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October 31 2017

Commentary by Eoin Treacy

Facebook, Twitter, Google to Tell Congress How Russia Meddled

This article by Steven T. Dennis, Sarah Frier and Gerrit De Vynck for Bloomberg may be of interest to subscribers. Here is a section:

Lawmakers are focused on whether there was any overlap between the Trump campaign and the massive Russian effort to flood Americans’ social media feeds with fake news and fake ads.

Facebook plans to tell lawmakers that 80,000 posts came from 470 fake Russian accounts and that it closed 5.8 million fake accounts from all sources in October 2016 alone. Fake Russian accounts on Facebook’s Instagram posted an additional 120,000 pieces of content, the company will tell lawmakers.

At the same hearing, Twitter Inc. will say it has suspended 2,752 Russian-linked accounts, far more than it previously disclosed, according to testimony obtained by Bloomberg News. Alphabet Inc.’s Google plans to say the impact on its sites was much smaller, with $4,700 worth of Russian-linked ads, compared to the $100,000 Facebook disclosed.

 

Eoin Treacy's view -

There is no doubt that foreign interference in the electoral process of another country is almost universally going to be greeted with hostility and not least when it is so openly pursued. Russia was probably betting that it could pursue its geopolitical goals with less interference from a Trump administration than a Clinton one but that was a risky strategy when it must have known what the political blowback would be when it actions were discovered. 



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October 30 2017

Commentary by Eoin Treacy

October 30 2017

Commentary by Eoin Treacy

Japan is the 'most under-owned stock market on the planet,' and David Rosenberg says buy it

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

"The one part of the world which looks very good to me right now, a great turnaround story that's under-owned, is Japan. The Nikkei is breaking out," said Rosenberg said Friday on CNBC's "Trading Nation."

He added: "I think even a child could see that the 30-year secular downtrend has been broken over the course of the past couple of months."

The Nikkei 225, Japan's benchmark stock index, has soared nearly ten percent over the past three months. It's now up 15-percent so far this year. But it's still about 56 percent way from its all-time high hit in 1990.

According to Rosenberg, Japan has one of the few markets that isn't trading expensively to its historical price earnings ratio — noting "almost everybody else in the world is." 
 

Eoin Treacy's view -

Japan has been a disappointment for so long that when it breaks out to new highs it is tempting to think that this will be just another failed upside break. However there is an important point that should not be ignored when making that decision. It is one of the few countries in the world running simultaneously easy monetary and fiscal policy. Considering the magnitude of the Bank of Japan’s debt it needs to generate inflation if it is to ever have any hope of paying them back. That is also why it is buying stocks, as part ownerships in companies they represent income streams outside the taxation power of the government. 



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October 30 2017

Commentary by Eoin Treacy

Video Game Software Industry Primer; Surpassing $100bn in 2017

Thanks to a subscriber for this report from Bank of America/Merrill Lynch. Here is a section:

Sony maintaining lead over Microsoft, Nintendo rebounding Sony has enjoyed a strong lead over Microsoft with 50mn estimated PS4 units sold vs. 23mn sold for the xBox as of 2016. We expect Sony to maintain this lead, but will likely lose some market share to Nintendo given the success of the Switch. We forecast total hardware unit sales in this cycle to reach approximately 46mn for the xBox, 112mn for the PS4 and 55mn for the Switch by 2020. With the Sony PS4 Pro driving a modest increase in retail sales, and the xBox One to come, we expect the high-definition console base (which is key to US publishers) to remain relatively stable over the next four years. We assume a higher obsolesce rate as consumers upgrade their existing consoles, but the overall active PS4/xBoxOne console base to remain steady at around 100-105mn units.

We think that the Switch will have appeal with casual players who do not currently game on PS4 and xBox One and are fans of Nintendo franchises (Mario, Zelda, etc). Based on these assumptions, we are forecasting the total console base to grow to 155mn by 2020, with Gen 9 base flattening and the Gen 10 (Switch) casual user base driving growth.

Looking out to our 2020 forecasts, we expect Nintendo to drive over 39% of hardware unit shipments in ’17-‘20. We believe Sony could come out with a new or upgraded console by 2019 or 2020 to compete with the xBox One X if the One X gets traction.
 

Eoin Treacy's view -

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

I spent much of Saturday at Stan Lee’s ComicCon in Los Angeles where my daughters were in 7th heaven meeting up with Youtube artists they watch, meeting up with cosplayers and have their photo taken with them. My eldest was delighted to have one of her questions answered by the actor who did the voiceover for one of the characters in her favourite game, Overwatch. 



