replenish the emergency stockpile. The Energy Department announced in May it was planning a new method of buybacks to allow for a “competitive, fixed-price bid process,” with prices potentially locked in well before crude is delivered.

Eoin Treacy's view -

The mid-term elections are in exactly three weeks. The incumbent party generally does not do well in the mid-terms but this year with inflation running rampant and a slim majority, the majority in both houses is at stake. Getting gasoline prices down was central to the effort to appease consumers’ inflation fears ahead of the election.



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October 18 2022

Commentary by Eoin Treacy

Intel Slashes Mobileye IPO Valuation Again to $16 Billion

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

Despite the drop in valuation, the listing is set to be one of the year’s biggest IPOs. Amid heightened volatility and disappointing debut performances of last year’s listings, IPO volume in the US has plummeted to $22.3 billion this year, compared with $277 billion at this point in 2021, according to data compiled by Bloomberg. Instacart Inc., another highly anticipated IPO, last week cut its valuation for the third time, to $13 billion, and is waiting for the markets to settle before going ahead with a listing. Another deterrent for new listings is the fact that many companies that went public in 2020 and 2021 are trading below their IPO prices.

But some analysts said it was reasonable for Intel to go through with the listing despite the poor market timing. Analysts at Bernstein said Intel likely needs the money it will receive from the deal, “given the way their own business is currently trending.” And Vital Knowledge analysts wrote that the “headline is negative, but keep in mind the $50B valuation was floated back in December, so no one should be shocked that the number is now lower today.” Intel shares were up about 1.4% in early trading in New York. 

Eoin Treacy's view -

At present we have straws in the wind but the issues with alternative asset valuations are going to become pressure points for investors over the next couple of years. The LDI debacle in the UK where pensions engaged in financial engineering to avoid leverage rules is the thin end of the wedge.

The reality is QE and the low interest rate environment robbed savers, like pension funds, and forced them to become speculators. At the same time it favoured risk takers and inflated their assets. That allowed both to prosper for a long time but rising rates and tighter liquidity mean the party is over.



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October 17 2022

Commentary by Eoin Treacy

Video commentary for October 17th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: China supports stock market ahead of Xi's confirmation of a 3rd term. Dollar eases on UK fiscal recalibration, Bond yields rebound from intraday low, gold fails to hold the intraday highs, Latin America currencies steady. 



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October 17 2022

Commentary by Eoin Treacy

Mini-Budget Torched, Now Hunt Must Balance the Books

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

Our latest assessment, taking on board the change in borrowing costs since Hunt’s announcement and the policies in the statement, is that a further £13 billion will still need to be found to just get debt falling relative to GDP. It would take more like £36 billion of consolidation to put it on the same trajectory as we projected before the mini-budget was published in September.

Debt Still On Explosive Path
Finding a package of spending cuts that are politically viable and deliverable will be extremely challenging -- much of the low-hanging fruit has already been picked. Hunt faces an uphill struggle to win the faith of markets as he formulates a budget, to be delivered on Oct. 31.

Hunt also said that the universal household energy price cap will be replaced from April 2023 with more targeted measures. It’s not clear what those measures will be but removing the government cap altogether and reverting to Ofgem’s methodology from April would imply a 75% rise in energy bills for households. Inflation would jump to 11.6% in April, against 6.4% under the cap.

The combination of austerity and less support for households next year means the risks to our forecast for a 0.4% drop in GDP in 2023 have shifted to the downside. 

Eoin Treacy's view -

Jeremy Hunt introduced a reset over the weekend which puts the UK government’s finances back to where they were two weeks ago. As a result the Pound is back to where it was on September 20th. Deficits are wide but the assumption is the universal energy price cap is assumed to be temporary. The reality is price controls are difficult to remove once installed and are always expensive to maintain.



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October 17 2022

Commentary by Eoin Treacy

Email of the day on name changes and courier services

It seems Royal Mail changed its name to International Distributions Services plc (IDS.L). I would be grateful if you would kindly share your views on the implications of this change to the price of the share and the health of the company. As always thanks for your great service.

Eoin Treacy's view -

The official name change was announced several months ago but went into effect on the 5th. The main reason posted was to highlight that Royal Mail has two businesses, domestic and international. At the time the name change was announced the company said there would be no transfers between the international and domestic businesses. In other words, they are intent on pushing through significant rationalization of the domestic mail and package service which is still called the Royal Mail.



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October 17 2022

Commentary by Eoin Treacy

China Seeks to Boost Stock Market as Xi Speech Disappoints

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

Chinese regulators are ramping up efforts to support the stock market, which saw little reprieve from President Xi Jinping’s speech amid continued pressure from geopolitical tensions and the Covid Zero policy. 

A series of market-supporting measures are in the pipeline, including proposals to encourage companies to buy back shares and to ease curbs on short-term transactions by overseas mutual funds. In a sign that private firms are heeding the government’s efforts, at least eight mutual funds announced plans on Monday to invest in their own equity products.  

The benchmark CSI 300 Index ended up 0.1%, reversing earlier losses as investors weighed Xi’s speech against the prospect of measures. The Hang Seng Index climbed 0.2%, while a gauge of Chinese stocks trading in Hong Kong also eked out gains. 

Stock investors have been looking for fresh market impetus after suffering losses that have been among the worst in the world. Xi’s renewed pledge for tech self-reliance trigged a rally in the sector’s stocks, but the overall market reaction was muted as he defended the Covid Zero policy and fell short of promising further support for the property sector.   

Eoin Treacy's view -

The Chinese authorities will be eager to ensure the market and society at large are deeply supportive of President Xi’s third term in office as well as the economic agenda laid out over the weekend. That suggests at least a near-term low for the CSI 300 has been reached.



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October 14 2022

Commentary by Eoin Treacy

October 14 2022

Commentary by Eoin Treacy

Champagne Flows at Pension Gathering in Midst of a UK Crisis

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

Margin calls for more collateral are still coming through, though at a less aggressive pace than two weeks ago, according to market participants, who asked not to be identified. Funds are still selling assets to meet them, managers are trying to lobby the BOE, everyone is bracing for next week when the central bank support has gone, they said. 

Many funds are making tough choices in the run up to the deadline. Almost daily they have been having to decide whether to dump assets to raise cash for possible future margin calls, which would weigh on returns; reduce their LDI positions, which would leave them more exposed if rates turn back around; or find other ways to get some cash.

Some have asked the corporates, whose employees pensions they manage, for emergency short-term loans so they don’t have to sell prized assets. Others have agreed that the companies could accelerate already-agreed payments they would have made to their pension schemes over several years, according to consultants, who asked not to be identified discussing their clients. This means some companies have been stumping up large one-off payments to their pensions, the people said.

“For instance, if they had a pre-agreed payment plan to put in cash on a monthly schedule, some have decided to make an advanced contribution equivalent to one year’s deficit recovery payment,” Norbert Fullerton, a partner at Lane Clark and Peacock said.

“Across the industry there are schemes that can’t raise enough cash and have had to reduce their leverage and hedge ratios,” he said. “It’s an unfortunate situation to be in but some don’t have sufficient liquid assets to sell.”

Eoin Treacy's view -

Every pension fund has been faced with the same challenge. They need an assumed return of 7-8%. When bond yields collapsed and stayed down for a decade, the scope for compounding disappeared. Quantitative easing was often described as favouring traders at the expense of savers and the dilemma faced by pensions is a vivid example of that.



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October 14 2022

Commentary by Eoin Treacy

First Tesla 4680 battery teardowns reveal it is not all that revolutionary at the moment

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

Current 4680 battery cells are not living up to their promises made by Elon Musk during Tesla's Battery Day in 2020 when they were first revealed. At the time, Musk mentioned features like a high-nickel cathode, silicon anode, and an ingenious packaging system at a fraction of the cost of the 2170 batteries. For now, however, it has hit only one of these purported features.

We already know that the 4680 battery packs that Tesla now places in its Model Y are only halfway to the stated goal of a 50% cost reduction compared to conventional batteries. The bulk of the savings come from the packaging efficiency of stuffing them into much larger tubes hence improving the volumetric density and requiring fewer welding points. The key dry-coating process for the electrodes, however, which doesn't require toxic mixes and oven baking, remains a pie-in-the-sky goal for now, despite that Tesla hopes to hit a pilot run this year.

Moreover, independent 4680 battery teardowns and chemistry analysis shows that Tesla is still using the regular 811 nickel-manganese-cobalt mixture for the cathodes and ordinary graphite anodes. Be it because of the price of raw materials that go into batteries for performance electric vehicles now, or simply for the lack of necessary manufacturing technology or equipment, the high-nickel and silicon electrodes that bring about true cost, range, and performance improvements, are still to come for Tesla vehicles with the 4680 battery.

Even NIO, which is farther ahead in the development and mass production of a 150 kWh high-nickel battery that is supposed to propel its top ET5 and ET7 performance sedan versions for more than 620 miles on a charge, had to postpone their launch. Its battery maker WeLion was supposed to deliver the first mass-produced batch of 150 kWh semi-solid packs with high-nickel technology this month, but the launch of the top ET5 and ET7 models has now been stretched into 2023 as the technology needs further validation.

Eoin Treacy's view -

As if the issues with the 4680 battery not living up to its hype were not bad enough, apparently Tesla is facing some significant issues with scaling up production. Quite apart from the fact lithium prices broke out to new highs this week, the cost of production is rising and a lack of manufacturing efficiency is going to make matters worse.



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October 14 2022

Commentary by Eoin Treacy

Oil prices rise 2% on low diesel stocks ahead of winter

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

The U.S. Energy Secretary in August urged domestic oil refiners to refrain from further increasing exports of fuels like gasoline and diesel, adding the Biden administration may need to consider taking action if the plants do not build inventories.

The EIA warned this week that most U.S. households will pay more to heat their homes this winter. President Joe Biden said on Thursday that U.S. gasoline prices remain too high and he will speak next week about lowering the cost. 

Eoin Treacy's view -

I’ve seen a lot of commentary predicting an oil price spike is imminent, that the winter is going to result in a chronic shortage of every form of distillate and there is nothing being done to solve the issue. Meanwhile, the number of drilling rigs in service continues to trend higher and the economic activity is likely to moderate everywhere in response to higher rates. Energy is mostly about supply but at economic turning points it is about demand.



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October 13 2022

Commentary by Eoin Treacy

Video commentary for October 13th 2022

October 13 2022

Commentary by Eoin Treacy

ECB's Wunsch Wouldn't Be Surprised If Rates Exceed 3%: CNBC

This note from Bloomberg may be of interest to subscribers.

European Central Bank Governing Council member Pierre Wunsch said interest rates may eventually have to top 3% to get record inflation under control. 

“My bet would be it’s going to be over 2%, and I would not be surprised if we have to go to above 3% at some point,” Wunsch told CNBC in an interview in Washington. 

Wunsch also said:

The ECB’s deposit rate, currently 0.75%, will “most probably” need to exceed 2% year-end

“Frankly on the basis of our base case, which is now more or less a technical recession in Europe, I think we are going to have to go real positive somewhere”

“We’ve been claiming that what happens in Europe is different from the U.K., from the U.S. But over the last six months basically the direction we’ve been taking was not that different”

Eoin Treacy's view -

The ECB’s rate peaked at 4.25% in 2008. That suggests the anticipated peak of hiking, at 3%, will be well below that 2008 peak. That’s only relevant because the Fed Funds rate could exceed its 2007 peak at 5.25% before this hiking cycle has ended. That raises the question why is the Euro rebounding?



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October 13 2022

Commentary by Eoin Treacy

Truss Prepares to Abandon Key Tax Cuts Following Market Turmoil

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

“Has the government finally heeded the calls from markets and the Bank of England? Price action in gilts and the pound suggests markets believe so,” said Simon Harvey, head of FX analysis at Monex Europe. 

The plan to freeze corporation tax next year has come in for particular attention from detractors within Truss’s own Tories. Under a strategy set out by the previous Conservative administration, the levy on companies was due to rise to 25% from 19% in April. But scrapping that move was one of the key measures in Kwarteng’s fiscal plan announced Sept. 23.

The initial market reaction on Thursday suggests that a U-turn on corporation tax -- along with the bank’s greater buying activity this week -- could help ease any turbulence next week after the Bank of England halts its bond purchases on Friday. Investors will be focused on the details of the plans the government is drawing up, and that may determine whether the broad market rally can be sustained.

“Given investors are short, the reaction of sterling is not a surprise,” said Gareth Gettinby, portfolio manager at Aegon Asset Management. “Ultimately, the UK has an extremely negative external balance that remains reliant on foreign funding which remains a negative. So a short term bounce on government noise and then expect the currency to weaken.”

Eoin Treacy's view -

Confidence in the standard of UK governance has taken a beating recently. The government has few options when the bond market is throwing a fit at the prospect of modern monetary theory gone wild. They will inevitably have to walk back the commitment to lower taxes and will hopefully double down on deregulation.



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October 13 2022

Commentary by Eoin Treacy

Hong Kong Buys HK$11.697 Billion to Defend Currency Peg System

The Hong Kong Monetary Authority buys HK$11.697 billion ($1.5 billion) to manage the city’s currency peg for Oct. 14 settlement, according to the de facto central bank’s page on Bloomberg.

Aggregate balance will decrease to about HK$106.6 billion on Oct. 14

Eoin Treacy's view -

The strength of the Dollar and the Fed’s policy of raising rates has put a lot of pressure on the Hong Kong Monetary Authority to sustain the Hong Kong Dollar’s peg. The rate has been bumping up against the HK7.85 level for much of the last year in a repeat of the 2018/19 weakness.



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October 12 2022

Commentary by Eoin Treacy

Video commentary for October 12th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: BoE defends 5% on the 30yr, Fed Minutes see a long slog to control inflation, stocks ease, bonds steady, Bank of Japan recommits to QE so Yen extends decline, rise of asset heavy businesses versus intangible assets. 



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October 12 2022

Commentary by Eoin Treacy

UK 30-Year Yield Tops 5%, Pound Jumps as Confusion Grips Market

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

“Bailey’s words did sound harsh but from the BOE’s perspective they need to sound stern,” said Pooja Kumra, rates strategist at Toronto-Dominion Bank. “The BOE has been very receptive to markets. If chaos continues we doubt that they will run away.”

Eoin Treacy's view -

The Bank of England is in a very difficult position. They desperately need to act against inflationary pressures but are constrained from using the tools at their disposal because of the risk posed by leverage in the financial system, not least in the pension sector.



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October 12 2022

Commentary by Eoin Treacy

FOMC Minutes for September Meeting

This excerpt of commentary following the release of the Fed Minutes may be of interest. Here is a section:

It will take years to see inflation pressures completely recede, according to the minutes. That’s also apparent in the Fed forecasts, which don’t see headline inflation returning to 2% until 2025, and core still above that then.

Catarina Saraiva  Fed Reporter

10/12 19:26

Regarding QT, several officials said it would be “appropriate” to consider sales of agency MBS at some point so the Fed’s long-term portfolio can be composed primarily of Treasury securities.

Ian Lyngen at BMO Capital Markets comments:

“Not new information per se, but nonetheless reinforcing the idea that for the time being the status quo of QT will be maintained. Especially after the volatility experienced in the gilt market, and liquidity in both mortgages and Treasuries already becoming an issue, we don’t expect MBS sales from SOMA will be a near term issue.”

Ye Xie  Markets Reporter, New York

10/12 19:25

Here’s something to keep in mind when looking at tomorrow’s CPI report:

“Participants commented that they expected inflation pressures to persist in the near term.”

Catarina Saraiva  Fed Reporter

10/12 19:25

The median estimate of Fed officials’ projections in the September SEPs was for unemployment to climb to a high of 4.4% next year. Many economists have said this is wishful thinking, and that it will likely rise much higher if the Fed keeps raising rates. It sounds like some at the Fed are concerned about this as well.

“A few participants particularly stressed the high uncertainty associated with the expected future path of the unemployment rate and commented that the unemployment rate could rise by considerably more than in the staff forecast.”

The highest unemployment rate forecast among the 19 policymakers for 5% in 2023.

Eoin Treacy's view -

The steadier action focusing on the “calibrate” statement implies the Fed will slow down the pace of interest rate hikes after the November meeting. The thing I find most interesting about this evolving environment is the willingness of investors to pre-empt what the federal reserve will do. It’s a symptom of relying on past experience to inform future decisions. We know what has happened on every other occasion, so why not this time? That’s why buying the dip works after all.



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October 12 2022

Commentary by Eoin Treacy

Putin Says All Infrastructure at Risk After Nord Stream Hit

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

Russia’s President Vladimir Putin said any energy infrastructure in the world is at risk after the explosions on the Nord Stream gas pipelines.

The attacks were an act of terror that set “the most dangerous precedent,” the Russian president told a Moscow energy forum on Wednesday. “It shows that any critically important object of transport, energy or utilities infrastructure is under threat” irrespective of where it is located or by whom it is managed, he said.

Putin blamed the sabotage on the US, Ukraine and Poland, calling them “beneficiaries” of the blasts that caused major gas leaks in the Baltic Sea. The US and its allies have rejected those allegations and suggest Russia may have been behind the underwater blasts.

The attacks on two strings of Nord Stream and one string of Nord Stream 2 at the end of September have raised concerns over the future of Europe’s gas supplies. Other critical infrastructure in the region has also suffered damage in recent weeks. 

Earlier this month, an act of sabotage halted train services across northern Germany and the government has said it can’t rule out foreign involvement. A pipeline that carries Russian oil through Poland was found to be leaking on Tuesday. Investigations continue, and Poland’s top official in charge of strategic energy infrastructure said he assumed it was an accident.

Eoin Treacy's view -

This is a none too subtle threat to expect escalation of attacks on energy infrastructure for as long as the EU is supporting Ukraine’s resistance efforts. The sabotage of Germany’s rail network with specialized interruptions conducted simultaneously at locations 200km apart is a display of Russia’s extraterritorial ability to sow disruption.



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October 12 2022

Commentary by Eoin Treacy

October 11 2022

Commentary by Eoin Treacy

Video commentary for October 11th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: Dollar eases, gold steadies, stocks steady and bonds hold lows, Bank of England intervenes in inflation protected bonds market, China pauses but renminbi remains weak, technological innovation raises scope for unconventional war during times of geopolitical stress.



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October 11 2022

Commentary by Eoin Treacy

Email of the day on annuity pensions

It will be interesting to see whether the higher gilt yields (and turbulent stock markets) lead to an increased demand for fixed pension annuities and thus a new demand for gilts

Eoin Treacy's view -

Thank you for this email which may be of interest. Annuity sales in the USA set a record in the 2nd quarter of this year at $79.4 billion. With so much volatility in stock markets there has been significant demand for guaranteed returns and particularly now since bonds pay a modest yield. 



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October 11 2022

Commentary by Eoin Treacy

Social Security COLA update coming this week - and it could be huge

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

Should Social Security beneficiaries see an 8.7% increase in their monthly checks next year, it would mark the steepest annual adjustment since 1981, when recipients saw an 11.2% bump. An increase of that magnitude would raise the average retiree benefit of $1,656 by about $144 per month or roughly $1,729 annually, the group said.

"A COLA of 8.7% is extremely rare and would be the highest ever received by most Social Security beneficiaries alive today," Mary Johnson, a policy analyst at the Senior Citizens League who conducted the research, said. "There were only three other times since the start of automatic adjustments that it was higher."

However, the decades-high benefit increase is not always good news for recipients, according to Johnson.

Higher Social Security payments are a bit of a Catch-22. They can reduce eligibility for low-income safety net programs, like food stamps, and can push people into higher tax brackets, meaning retirees will pay more taxes on a bigger share of their monthly payments.

Eoin Treacy's view -

There is a lot of complication in the US tax code but one thing is certain, if you make more you pay more. That both increases compliance costs and ticks people off when they believe they should not have to pay taxes. It’s likely to become a political factor in coming elections.