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October 30 2017

Commentary by Eoin Treacy

LME Considers New Nickel Contract to Tap Boom in Electric Cars

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

The LME is considering starting a nickel sulphate contract as part of a trio of new products that take advantage of growing demand for battery metals, according to Chief Executive Officer Matthew Chamberlain. The launch is 18 months away at best, he said in an interview Friday, ahead of the metal industry’s annual gathering in London.

“Electric vehicles are clearly the growth story for our industry,” Chamberlain said. The bourse will meet with stakeholders in the electric vehicle market during LME Week to firm up plans for new nickel, cobalt and lithium chemical contracts, he said.

Eoin Treacy's view -

I posted a report from Vale on October where they made clear how they see the growth in the nickel market is likely coming from batteries and additionally how much additional investment is going to be required to develop the resources necessary to deliver the quality of nickel required to supply the market. That suggests nickel is evolving into a supply inelasticity meets rising demand market; provided of course the futures markets evolves along with it. 



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October 27 2017

Commentary by Eoin Treacy

October 27 2017

Commentary by Eoin Treacy

Amazon Threat Causes Shakeout in the Health-Care Industry

This article by Robert Langreth, Jared S Hopkins, and Spencer Soper for Bloomberg may be of interest to subscribers. Here is a section:

Analysts have speculated that Amazon could soon enter the business of selling prescription drugs, threatening to disrupt retail drugstores, drug wholesalers, and the pharmacy-benefits management business. While Amazon has never publicly commented on what its plans may be, CNBC reported this month that the Internet giant could make a decision about selling drugs online by Thanksgiving. The network didn’t name its sources.

McKesson slid 5.2 percent at 4 p.m. in New York, while AmerisourceBergen shares fell 4.2 percent and Express Scripts sank 3.7 percent following the report on Amazon’s state licenses by the St. Louis Post-Dispatch.

Bloomberg News confirmed that Amazon had obtained wholesale-pharmacy licenses in at least 13 states, including Nevada, Idaho, Arizona, North Dakota, Oregon, Alabama, Louisiana, New Jersey, Michigan, Connecticut, New Hampshire, Utah and Iowa. An application is pending in Maine. Some of the licenses were obtained late last year and some this year.

 

Eoin Treacy's view -

Amazon doesn’t make money from shipping products in the USA and makes a loss on doing the same elsewhere which helps to explain why it can continue to grow market share at the expense of conventional companies. It depends on its webservices business to provide profits even though the online retail business accounts for the vast majority of turnover. However, it is the fact that Amazon has leeched earnings from other sectors to feed its revenue growth which is what investors are betting on which has contributed to the consistency of the advance since 2015. 



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October 27 2017

Commentary by Eoin Treacy

Asia Local Markets Weekly - Slippery slope

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

Away from the debate on whether the recapitalization bonds will – and should – be treated as an ‘above the line’ item in the Budget or not, and hence the optics on the Budget Deficit;

the issuance of such a large quantum over a period of 12 months will pressurize an already weak technical position for the bond markets by detracting from the public sector bank appetite for general government issuance (center and state). The specifics of the recap bonds (whether eligible for SLR, whether marketable etc.) will determine the extent of substitutability between recap bonds and other government paper. Note also the backdrop of recent lowering by RBI of both the mandatory SLR for banks, and the limit on SLR securities held under the HTM category, which should reduce the overall appetite from banks for SLR paper – and in particular for duration. There are two mitigating factors to consider though – a) that the banking system remains flush with liquidity (as obvious in the money parked with RBI) created by the demonetization exercise from late last year, and b) possible reduction in RBI OMO sales given that this recap bond issuance will, at least temporarily, take some surplus liquidity out of circulation. The net sum though, we expect, to still be negative for the demand technicals of the markets. Comes as this does together with increasing likelihood of slippage in deficit for the current FY (unless the government manages to get additional dividends from PSUs) – and likely putting at risk the FRBM Committee recommendation for 3% target for next FY – the technical picture overall points to risk of higher rates and steeper curves still in India. We stay underweight in our exposure to duration.

 

Eoin Treacy's view -

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

Indian 10-yr government bond yields contracted from 9.5% in 2013 when the Rupee was among the weakest currencies in the world to lows of 6.2% in late 2016. The yield has broken its downtrend over the last year and a sustained move below 6.5% would be required to question support building. 



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October 27 2017

Commentary by Eoin Treacy

Brent Oil Tops $60 for First Time Since 2015 Amid OPEC Optimism

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

Both the global benchmark and its U.S. counterpart have rallied in October amid increasing belief that the Organization of Petroleum Exporting Countries will agree to cut output later into next year, helping to work down global inventories. Statoil ASA’s Chief Executive Officer Eldar Saetre said in a Bloomberg Television interview that he continues to see strong demand and the oil market is “definitely balancing.”