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October 11 2022

Commentary by Eoin Treacy

Discovering novel algorithms with AlphaTensor

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

Beyond this example, AlphaTensor’s algorithm improves on Strassen’s two-level algorithm in a finite field for the first time since its discovery 50 years ago. These algorithms for multiplying small matrices can be used as primitives to multiply much larger matrices of arbitrary size.

Moreover, AlphaTensor also discovers a diverse set of algorithms with state-of-the-art complexity – up to thousands of matrix multiplication algorithms for each size, showing that the space of matrix multiplication algorithms is richer than previously thought.

Algorithms in this rich space have different mathematical and practical properties. Leveraging this diversity, we adapted AlphaTensor to specifically find algorithms that are fast on a given hardware, such as Nvidia V100 GPU, and Google TPU v2. These algorithms multiply large matrices 10-20% faster than the commonly used algorithms on the same hardware, which showcases AlphaTensor’s flexibility in optimising arbitrary objectives.

Eoin Treacy's view -

Taiwan Semiconductor initially expected to produce 3nm chips this year and now plans to mass produce next year. They expect to have 2nm chips in the market by 2024/25. A silicon atom is 0.2nm wide so the 2nm phrase is essentially marketing terminology for chips that more efficient and incorporate more transistors. 



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October 11 2022

Commentary by Eoin Treacy

China Shows Off Drone That Drops Robodog With Huge Gun Anywhere

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

A video has gone viral of a large drone dropping off a gun-wielding robot dog, a terrifying vision of what the future of warfare and policing could soon look like.

The footage shows a sizable octocopter drone dropping off its armed payload on a rooftop in an urban area. The robodog then springs to life and stretches its legs.

The robot appears to be carrying a modified, semiautomatic assault rifle, which has been the service rifle for the People's Liberation Army and paramilitary agencies in China since 1995.

The clip was shared by an account called Kestrel Defense Blood-Wing on Chinese social media. According to a rough Google translation of the account's description of the video, "war dogs" that "descend from the sky" can be "directly inserted into the weak links behind the enemy to carry out surprise attacks," be delivered "to the top of enemy buildings," or provide fire suppression.

Eoin Treacy's view -

Boston Dynamics has committed to not developing weapons, but they are certainly inspiring copycats. This kind of picture is designed to instill fear. It does not get over the issue Boston Dynamics has with battery life. A robot dog like that, has 90 minutes of usability before it runs down. Carrying a gun, it would be even less. At that point they had better explode or they will quickly be repurposed to fire back at an invading force. 



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October 10 2022

Commentary by Eoin Treacy

Video commentary for October 10th 2022

October 10 2022

Commentary by Eoin Treacy

Email of the day - on synthetic biology

In the section of the Wired article, you post there is this: "...and production is on the cusp of becoming biological". Any ideas what this means? Is it the "synthetic biology" that you refer to in your view?

Eoin Treacy's view -

Thank you for this question. Yes, they use some poetic license with the language but what they are talking about is synthetic biology. Most people are familiar with the Human Genome Project. It’s what led to the birth of the genetic revolution which has been underway for the last twenty years.



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October 10 2022

Commentary by Eoin Treacy

Taiwan Tensions Spark New Round of US War-Gaming on Risk to TSMC

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

That doomsday scenario injects a new dynamic to Washington’s war-gaming that highlights an uncomfortable dilemma: For all the talk of strong support for the government in Taipei, the US has concluded that it’s too dependent on Taiwan for the kind of advanced chips that are essential for the latest smartphones and next-generation military hardware, and is working to build more domestic capacity as a result.

“The focus among policymakers — and this is true of the US and elsewhere — is of understanding where risks are or concentration is,” said Chris Miller, an associate professor at Tufts University and the author of Chip War: The Fight for the World’s Most Critical Technology. The chip industry’s concentration in Taiwan, he said, “has raised red flags.”

The following account of the contingency planning being undertaken was provided by multiple officials and former officials who requested anonymity to speak candidly. They stressed that plans are purely hypothetical and many details remain unresolved. 

Eoin Treacy's view -

There is a lot of talk about the possibility of war over control of Taiwan. The island economy’s dominance of the semiconductor sector is often associated with TSMC. However, Taiwan’s network of smaller essential component companies is equally important. That’s not going to be solved by expatriating a relatively small number of engineers.

 



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October 10 2022

Commentary by Eoin Treacy

Was That The Whale?

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

On this last point, an old Gavekal trope has it that liquidity crises resemble dynamite fishing. When a stick of dynamite is detonated under the sea (let alone 200kg equivalent, as seems to have occurred off Denmark’s coast this week), everything in the vicinity is killed. The coral dies, little fish die and so do any whales in the vicinity. The tiddlers quickly come up to the surface, but it takes longer for any whale carcasses to emerge. Historically speaking, it is when the whales show up that policymakers shift gear and reinject liquidity. In my career, whales have included Mexico in 1994, Asia, Long-Term Capital Management and Russia in 1998, Enron and MCI-Worldcom in 2001-02, Lehman, AIG and Bernie Madoff in 2008 and the US repo market in 2018.

Now, in the past few weeks, the financial markets’ waters were undeniably troubled. We have seen surging currency volatility, huge moves in government bond markets, especially in the US and the UK, and collapsing equity prices. The waters were sufficiently turbulent to suggest that a whale may soon show up. Indeed, on Monday, I speculated that the underfunded US pension fund system could be the surprise whale, whose troubles would force the Fed to change course (see The US Dollar Wrecking Ball)? I was wrong—by one letter. It turns out that the whale was most likely the UK pension fund system.

Eoin Treacy's view -

The margin call on UK pensions was a big deal and has painted the Bank of England into a difficult position. 



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October 10 2022

Commentary by Eoin Treacy

Email of the day - on an online version of The Chart Seminar

Why not do the Chart Seminar by Vimeo? I don't want to travel to London from California for this valuable seminar. I attend John Mauldin's seminar online, which are quite helpful. Why not yours, also?

Eoin Treacy's view -

Thank you for this suggestion and I can understand the reluctance to travel when so much is online today. There are several reasons I am reluctant to do an online seminar.

The first is I have done online seminars for private organisations in the past and they turn into lectures very quickly. It is virtually impossible to practice the Socratic method with a group of strangers online who are unfamiliar with the material being covered.

The second reason is time zones. This is a truly global service with subscribers coming from all over. If I were to schedule a seminar, what time zone would I pick, or should I do three? One each for the Americas, Europe/Middle East and Asia/Australia?

Lastly, I do my best work in person. That’s why I refused to participate in the Money Show’s online seminars. When I give a seminar, I want to deliver the best of what I can offer and I believe that is in person.



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October 10 2022

Commentary by Eoin Treacy

October 08 2022

Commentary by Eoin Treacy

October 08 2022

Commentary by Eoin Treacy

The Great Progression 2025-2050

This lengthy article by Peter Leyden for Wired’s bigthink.com may be of interest to subscribers. Here is a section:

We’re living through an extraordinary time in American history, and really in all human history. Once you take that big-picture historical perspective, once you look at the whole forest rather than the individual trees, the real story of our times starts to make more sense. We happen to have arrived at a juncture between two very different historical eras and that makes everything on the ground very confusing, and very traumatic.

One way to understand this is that for the last 40 years America and the world have been operating within a series of interconnected systems that add up to one mega-system. Our energy system was rooted in carbon, and our transportation system was based on the internal combustion engine. Our culture was dominated by the huge Baby Boom generation and our politics tended to be more conservative. Our economics was all about unleashing the private sector and maximizing shareholder capitalism. Work was done in physical places and production was primarily industrial. Our uber-challenge was terrorism, and our geopolitical focus was the Middle East, which made sense because we needed to keep the carbon energy flowing to keep the whole flywheel of this mega-system spinning.

That whole mega-system, and all the subsystems, arguably are now breaking down and often causing more problems than they are solving. This world that older people spent their entire careers and lives mastering is coming to an end. This world that younger people were taught is “just the way things are” increasingly does not make sense. This world that politicians proudly had policies for, and that the media confidently analyzed and explained, is soon going to be over.

Every one of those systems arguably is being superseded by new systems much better suited for the 21st century. Our uber-challenge is now climate change and so our energy system must shift to clean power and our transportation system to electric. Our culture now is dominated by the huge Millennial generation and our politics are becoming more progressive. Our economics is raising the role of the public sector and capitalism being pushed to include all stakeholders. Work is now taking place much more virtually, and production is on the cusp of becoming biological. And our geopolitics is recentering on Asia, and in particular on the new superpower, China.

Eoin Treacy's view -

There are two important cycles investors need to be aware of. First you have the technology cycle. Time marches to a different beat inside universities and labs all over the world. The market may go up and down but smart people, beavering away on their pet idea, will eventually lead to technological innovations that take everyone by surprise.



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October 08 2022

Commentary by Eoin Treacy

Malaysia LNG declares force majeure on supply to customers -Mitsubishi

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

The possible disruption comes at a time when Japan and many other countries in Europe are scrambling to ensure gas supply for the peak winter demand season as they face the threat of an energy cut-off from Russia amid the war in Ukraine.

The force majeure was due to a leak on the Sabah-Sarawak Gas Pipeline on Sept. 21, the Mitsubishi spokesperson said, adding it was assessing the impact from the action.

"We have already strongly requested that Malaysia LNG take all possible measures to examine and respond to the impact," he said.

"We will closely monitor the situation and provide full support to Malaysia LNG in order to minimize the impact on the Japanese market," he said, adding there would be limited impact on its earnings.

The spokesperson declined to give details such as the dates of declarations and volume of the supply that may be affected or how long the supply disruption could last.

Eoin Treacy's view -

We are in a tight supply environment so every pipeline or processing facility interruption makes global headlines. Nevertheless, there is still potential that the explosion at the Freeport terminal in Texas, the Nordstream pipeline explosion and the Petronas leak are related events. Regardless of whether these events are the result of malicious intent, the argument for any measure that supports energy independence is more convincing than ever.



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October 08 2022

Commentary by Eoin Treacy

Email of the day on pension troubles

Thank you so much for a superb and invaluable service. I’ve been a subscriber since the ‘80s. I’ve just recently renewed my subscription again after a short break of a couple of years. Just so enjoying hearing your thoughts and steady guidance through these volatile times, thank you. I’d really enjoy your thoughts re this recent article from Reuters ‘Pension fund blowup faces brutal second act’ which may also be of interest to the collective

Eoin Treacy's view -

Thank you for your kind words and this question which I’m sure others have an interest in. The short answer is the blowup of pension funds in the liability-driven investing (LBI) sector is likely to have a long tail. Pensions are now going to be much more wary about taking on leverage so they are forced sellers of illiquid assets. 



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October 08 2022

Commentary by Eoin Treacy

Overwatch 2 launch brings big hopes and woes for Activision Blizzard and OWL

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

Overwatch 2’s launch suffered from a double whammy of troubles when the servers opened for business Tuesday: Massive player interest led to equally massive login queues and a cyberattack.

Blizzard Entertainment President Mike Ybarra tweeted that the company was dealing with a Denial of Service (DDoS) attack that was disrupting servers (these stopped after Tuesday’s launch). "Server issues” and “launch day” predictably go together in gaming, so plenty of players knew to expect disruptions and wait times.

Another issue plaguing Overwatch 2’s launch was the use of Blizzard’s SMS Protect feature, which requires a mobile phone number to prevent cheaters and stop hackers from taking over player accounts. But since Tuesday’s launch, those using prepaid cellular accounts can’t use those mobile numbers to play (it's part of the SMS Protect protocol). A Blizzard spokesperson said that the company is "actively engaging with some service providers to explore if we can expand the program to cover more users while still protecting our players and game security."

Late Wednesday, Blizzard said an update it plans to roll out Friday will change SMS Protect so that any player who has logged into Overwatch since June 2021 can play without a phone number requirement (anyone who hasn't played Overwatch since that time will need to use a phone number. It’s also rolling out updates to improve online stability and long login queues. Players have also been reporting missing items and other data, and Blizzard said half of these issues are because players didn’t merge their accounts. For the rest, Blizzard said no data has been wiped or lost and it is working to restore missing items.

Eoin Treacy's view -

Activision Blizzard was in the process of collapsing before Microsoft made a bid for the company. The share is falling once more which suggests investors are wary of thinking the merger will get approval from the EU.



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October 06 2022

Commentary by Eoin Treacy

Video commentary for October 6th 2022

October 06 2022

Commentary by Eoin Treacy

PGIM Sees No-Brainer in Betting Against Another Fed Pivot Trade

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

Investors counting on a Federal Reserve pivot any time soon are bound to get burned again, according to PGIM Fixed Income.

“We’ve seen this movie time and time again,” said Greg Peters, co-chief investment officer at the Newark-based firm, in an interview. “The market gets hyped up on different narratives between inflation releases. I’ve been surprised by it, and we’ve been using it as an opportunity to sell into.”

The firm, which manages assets of $790 billion, sold US Treasuries after a rally earlier this week sparked by speculation the Fed was about to turn more dovish. The market move proved short lived, backing its view that there’s still not enough evidence to suggest policy makers will rein in aggressive interest-rate hikes.

The speculation -- fueled by a smaller-than-expected rate hike in Australia -- drove action across global markets in the first two days of this week, driving down two-year Treasury yields by nearly 30 basis points at one point to below 4%.

Eoin Treacy's view -

Neel Kashkari, who has historically been viewed as a dove, was quoted today as saying "more work to do" on bringing down inflation, and is "quite a ways away" from being able to pause its aggressive interest-rate hikes.



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October 06 2022

Commentary by Eoin Treacy

LNG Market Supply to Remain Tight for Years, Top Producers Say

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

Liquefied natural gas will be in short supply in the coming years as production lags behind surging demand from Europe, according to the world’s top producers of the fuel.

Global LNG demand is unlikely to peak for another 20 to 30 years, Qatar Energy Minister Saad Al-Kaabi said at the Energy Intelligence forum in London. Meanwhile, supply will remain “structurally short” until there’s significant new production capacity, which will be 2026 at earliest, Meg O’Neill, chief executive officer of Australia’s Woodside Energy Group Ltd., said at the event.

Their comments add to a growing chorus warning that Europe’s worst energy crisis in decades is unlikely to end soon. While the continent looks set to cope this winter, it’s next winter when the supply shortage will really bite as Europe tries to replenish its stockpiles without Russian imports.

“Next winter is going to be the problem,” Al-Kaabi said. “It doesn’t look like it’s getting better.”

Eoin Treacy's view -

The opinion that Europe will cope this season is implied in prevailing prices of natural gas. It is not reflected in media coverage which continues to paint a dire picture of what this winter will feel like for many consumers.



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October 06 2022

Commentary by Eoin Treacy

Thyssenkrupp may have just cleared the path to bulk green steelmaking

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

German steel giant Thyssenkrupp is investing US$1.9 billion in a hydrogen-powered direct-reduction system that can create high-quality steel without needing the rare, high-grade iron ore required by most green steel processes. This could open the floodgates.

But the technology to make green steel is well understood and already in use. You stop using fossil-fired blast furnaces to release the oxygen from iron ore, and you stop using baked coal, or coke, as a reductant to add the critical small percentage of carbon to your iron. Instead, you use green hydrogen in a direct reduction process, both as your reductant and to power an electric arc furnace to supply the heat. Instead of tons of carbon dioxide, this process emits water.

Eoin Treacy's view -

Electric arc furnaces require scrap steel to function so there is a heavy reliance on recycled supply. Using hydrogen to make the process more efficient and to avoid buying costly carbon credits is a bonus if it can be achieved effectively.



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October 06 2022

Commentary by Eoin Treacy

Tilray, Other Marijuana Stocks Rise After Biden Says He Will Pardon Federal Offenses of Simple Possession

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

"No one should be in jail just for using or possessing marijuana," Biden said in a post on Twitter (TWTR). "Today, I'm taking steps to end our failed approach."

Biden said he will pardon all previous federal offenses of simple marijuana possession.

"There are thousands of people who were previously convicted of simple possession who may be denied employment, housing, or educational opportunities as a result. My pardon will remove this burden," he said.
The president also said he is asking Health Secretary Xavier Becerra and Attorney General Merrick Garland to review how marijuana is scheduled under federal law.

"We classify marijuana at the same level as heroin -- and more serious than fentanyl. It makes no sense," Biden said.

Eoin Treacy's view -

The are clear arguments in favour of freeing individuals for cannabis offenses when cannabis possession and consumption is legal in many states. The potential for reclassification of cannabis is a potentially significant development for the sector.



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October 05 2022

Commentary by Eoin Treacy

Video commentary for October 5th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: high yield spread continues to march higher, the yield curve is still inverted, crude oil and oil stocks extend advance, dollar bounces, Treasury yields bounce but stock market steady. If the preceding trends remain intact, that spells trouble for the stock market. 



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October 05 2022

Commentary by Eoin Treacy

KKR's Debt Deal Shows How Ugly Things Are Getting for Lenders

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

Such maneuvers had been a decade in the making. Easy money after the global financial crisis made debt investors hungry to buy loans and bonds that provided higher yields. Funds began to agree to weaker protections in their creditor agreements. Loan and bond documents riddled with loopholes and imprecise language gave borrowers more flexibility in times of stress.

The documents didn’t explicitly allow future creditors to grab collateral. But they left just enough ambiguity, sometimes called “trap doors,” for lawyers with a bit of ingenuity and a lot of motivation to move assets to new entities and give dying companies some fresh capital. Because of these often-overlooked provisions, some creditors were surprised to discover they’d been left with almost worthless loans and bonds after struggling companies restructured.

“Loose documents have become the norm rather than the exception,” says Damian Schaible, co-head of restructuring at Davis Polk & Wardwell. “If we go into a real recession, we are going to see more and more borrowers and sponsors seeking to exploit document loopholes to create leverage against and among their creditors.”

Eoin Treacy's view -

Covenant light debt issuance has dominated the post Global Financial Crisis bond markets. That hasn’t mattered until now. Default rates were low, successive waves of new money ensured rates stayed low, and credit remained abundant. 



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October 05 2022

Commentary by Eoin Treacy

OPEC+ Tries to Keep Oil Above $90 With Large Production Cut

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

Earlier on Wednesday, US officials were making calls to counterparts in the Gulf trying to push back against the move to cut production, according to people familiar with the situation. President Biden has long been pushing OPEC+ to boost output, visiting Saudi Arabia earlier this year in search of lower pump prices for Americans ahead of midterm elections in November.

The White House’s national security adviser, Jake Sullivan, and National Economic Council Director Brian Deese said in a statement after the OPEC+ meeting that the US would release another 10 million barrels of oil from the Strategic Petroleum Reserve in November, and that “the president will continue to direct SPR releases as appropriate to protect American consumers and promote energy security.”

Real Cuts
The cut of 2 million barrels a day will be measured against the same baseline as the previous OPEC+ agreements, Amir Hossein Zamaninia, OPEC governor for Iran, told reporters in Vienna after the meeting. Shared pro rata between members, that would require just eight countries to curb actual production and deliver a real reduction of about 900,000 barrels a day, according to Bloomberg calculations based on September output figures.

OPEC+ will no longer hold monthly meetings, Zamaninia said. The group’s Joint Ministerial Monitoring Committee, which oversees implementation of production cuts, will meet every two months, he said. 

Eoin Treacy's view -

Moving meetings to every two months suggest this cut to production is not a short-term measure. OPEC ministers are obviously worried about the prospect of lower demand and above all do not wish to re-experience the 2020 plunge in prices because they were not prescient enough to reduce supply.



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October 05 2022

Commentary by Eoin Treacy

Ice Age - End In Sight

Thanks to a subscriber for this report from Morgan Stanley focusing on Asia. Here is a section:

Upgrade from Cautious to Attractive: No one knows exactly when this downturn will end and we find it difficult to get ahead of macro events, but we see signals that suggest we should no longer be overly pessimistic: (1) the cyclical sell-off has already been punitive in an historical context; (2) the magnitude of the valuation correction (YoY) is approaching extremes relative to the last two decades; (3) earnings risks are now well understood and it is surprises that will drive stocks from here; (4) green shoots are emerging while some consumer parts of tech are close to bottoming; (5) we are upgrading our top down EM strategy view on IT, Korea, and Taiwan; these are set-up for a reversal in returns in the coming weeks. What is not understood is cycle turns and the market's willingness to increasingly look through this late stage of the downturn and, hence, our focus on the other side of the cycle.