“People are starting to price in the OECD inventories moving back towards normalized levels into later 2018,” Brad Hunnewell, senior equity analyst at Rockefeller & Co., said by telephone.

U.S. Army Colonel Ryan Dillon, a spokesman for Operation Inherent Resolve, the U.S.-led coalition against the Islamic State said in a Twitter message Friday that he “incorrectly” said in an interview with Kurdish Rudaw news agency that there was a cease-fire between Iraqi and Kurdish forces. A rally in WTI immediately followed his message. Iraqi Prime Minister Haider Al-Abadi suspended operations by federal forces for 24 hours in disputed areas to allow a joint Iraqi and Kurdish team to deploy forces, Sumaria TV reported.

 

Eoin Treacy's view -

Synchronised global economic expansion is generally positive for commodity prices. With OPEC at least limiting supply that is helping to support prices. Saudi Arabia also has a vested interest in getting prices as high as possible over the next year as it burnishes the appeal of the Saudi Aramco IPO. 



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October 27 2017

Commentary by Eoin Treacy

Email of the day on the legacy of The Chart Seminar

Dear David - see attachment!

You are mentioned in this week's Investor's Chronicle.

 

Eoin Treacy's view -

Thousands of people have participated in The Chart Seminar over its 48 years and while markets change, the investment crowd shares the same aptitude for extreme emotions as they ever have. I look forward to welcoming delegates at our next venue for the seminar in London on November 16th and 17th. 



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October 26 2017

Commentary by Eoin Treacy

Video commentary for October 26th 2017

Eoin Treacy's view -

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

Some of the items discussed include: ECB announces tapering, Euro and Pound fall but European stock markets breakout, India extends breakout, China steady, Australia testing its range highs, gold weak, oil testing the $60 area. US Treasury yields extend break above 2.4%. 



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October 26 2017

Commentary by Eoin Treacy

Draghi Calls for Caution as Flagship Stimulus Heads to Exit

This article by Carolynn Look and Alessandro Speciale for Bloomberg may be of interest to subscribers. Here is a section:

Mario Draghi warned that the European Central Bank will remain cautious even as he put his signature stimulus measure on the road toward an exit.

Starting in January, the ECB will take a step toward ending one of its more controversial tools by cutting monthly purchases of public and private debt to 30 billion euros ($35 billion), or half the current pace. The shift in stance comes six years into Draghi’s presidency, a new phase after his unprecedented actions to prevent the breakup of the euro area and stave off deflation.

The decision “reflects growing confidence in the gradual convergence of inflation rates towards our inflation aim on account of the increasingly robust and broad-based economic expansion,” he said in a press conference after Thursday’s Governing Council meeting. “At the same time, domestic price pressures are still muted overall, and the economic outlook and path of inflation are conditional on support from monetary policy.”

While Draghi toned down his language, saying the euro area still needs “ample” stimulus instead of the “substantial” used in previous statements, he emphasized the need to tread carefully as long as consumer prices remain weak. QE will be extended again if needed, even if only to draw it to a gentle halt, and will take total holdings to at least 2.55 trillion euros.

 

Eoin Treacy's view -

The ECB has added 2.3 trillion to its balance sheet in less than three years. That’s a substantial sum and in tandem with the Bank of Japan, has been responsible for the continued flow of liquidity into global financial markets. 



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October 26 2017

Commentary by Eoin Treacy

Finally the Indian TARP

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

We expect the stocks to trade above their historical averages on P/BV given cleaned-up balance sheets and lack of foreign ownership. Hence, we assign core F19e multiples of 1.1x for SBI and BOB and 1x for PNB . This compares to the three-phase residual income model approach we previously used to value corporate banks. The table below summarizes our key assumptions for these banks: cost of equity (no change), sustainable RoE (no prior assumptions because we used RI models),and long-term growth (no prior assumptions because we used RI models). We leave the valuations of non-bank entities and cost of equity unchanged. This drives the price target and scenario value changes at these banks. We double upgrade SBI and PNB to OW. We upgrade BoB to EW. 

Both ICICI Bank and Axis have been affected by continued NPLformation and inability to get ahead of the problems. These banks are not the direct beneficiaries of the government's move. However, they should benefit in two ways: 

1. With SOE banks properly capitalised, they can finally see proper clearing of NPLs in the system.

2. This makes it easier for the RBI to implement IND-AS in F19 as SOE banks will not be constrained by capital from taking the necessary hits. The implementation will allow private lenders to recognise losses in the transition period, raise capital (if needed),and potentially move to normalised provisioning from F19 itself.