An inflection is near and we see reasons to be constructive on a 2H23 recovery. (1) Macro headwinds are fading with the bulk of the Fed’s heavy lifting likely to be done by year-end and benefits from China’s reopening; (2) demand elasticity and replacement cycles will be driven by the sharp fall in pricing, especially consumer products; and (3) supply adjustment is accelerating via significant production and capex cuts that are underway. We have clearly worked through the slowdown in the consumer and are most positive on 'first-in, first out' exposure in LCD panels bottoming now, followed by memory in 4Q22, while the trough for foundry, auto and semicap should come with a lag in 1H23.

Eoin Treacy's view -

As the fourth quarter begins and investors position for how they hope to salvage returns for 2022, questions are already arising about the prospects for 2023. There is no doubt, steep declines in asset prices, particularly within the tech sector, have improved valuations. In normal circumstances that would be sufficient to create attractive entry points. Therefore, the question is whether this is a normal correction following the excesses of the pandemic or the end of the cycle. 



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October 04 2022

Commentary by Eoin Treacy

Video commentary for October 4th 2022

October 04 2022

Commentary by Eoin Treacy

Email of the day on looking at lots of charts

Dear Eoin, In the 1960s and 1970s subscribers to the David Fuller Chart Service received a booklet containing hundreds of charts each week or each month. I used to come into the office at 6a.m. and complete the point and figure charts each day. Thanks to this work, I gained a reputation among my colleagues for being the first one to spot changes in the long-term trends of both overall markets, sectors and individual shares. As of this morning, I am getting up one hour earlier and I will start by looking at all the daily charts of the Autonomies in the Chart Library. Let's hope that this will produce the same result. This morning's work show very small blue upward marks in almost every chart. These are tiny upward movements in the year-long major decline in all these share prices. This "summer's swallow" has not yet started chirping. Regards,

Eoin Treacy's view -

Thank you for this account. David was still having chartbooks printed in 2003, when we began working together. By that stage they were a very niche product that had become obsolete with the development of charting software. Nevertheless, the practice of looking at lots of charts is as useful today as it has ever been.

In following your program of activity, I would suggest taking one day to look at point and figure charts. They will give you clear confirmation of a change of trend.



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October 04 2022

Commentary by Eoin Treacy

The Freeport LNG Paradox

This article from Goehring & Rozencwajg may be of interest to subscribers. Here is the conclusion:

With the announcement that Freeport will likely resume exports in October, much sooner than originally planned, combined with low inventories and a gas supply that has shown little in the way of growth, we believe the risk of a Q4 price spike in North American natural gas is once again high.

Natural gas has quickly gone from relative obscurity to geopolitical lynchpin. In the summer of 2020, seaborn LNG reached a low of $1.90 per mmcf while oil prices turned negative. Together, this represented the lowest energy costs in human history. Two short years later, LNG has risen 30-fold to $58 per mmcf, representing the highest energy costs in human history. Such is the result of a decade of underinvestment. Given the fragility of the world’s energy supply, it is no wonder tyrants and despots are moving to weaponize fuel sources. We do not expect this trend to stop and recommend investors position themselves accordingly. We remain extremely bullish on North American natural gas and recommend investors continue holding their natural gas related equities.

Eoin Treacy's view -

Some of information quoted in this report is not accurate. For example, Rhine river levels could approach normal depths this week, and France changed the rules on nuclear power heating of river water in August. European coal prices peaked in March and continue to unwind an overbought condition.
 



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October 04 2022

Commentary by Eoin Treacy

UK Seeks 20-Year Gas Deal With Norway to Avoid Winter Blackouts

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

The UK is in talks with Norway to secure a natural gas contract of potentially 20 years in a bid to stave off the risk of winter blackouts, a person familiar with the matter said.

Ministers are discussing a price with their Norwegian counterparts, according to the person, who asked not to be named discussing sensitive matters. The business department didn’t immediately respond to a request for comment.

Because of the length of contract under discussion, there’s a risk that locking in long-term gas contracts now might leave the UK exposed to high costs in years to come. Current volatility means producers could demand higher prices to guarantee strong profits as it’s unclear how much money they could make by selling on the spot market in the future instead.

Eoin Treacy's view -

Forced buyers are never going to get the best price regardless of how amicable the relationship is between Norway and the UK. However, if that is the only way to ensure security of supply over the coming couple of years, it may be a price worth paying.



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October 03 2022

Commentary by Eoin Treacy

October 03 2022

Commentary by Eoin Treacy

Some of Truss's Top Team Say Her UK Project May Already Be Over

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

Speaking on the sidelines of the Tories’ annual conference in Birmingham, the ministers predicted she will survive to fight the next election, due in about two years, because there isn’t enough time to replace her. The result, they said, is likely to be more rebellions from Tory MPs pushing around a lame duck premier, just like the one that forced her into a humiliating U-turn on Monday morning. 

The stark view suggests the “new economic deal for Britain” launched by Truss and her Chancellor of the Exchequer Kwasi Kwarteng may be dead in the water before it has even got going. The policy calls for a major program of deregulation in areas such as housebuilding and childcare alongside tax cuts.

One former Cabinet minister predicted Truss will be gone within a year to allow the party time to regenerate before the general election, which must be held by January 2025 at the latest. They said local votes in May, 2023, would provide a clear indication of how badly Truss is doing and predicted that her successor would have to come from outside the current Cabinet.

Eoin Treacy's view -

Reversing the 5% cut to the top rate of tax was essential to avoid significant public protest. The biggest challenge for the Truss administration is their inability to fathom that the era of profligate spending with no concern for funding ended when inflation surged and forced rates higher. The reality is high rates force a reappraisal of value and in turn a questioning of values is inevitable.



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October 03 2022

Commentary by Eoin Treacy

Brazilian Assets Soar as Presidential Race Goes to Runoff

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

Brazilian assets jumped after President Jair Bolsonaro secured his way to a runoff election against Luiz Inacio Lula da Silva as investors cheered on the incumbent’s better-than-expected showing and bet his leftist challenger will be forced to moderate his stances in the second stretch of the race.   

Lula, as he is universally known, took 48% to Bolsonaro’s 43%, Brazil’s electoral court said, with almost all votes counted.

That tally left Lula without the simple majority needed for an outright victory, as some opinion polls had suggested, and set the two up for a bruising face off in what has already been a divisive election campaign.

Eoin Treacy's view -

The Brazilian iBovespa is the only major global index in positive territory this year; in both nominal and currency adjusted terms. 13.75% short-term interest rates, up from 2% in March 2021 have successfully got inflationary pressures under control. The central bank expects to be cutting rates by the end of the year or early in 2023. 



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October 03 2022

Commentary by Eoin Treacy

JPMorgan Is Worried About Who's Going to Buy All the Bonds

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

Even if new buyers step into purchase these bonds, they’re likely to demand a higher yield for doing so — potentially adding to government deficits and mortgage rates at a time when they’re already soaring.

“All this points to a somewhat higher resting level for the mortgage/Treasury basis—and potentially for other related assets like IG corporates, which finally caught up with some of the mortgage widening over the past few days,” the analysts conclude.

Eoin Treacy's view -

2-year yields at over 4% are sufficient incentive to drag cash into the sovereign markets. When the alternative is to lose double digits in the stock market and see cash eroded by inflation, the allure of a guaranteed 4% is reason enough to invest.



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October 03 2022

Commentary by Eoin Treacy

China Offers Rare Tax Rebate to Spur Home Purchase in Crisis

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

China’s central government offered a rare tax incentive for residential purchases, ramping up support for the country’s embattled real estate sector. 

Residents who buy new homes within one year after selling old homes will enjoy refunds for personal-income tax on the sale, according to a statement on the finance ministry website. The tax refunds will take effect from October till the end of 2023. 

The novel tax policy comes after a yearlong slump in the housing market. To spark a turnaround, the central government is allowing nearly two dozen cities to lower mortgage rates for purchases of primary residences, while the central bank vowed to speed up delayed homes with more special loans. 

“The measure may help restore some confidence,” said Xu Xiaole, a property analyst at Beike Research Institute. “It’s another demand-side policy targeting homebuyers after mortgage rate cuts.” 

The tax break suggests the central government is ramping up support for people seeking to upgrade their homes. Previously, most incentives focused on first-time buyers, echoing President Xi Jinping’s mantra that “houses are for living in, not for speculation.”

Unless the person has held on to the home for at least five years, most big cities charge personal tax income on property sales when there’s a gain in value, usually 1% of the full amount or 20% of the gain. 
Under the new policy, people who buy more expensive apartments will enjoy a full refund in this area. The tax break only applies to home upgrades in the same city.  

Eoin Treacy's view -

The range of measures China is putting in place to support the housing market continue to increase. That’s good news for the domestic property sector and commodity demand in general. By limiting the tax cut to those also selling a property, the government is attempting to avoid stimulating property speculation but more money for the sector is certainly a positive.



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September 30 2022

Commentary by Eoin Treacy

September 30 2022

Commentary by Eoin Treacy

CIOs Waiting for Cloud Investments to Pay Off

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

Roughly 67% of 1,000 senior technology leaders at U.S. firms across industries said they are still waiting for cloud investments to pay off, KPMG said Thursday in its annual technology survey. Why the wait? Blame insufficient skills among tech teams, added requirements, and a misalignment on expected outcomes, says Barry Brunsman, a principal in KPMG’s CIO Advisory group.

Tech leaders take note. Diane Comer, chief information and technology officer at Kaiser Permanente, said that when the healthcare provider is working on a new initiative, it will price it out and compare an on-premises solution against one in the cloud. “You really do need to not just take it for granted that cloud is where you should head,” she said.

Eoin Treacy's view -

Companies boost their valuations by making claims about the size of the total addressable market (TAM) in their corporate presentations. The logic is simple enough. We might only make a couple of hundred million today, but the size of the market is so much larger, that we can grow quickly to capture sizeable market share.



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September 30 2022

Commentary by Eoin Treacy

Message From Stock Market Is Clear: Fed Put Is Getting Closer

This article from Bloomberg, focusing on the options market, may be of interest. Here it is in full:

The price of deeper out-of-the-money insurance in equities is falling, implying lower demand for
crash insurance. This suggests the market believes the Fed put is getting closer.

A conundrum all year has the been the relatively low level of the VIX despite equity markets being in a bear market. The VIX has been low relative to implied volatility, relative to longer-term volatility, and remains low compared to cross-asset volatility. Most notably, though, the VIX has been low -- and
continues to fall -- versus at-the-money volatility.
 
This is due to the price of further out-of-the-money put options falling by more than options that are less out of the money. We can see this by looking the difference in volatility between 80% and 90% out-of-the­-money put options and see it has been falling.

As the VIX is a weighted average of all S&P options with approximately 1-month to expiry and that have a non-zero bid, the lower price of these deeper out-of-the-money options is keeping the VIX lower relative to at-the-money volatility than it otherwise would be.

Puts have still been in demand though. The put/call volume ratio has been rising, showing that investors are buying more puts relative to calls. But the put/call price ratio has been falling, showing that investors have been paying relatively less for those puts.

Investors have therefore not been paying up as much for crash insurance, and buying puts that are less out of the money. The Fed is now well into its hiking cycle, and the market is inferring it believes the Fed put is getting nearer.

Certainly, current oversold conditions suggest a short-term bounce is at hand. But while excess liquidity remains depressed, it will be hard for the market to make new highs. The Fed put may be closer, but that does not mean the bear market is over.

Eoin Treacy's view -

No two crises are the same and yet the temptation to think “this time is different” has been proved wrong on so many occasions that the term is a cautionary tale. The Bank of England intervened to support the domestic pension system this week. Several schemes required £100 million in additional capital each and others were looking at closing. The central bank had no choice but to wade in and provide some stability. The ramifications of this move raise more questions than answers.



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September 30 2022

Commentary by Eoin Treacy

Illumina Unveils DNA Sequencing Machine Delivering a $200 Genome

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

Many consumers have been introduced to their DNA through relatively low-cost tests like those marketed by 23andMe Holding Co. that analyze small snippets of the genome for clues to disease risk and ancestry. Whole-genome sequencing can provide a far clearer, more accurate view of patients’ genetic makeup that doctors can use to precisely identify some diseases, including certain forms of cancer and heart disease. However, the price of performing the tests, along with their interpretation, has been a barrier for many patients that companies have been trying to bridge.

More efficient machinery and materials reduce customer cost to sequencing one genome, or the complete set of genetic material, Illumina said, adding that costs would range from less than $200 per genome, with discounts for bulk use, to $240 for a higher-quality analysis. Slashing the price of reading DNA could allow the practice to move into the mainstream, where it might be used to better tailor medications or treatments to people or have other health benefits.

“This will be a huge force in terms of significantly increasing accessibility to genomics in a number of ways,” deSouza said in an interview ahead of the announcement. “It will democratize access to genomics by allowing sequencing to be offered to hospitals and researchers at much lower prices.”

Eoin Treacy's view -

Illumina is a highly cyclical business. They are the clear leader in developing machines for genetic sequencing. Every few years they bring out a new machine that delivers more efficient and cheaper sequencing. That kickstarts an upscaling cycle among its customers which boosts sales over the next 18 months. 



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September 29 2022

Commentary by Eoin Treacy

Video commentary for September 29th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: Dollar easing supports gold but weighs on stock markets. Nasdaq-100 testing the June low and is below the 1000-day MA for the first time in a decade. It needs to bounce soon to avoid a break of the secular trend. Bonds pause amid yield curve control speculation, oil steady. 



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September 29 2022

Commentary by Eoin Treacy

Email of the day on UK pension fund leverage

I've spent some long days and nights this week on this very subject (work as an investment actuary in DB [Ed. Defined Benefit] pension fund space)...

Fiscal policy context: mini-budget, with expected energy price cap but surprise revenue cuts (tax, NI, duty, etc.); cost of the latter might be in the vicinity of c£40bn pa (without OBR numbers its hard to say though).

Monetary policy context: TBC regarding rate hikes from November MPC meeting; QT expected to be of the order of c£80bn over next 12months, in an effort to combat inflation. So we have fiscal loosening amid a longer term aim from the BoE to tighten.

As above, the surprise cuts cost, and the DMO has therefore had increase it's expected gilt issuance significantly. This huge increase in supply led to an increase in gilt yields, which move inversely vs price and hence inversely vs relative demand. But, that was only the start...

DB pension schemes facing substantial deficits post-GFC typically have portfolio divided into two parts:

one part seeks excess return in order to make good the deficit
the other part "hedges" the liabilities, which behave like typically long duration bonds (insomuch as they have interest and inflation sensitivities) - their long duration makes them susceptible to quite large changes in value (e.g. 20y duration with a 1% increase in rates at that duration would lead to a 20% fall) - it's therefore a good idea to minimise risk, but you need to minimise risk relative to your specific liabilities (i.e. jurisdiction, duration, realness, etc.)

But, if you're trying to hedge 100% of your liabilities (or even something less) with <100% of your assets (in practice this number is often in the 25-50% range), then you need to use leverage. Two (not exhaustive) ways of gaining exposure to interest rates and inflation using leverage are: 

To enter into swaps whereby I agree with you that I'll pay you x% each period and you'll pay me whatever a floating interest rate or inflation is. I haven't actually bought anything in doing so and therefore haven't actually used any money = leveraged exposure

Another option is that we use a "repo". I sell you my gilt on the understanding that I'll buy it back on a known future date at a specified future (higher) price. In other words, I am paying to borrow over the period whilst still exposed to the price move of the asset repo'd. With that borrowing I can go and buy another gilt. I've therefore effectively doubled my exposure to gilt price moves = leveraged exposure.

In practice, to ensure that these synthetic hedges don't pose excessive credit risk either way, you are usually required to maintain a pool of collateral (the gilt in the repo, or a pool of assets backing a swap portfolio).

With both these techniques, if rates rise/fall, then the value of my liabilities falls/rises. So too do my assets. If I had used these synthetic techniques to ensure my asset sensitivity = liability sensitivity then the move will be similar on both sides, so my deficit won't have changed.

So, what's the problem? As yields rise, the value of my gilts fall. So, when I close out the positions on a repo for example: I make a loss on the second gilt; I then can't repay the lender in the repo arrangement. You can see how this ends if I hadn't repo'd once, but more...

That means then that when yields rise people are forced to close out positions and you end up with a load of gilts sold. Those additional sales push the price down further (DB funds are massive players in the gilt markets - less so in other risk asset markets - so move prices materially). This forces those next up the chain to close out, pushing the price down further. Repeat. You end up in a spiral that collapses pretty spectacularly and pretty quickly.

The only way to avoid having to close out in such situations is to keep posting more collateral. But, that means selling those assets you're using to seek excess returns. Can you do that quickly enough, allowing for settlement times and the necessary transfer of cash over to your leveraged gilt portfolio? Normally yes when markets are moving gradually, but not in the last week and certainly not in a fully fledged spiral sell-off.

So far, it's not a pension fund solvency issue - just a liquidity one - they have the cash/liquid assets but can't put them to work in time. But, you really don't want to be the last one out in these spirals as you come out at the worst price without much ability to get back in for the ride back down (in yields/up in prices). You either want to be out from the start or in all the way and still in at the top. If you do end up closed out in the spiral, then you most likely will struggle to buy back in before yields fall. And that is where the long term damage is done: when yields fall back down, the value of your liabilities is going back up, but you no longer have the hedging assets to match that rise, so your scheme funding worsens.

In this week's episode, we eventually saw the BoE step in. Probably a day late and after much pressure, but understandable given to calm things they are committing to buying gilts to whatever extent is necessary - effectively QE, and the opposite of what they are trying to do medium term to curb inflation. But, their purchase has calmed things substantially, so that's good. It's just unfortunate that there will have been some casualties on the way - we'll find out over the coming days. There will be large variation: those that were "underhedged" a month ago will have won big time; those that were forced sellers immediately before the BoE statement will be big losers; others will be somewhere between.

Here's the 20y nominal gilt yield. You can very clearly see when the budget was and when the BoE stepped in around 11am this morning. Worth also flicking to "all" to see quite how sharp this is in historical context. 

Eoin Treacy's view -

When people talk about how central banks have distorted the fixed income markets this is a perfect example. Pensions need reliable returns to meet their obligations. That’s especially true of defined benefit programs which occupied 45% of the UK market in 2019. The alternative to goosing returns with leverage or moving further out the risk curve into private assets.

The price of refusing to take these risks would be to demand much higher contributions to cover the shortfall and nobody wants to do that. Faced with the possibility of angry retirees, at the prospect of not receiving their dues, or relying on the central bank to bail them out, the answer is always going to be the latter.  Quantitative easing introduced significant moral hazard and yesterday Bank of England action, while necessary, compounded it



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September 29 2022

Commentary by Eoin Treacy

Have we entered the final crisis of the Euro?

This article by Charles Gave (original in French) for the Institute of Liberties may be of interest to subscribers. Here is a section: 

Let's do a little rule of three.
Debt service is now at about three percent of GDP per year and the ECB can no longer manipulate Italy's rates downward, to keep Italy's head above water, since the US is raising its rates.
On today's growth figures (which will fall), and with interest rates rising over the next five years, debt servicing will rise to six percent of GDP, which means that the standard of living of every individual will fall by at least three percent, which is impossible.
And there is no solution as long as Italy remains in the Euro, and everyone in Italy knows this.              
And Italy can easily get out because it has a primary budget surplus and a trade surplus. It does not need the financial markets to make ends meet, unlike France.
In any case, make no mistake: the Italian elections are about one thing and one thing only: the euro. "Always think about it, never talk about it" seems to be the watchword in Italy.
And so, the more "right-wingers" are elected, the higher the probability that Italy will abandon the euro.

Eoin Treacy's view -

Yield curve control is the topic of the moment. The UK has just introduced it, so the logical question is which jurisdiction will deploy it next. In this regard, Japan’s refusal to abandon its program looks particularly inspired. Another way to frame this question is what will Germany do to ensure everyone continues to use the Euro? So far, the answer has been whatever is necessary.



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September 29 2022

Commentary by Eoin Treacy

CarMax's Huge Earnings Miss Sends Warning Signal on US Consumer

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

“CarMax has reminded Wall Street that parts of the economy are already in a recession,” said Ed Moya, senior market analyst at Oanda Corp. The “affordability challenges” highlighted by the company as the main reason for the big miss suggests it is “only going to get worse as Fed tightening starts to impact the economy,” Moya added.

And

“When you combine these results with the story from yesterday that demand for iPhones is weak, it raises the question about the consumer as we move toward the holiday selling season,” said Matt Maley, chief market strategist at Miller Tabak + Co. “If the consumer is weak, you can take a soft landing off the table.”     

And

“The story of CarMax’s second-quarter is clear: demand destruction,” said Morgan Stanley analyst Adam Jonas. “High used car prices and rising rates are causing a buyers’ strike.”

Eoin Treacy's view -

Let’s not forget it takes between six to nine months for tighter monetary policy to show up in the real economy. The Fed started raising rates in March and added 300 basis points to the base rate since then.



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September 28 2022

Commentary by Eoin Treacy

Video commentary for September 28th 2022

Eoin Treacy's view -

A link to today's video commentary. 

Some of the topics discussed include: Bank of England wades in to support Gilt market and is interpreted as a risk on move. gold, oil copper, stocks rebound, Dollar pulls back and yields contract. Medium-term it is a monetisation of the debt and is likely to exacerbate inflationary pressures. 



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September 28 2022

Commentary by Eoin Treacy

Email of the day on the Bank of England's support action

I just read the article below, and am surprised that pension funds take (or are allowed to take) leveraged positions. If the positions are for hedging, then should they not have the full cash to take delivery? Your views would be invaluable.

An interesting chart is attached. The extent of loss on a 40-year UKT issued last year!

It's been a long time since I first started listening to your amazing Daily Commentary. Now it is mandatory for me to hear your comments so that I can put whatever else I hear elsewhere into perspective.

Thank you for your valuable service, and I hope that your readers will have your guiding words for many decades to come. 

Eoin Treacy's view -

Thank you for this informative email and the chart of the 40-year Gilt. The fact I received this same chart from several sources today is an indication of how momentous it is for a developed country long-dated bond to trade at 20p on the pound. Last year was a great time to issue a 40-year bond so kudos to the Treasury department. The measures announced by the Bank of England to backstop the market were necessary but come at a significant cost.



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September 28 2022

Commentary by Eoin Treacy

Biogen, Eisai Surge as Alzheimer's Drug Shows Promise in Trial

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

“There is an important cautionary note however: the magnitude of the delay – which was a slowing of decline – was small,” he said. “We can only hope that the benefit is durable and could grow with time. Those long-term properties are unknowable at this time.”

The medicine was originally licensed from Sweden’s BioArctic AB, whose shares more than doubled on the news. 

The Alzheimer’s Association welcomed the results, saying they were the most encouraging findings to date from drugs aimed at treating the underlying causes of the disease. Lecanemab has the potential to change the course of the disease and help people in the earliest stages retain their abilities, remain independent and fully participate in daily life, the group said.

Pharmaceutical and biotechnology analysts were equally bullish. “We finally have what we believe to be a clean win in Alzheimer’s disease,” Evan David Seigerman, an analyst at BMO Capital Markets, wrote in a note to clients. “The top-line data are clear to us — lecanemab slows the rate of cognitive decline.”

The trial met every goal that was set, including other measures of mental function and the ability to perform daily activities, the companies said. 

 

Eoin Treacy's view -

The biotechnology/pharmaceuticals sector is endlessly productive. It is one of the few where there is genuine potential for new products to meet unmet needs. That means there is clear scope for value creation that can contribute to both better living standards and rising productivity. 



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September 28 2022

Commentary by Eoin Treacy

Fertilizer Maker Mosaic Says Some Florida Sites Evacuated

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

Fertilizer maker Mosaic Co. has evacuated some of its Florida operations as Hurricane Ian prepares to make landfall.

All of our Florida locations have been secured with some “fully evacuated,” Mosaic spokesman Bill Barksdale said Wednesday in an email. The state is home to Mosaic’s phosphate rock assets, where they mine product, and to facilities where they turn that rock into crop fertilizers.

Ian’s current trajectory has it passing near Tampa, through the bulk of Mosaic’s facilities. The facilities are expected to remain closed for at least a week due to the hurricane, a hit that could see third quarter revenue fall by $240 million to $300 million, Bloomberg Intelligence said Wednesday in a note. Ammonia imports from Yara International and CF Industries at Tampa may also slow. 

The storm is on a path similar to Hurricane Irma in 2017, when Mosaic lost about 400,000 metric tons of finished phosphate products, according to Bloomberg Intelligence.

Eoin Treacy's view -

One of Mosaic’s primary phosphate mines is between Tampa and Orlando. There is clear  flooding risk in the region. The defining characteristic of recent hurricanes has been slow movement and elevated rainfall totals. The supply chain for fertilisers is already under stress so this hurricane is unlikely to be good news.



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September 27 2022

Commentary by Eoin Treacy

September 27 2022

Commentary by Eoin Treacy

House Sales Collapse as UK Lenders Withdraw Mortgage Offers

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

Deals for house purchases are collapsing after lenders pulled mortgage offers in response to soaring interest rates.

Smaller lenders such as Kensington, Accord Mortgages and Hodge were among those to say they were withdrawing products Tuesday. That follows the decision by Lloyds Banking Group Plc -- the UK’s biggest mortgage provider -- on Monday to halt some offers, while Virgin Money UK Plc temporarily stopped offering home loans to new customers.

Major firms weighed in later Tuesday. HSBC Holdings Plc told brokers it was removing new mortgage products for the rest of the day while Nationwide Building Society announced that it was increasing rates across product ranges starting Wednesday. Banco Santander SA said it was removing some products and increasing rates on many others.

Jessica Anderson, a 33-year-old who works in publishing, was set to buy a house in Walthamstow, east London, with her husband until the seller pulled out last week.

“We’re in an uncertain position where we’re not sure whether it still stands,” she said, regarding the couple’s mortgage offer. “Since the approval there have been two interest rate increases.”

Eoin Treacy's view -

The UK housing market is at a significant point of peril because of interest rate uncertainty. Fixed rate loans typically trade at a 100-basis point premium over the 5-year government yield. At present that implies a mortgage rate of 5.7%.



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September 27 2022

Commentary by Eoin Treacy

Putin Raises Gas Pressure as He Moves to Annex Ukraine Regions

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

Russia threatened to cut off the last gas pipeline to Ukraine’s European allies and moved to annex a large chunk of Ukrainian territory amid a string of military setbacks in the seven-month-long war.

Eoin Treacy's view -

Battlefield setbacks for Russia increase potential for them to cut off supplies of gas to all of Eastern Europe. That’s much more likely that the nuclear option.



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September 27 2022

Commentary by Eoin Treacy

Bitcoin Turns Lower as US Stock Selloff Extends Into Sixth Day

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

Cryptocurrencies failed to hold onto gains Tuesday as US stocks also faltered and extended losses for a sixth straight session.

Bitcoin, the world’s largest digital asset by market value, fell as much as 1.2% to trade around $18,878, failing to sustain an earlier advance. Ether, the second-largest cryptocurrency, also dropped. Most major digital assets were posting declines as of 1:45 p.m. in New York. 

The downturn occurred as US stocks turned lower, with the S&P 500 on pace for a sixth session of losses. Global financial markets have been gripped by volatility as central banks continue to promise that they’re going to keep raising interest rates to fight inflation that’s proven stickier than many had thought. 

“BTC did seem to pick up the risk selloff once again today. Followers of the ecosystem have been excited to see correlations with risk-assets begin to break, meaning the ‘fast-money’ speculative crowd may be losing their influence on the space,” said Stephane Ouellette, chief executive of FRNT Financial Inc. “With today’s move, it doesn’t seem like we’re quite there yet -- but consolidation at these levels continues to move in a bullish direction where loose hands sell BTC to the near cult-like ‘hodler’ community.”

Eoin Treacy's view -

At one point this morning bitcoin was up over $1000. That was clear evidence of the buy the dip instinct is still alive and well. Unfortunately for the bulls the early enthusiasm was not sustained through the close and bitcoin finished in negative territory.



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September 26 2022

Commentary by Eoin Treacy

Video commentary for September 26th 2022

Eoin Treacy's view -

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

Some of the topics discussed include: Pound rebounds from intraday low but Gilt yields close at their highs, pressure mounting on the Bank of England to act. gold weaker as the Dollar strengthens, Renminbi tests its lows, Treasury yields breaking out. stocks susceptible to further weakness as corporate profits and leveraged loans come under pressure. 



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September 26 2022

Commentary by Eoin Treacy

Email of the day on batteries and the challenge of commodity supply

Congrats on your opinion on a larger correction and acting on it with put purchases.

Last week Double Line presentation  had a chart that showed the performance of equity and the different credit subclasses, Ags., EM, HY, ClOs and so forth. Showed  the large move by equities compare to credit over the same time period. It made me wonder how much further the equity correction can go.

You often follow interesting companies, you mention EQNR from Norway. have you ever looked a Freyr. It is also Norwegian and is involved in batteries. During  the last days because of a report on its possible growth it had a huge move , but during this correction it may be a good opportunity, let me have your thoughts. Based on your comments  how much the market has already priced in the EVs maybe it is not a good idea.

The move on copper is not a good signal  

Trust all is well for you  and your family

Eoin Treacy's view -

Thank you for these well wishes and questions which may be of interest to the Collective. Of my nine different long-dated put positions, the only one not in profit is Tesla and yet that is the one I have the greatest hopes for. They all have maturities in 2024, but I expect the point of maximum pessimism will arrive while they still have some time value.



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September 26 2022

Commentary by Eoin Treacy

Email of the day on Apple's ability to outperform

Many thanks for the latest weekly video, which sets out the bearish case for investment at the moment. In today's FT there is an article about Apple's latest iPhone. The author claims that sales projections for the latest Pro version of the iPhone suggest that the company will earn record -breaking revenues from its sales , which account for 50% of its business. In addition, it suggests that there might be a future monthly package that combines the iPhone, Apple Music and iCloud. Could Apple stand out against the overall bear market?

Eoin Treacy's view -

Thank you for this topical question which may also be of interest to other subscribers. Just ask yourself how often you change your phone? For me at least, it is when the battery starts losing charging capacity. That’s usually every 3 years.

The new iPhone 14 costs $999 and the Pro version costs $1099. If amortised over 2 years, it works out at around $45 a month which can be lowered further if you have an old phone to trade in. So, for many people it will be a question of whether the new phone has sufficiently enhanced features to justify the added monthly expense.



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September 26 2022

Commentary by Eoin Treacy

Keep Calm and Carry On?

This article from Allegra Stratton at Bloomberg may be of interest. Here is a section:

Traders, analysts and politicians looking for a soothing balm had been surprised on Sunday to hear Kwarteng’s commitment “more is to come.” Sterling dropped further and then, while the UK was sleeping, its currency tumbled in Asian markets — to £1.03 to the dollar, something former Treasury officials I know didn't think they’d ever see.

And so, even though the pound pared its losses slightly, the Bank of England came under huge pressure to do something. Anything.

A likely whopping 100 basis-point hike in November was already priced in. By Monday this climbed to 200 basis-points — four times the size of its last hike — and a call for an extraordinary extra session hastily arranged for this week. By lunchtime, there was a rumour of a BOE statement within hours, possibly including a extra bonus rate hike.

In the end this didn’t materialise and all we got was the emollient tweet featured at the top of this email. Most agree the Bank will raise rates again — hammering household mortgage repayments in a period already billed as the worst winter in living memory (something former minister Jim O’Neill weighed in on today, calling the Budget “naive.”)

Eoin Treacy's view -

The Pound is accelerating lower so it is reasonable to question when it will find a sustainable low. The tail on today’s candle suggests a low of at least near-term significance so we may get some steadier action. However, the question of how the downtrend will eventually end is unanswered.



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September 23 2022

Commentary by Eoin Treacy

September 23 2022

Commentary by Eoin Treacy

UK's Biggest Tax Cuts Since 1972 Trigger Crash in Pound, Bonds

This article from Bloomberg may be of interest to subscriber's. 

Liz Truss’s new British government delivered the most sweeping tax cuts since 1972, slashing levies on rich households and companies in a bid to boost economic growth in a move that triggered a massive market selloff in UK assets.

Chancellor of the Exchequer Kwasi Kwarteng announced a series of tax cuts and regulatory reforms that will cost £161 billion over the next five years. That fanned concerns about inflation, already near a 40-year high, and about a spiraling government debt burden. 

The pound crashed below $1.11 for the first time since 1985, sliding 2% in addition to declines earlier in the week. Borrowing costs on five-year government bonds jumped the most for a single day on record as traders dumped UK assets.

“It is extremely unusual for a developed market currency to weaken at the same time as yields are rising sharply,” said George Saravelos, global head of foreign exchange research at Deutsche Bank AG. He warned the UK currency is “in danger” and suggested markets were treating it like a developing economy. 

The package was more ambitious than expected, with a big giveaway for the UK’s wealthiest households and plans to tear up planning rules and reform financial regulations. 

Kwarteng scrapped the 45% additional rate of income tax, paid by only the richest earners, leaving the top rate at 40%, and cut the basic rate from 20% to 19%. He paid only lip service to concerns about rising public debt, reiterating a pledge to “reduce debt as a percentage of GDP over the medium term.”

The Conservative administration hopes its program of lower taxes and deregulation will turbo-charge the economy, staving off a recession that the Bank of England says has already begun and shaking the UK out of a decade of weak growth.

 

Eoin Treacy's view -

In case it needs to be said, these are not Conservative policies. Cutting taxes and embarking on an historic fiscal stimulus while inflation is raging is not sound policy. It is only going to make the job of the Bank of England even more difficult and taxes will inevitably have to rise in future to fund these measures.



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September 23 2022

Commentary by Eoin Treacy

Brookfield plans 12-16 gigawatts of India renewables over next decade

This article from the Economic Times may be of interest to subscribers. Here is a section:

Brookfield is looking to multiply its current 4 GW renewable portfolio by 3 to four times in India within the next decade in generation as well as help corporates make the transition to decarbonise and invest in building large scale supply chain in the country, said a top executive.

The renewables current assets under management is approximately $1 billion.

Earlier this year, Brookfield Asset Management announced that it raised a record $15 billion for its inaugural Global Transition Fund. This marks the world's largest private fund dedicated to the net zero transition, signaling that investors are still committed to establishing cleaner portfolios. Brookfield is the single largest sponsor of the fund having deployed $2 billion itself.

Brookfield deals with state utilities but sees incremental green power demand coming from corporates who are increasingly becoming bulk consumers. For example, as part of its road map to achieve 100 per cent dependence on renewable energy by 2025. Amazon on Wednesday announced its first utility-scale projects in India — three solar farms located in Rajasthan. These include a 210-megawatt (Mw) project to be developed by India-based developer ReNew Power, a 100 Mw project to be developed by local  developer Amp Energy India, and a 110 Mw project to be developed by Brookfield Renewable Partners.

Eoin Treacy's view -

Brookfield is the name that comes up in almost every conversation I have with investors. The name is treated reverentially because the team so artfully plotted a route through the Global Financial Crisis and the subsequent boom.



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September 23 2022

Commentary by Eoin Treacy

Email of the day on attending The Chart Seminar:

Thanks to what we discussed at the seminar in June, I am feeling comfortable after having applied our conclusions to our investments. I see that you are organising another seminar in London in November. While appreciating the fact that "events are moving rapidly", do you think that it is really necessary for members like me to come to London again?

Eoin Treacy's view -

Thank you for this question and I want to thank you for being among the subscribers who have attended the seminar on multiple occasions already.

The first seminar I led, was in Dublin for a group of volunteers in 2008. That was right before a major crash. Banks were rolling over, miners had just begun to fade and the tone was complacent and only mildly cautious.

The second, for paying delegates, was in November 2008 and was immediately after the crash. That seminar offered a great opportunity to talk about what bottoming would look like, how to identify the candidates for a new bull market.

If I had guess, this year might be a repeat of that experience. The risk of a crash is rising.



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September 22 2022

Commentary by Eoin Treacy

Video commentary for September 22nd 2022

September 22 2022

Commentary by Eoin Treacy

Japan Intervenes to Support Yen for the First Time Since 1998

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

“The government is concerned about excessive moves in the foreign exchange markets, and we took decisive action just now,” Kanda said late afternoon. “We’re seeing speculative moves behind the current sudden and one-sided moves in the foreign exchange market.”

The intervention, ordered up by the Ministry of Finance, comes with risks if it fails to scare off speculators. Hedge funds have been adding to bearish bets on the currency, with Goldman Sachs Group Inc. warning it may decline all the way to 155.

“At best, their action can help to slow the pace of yen depreciation,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. “The move alone is not likely to alter the underlying trend unless the dollar, US Treasury yields turn lower or the BOJ tweaks its monetary policy.”

BOJ Governor Haruhiko Kuroda insisted at a briefing in the Tokyo afternoon there were no rate hikes in the works and guidance on future policy would not be change for the time being, even for as long as two or three years in principle. Still, his influence over policy will fade next April when he steps down.

“Today’s outcome strengthens my view that the chance of policy change is almost zero under Kuroda’s governorship,” said Masamichi Adachi, chief Japan economist at UBS Securities.

Kuroda’s stance sets him apart from other central banks that had also previously had negative rates, with the European Central Bank and the Swiss National Bank all hiking to deal with surging inflation.

Eoin Treacy's view -

The Yen has been selling off aggressively over the last year and inflationary pressures are rising in the economy as a result. However, inflation in Japan is nowhere near the rates being posted in North America and Europe.



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September 22 2022

Commentary by Eoin Treacy

Unless Rents Rise, Housing Is Set Up for an Epic Crash

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

But then the yellow dots happened. Home valuations increased as rates increased, just as in the housing bubble. Perhaps that is turning around now, as housing prices are beginning to decline (typically before we see large price declines we see softening markets — fewer buyers and sellers, longer delays between listing and sales — as have been happening in the last few months) and the Fed is raising rates. But looking at the data so far, it looks like a bubble.

Maybe you shouldn’t pay much attention to what I think now, since I was exactly wrong two years ago. But I’m still not panicking about a housing crash. I expect valuations to revert to long-term mean because rents will continue to increase rapidly, meaning no dramatic drop in home prices is necessary. I base that on expectations for more legal immigration and legalization of existing undocumented immigrants and lifestyle changes — mainly more working from home — triggered by the pandemic, but not reverting to past practices. 

Eoin Treacy's view -

The big difference between the housing bubble in 2005 and 2021 is consumer leverage. In the mid-2000s lending standards disappeared. People were buying houses with little more than a signature and never intended to pay the mortgage. Today, 20% down payments are still the norm in the USA. That is beginning to change with Bank of America floating zero down options but it is not commonplace.



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September 22 2022

Commentary by Eoin Treacy

Email of the day on elevated valuations:

on today's video you highlighted the virtues of the NOBL Dividend Aristocrat index, but on closer inspection the yield on this is just 2%. A year ago, that was 4x the yield on short term treasuries in the US, but with 1 and 2- year treasuries yielding 4% now, double that of NOBL, there seems to be far less support from those seeking out yield.
The TINA approach is fast coming to an end. With that in mind, and with the Sterling continuing to take strain, what investment vehicles are available to us in the UK to invest in 3M, 1Y an 2Y US Treasury paper?

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. There is of course a big difference between capturing a high yield now and buying with the expectation of dividend increases in future. It is essentially the difference between current yield and yield to cost.



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