 

Eoin Treacy's view -

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

India has hundreds of millions of young people entering the workforce over the next decade and has one of the lowest average aged populations in the world. In order to deliver a path to a better standard of living, which can ensure social cohesion, it is going to need credit growth. 



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October 26 2017

Commentary by Eoin Treacy

FAAMG: A Bubble In The Making?

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

FAAMG: The music continues to play We continue to be bullish on the global Information Technology (IT) sector, mainly due to our positive view on the semiconductor and software sub-segments. Global IT is benefiting from a macro environment, which is characterised by accelerating growth and rising rates that support IT companies due to their low financial leverage and high operating leverage. Global IT stocks are trading at a forward P/E of around 18x, broadly in line with the sector’s long-term historical valuation multiple average. As a result, we believe that the good growth perspectives of the sector are not yet fully reflected at current levels.

However, within the IT segment, we would like to take a closer look at the FAAMG group (Facebook, Amazon, Apple, Microsoft, Google). Those five stocks have been the main performance drivers of the underlying IT and consumer indices and now represent around 13% of the S&P 500, roughly the same weighting as the US energy sector.
 
A recession would be needed to trigger a bubble burst. 
While we agree that the share price performance of the FAAMG group may look like a bubble in the making, we would stress the fact that bubbles only tend to burst when the underlying market moves into a recession. According to our economists, global growth should accelerate towards the end of the year and stabilise at current levels in 2018. Leading indicators in all major regions around the globe support this forecast and thus a recession looks highly unlikely in the foreseeable future.

 

Eoin Treacy's view -

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

The US technology sector continues to represent some of the clearest beneficiaries of the evolution of the digital economy where data is a valuable asset. While companies like Microsoft and Facebook look quite different on the surface they both see their growth deriving from gathering, parsing, interpreting and selling data. The evolution of the home speaker/digital assistant market being simultaneously pushed by Apple, Amazon and Google are all symptomatic of their desire to secure consumer cashflows by being the conduit for data. 



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October 26 2017

Commentary by Eoin Treacy

New CRISPR tools enable extraordinarily precise gene editing in human cells

This article by Rich Hardy for Newatlas.com may be of interest to subscribers. Here is a section:

In the team's early experiments with base editing a specific mutation associated with the disease hemochromatosis was successfully fixed. No unwanted off-target effects were identified and the base editor enzyme operated with greater than 50 percent efficiency.

"We are hard at work trying to translate base editing technology into human therapeutics," Liu says.

The second new CRISPR innovation revealed recently comes from a collaborative team of Broad Institute and MIT scientists. For the first time the team discovered a way to accurately edit RNA base pairs in human cells.

Dubbed "REPAIR" this system also focuses on base editing but this time is targeted at RNA. Unlike permanent changes to DNA, RNA is much more ephemeral and even reversible. The ability to edit RNA in human cells opens up an entirely new world of disease treatments targeting conditions including diabetes and IBD.

"REPAIR can fix mutations without tampering with the genome, and because RNA naturally degrades, it's a potentially reversible fix," explains co-first author David Cox.

 

Eoin Treacy's view -

CRISPR represents a paradigm shift for the genetics industry because it reduces the cost and time required to experiment with how to edit DNA. When I visited the MIT genetics labs a year ago it was clear that what was next to near impossible five years ago is now something doctoral students can achieve with ease on a daily basis.  

 



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October 25 2017

Commentary by Eoin Treacy

October 25 2017

Commentary by Eoin Treacy

Markets, Moody's Applaud $32 Billion Bazooka for India Banks

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

India’s government has won a resounding reception from investors and credit-rating firms for its unprecedented pledge of 2.11 trillion rupees ($32 billion) in capital for the country’s beleaguered state banks.

The move, which drove an index of government-run banks up as much as 26 percent, is part of Prime Minister Narendra Modi’s goal to help lenders meet tighter capital-reserve requirements, as slower economic growth and falling demand erode borrowers’ ability to repay loans. Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur Asia’s third-largest economy.

“The proposed infusion is a sizable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks,” said Jobin Jacob, a Mumbai-based associate director at Fitch Ratings Ltd. This addresses “weak core capitalization, one of the key drivers for our negative outlook on the South Asian nation’s banking sector.”

Moody’s Investors Service analyst Srikanth Vadlamani said the move is a “significant credit positive” for India’s state- run banks. The amount of capital pledged is enough to address the lenders’ solvency challenges and recapitalize them adequately, Vadlamani, who is vice president of the financial institutions group at the unit of Moody’s Corp., said by phone.

 

Eoin Treacy's view -

Non-performing loans have been one of the biggest concerns of international investors in India over the last few years. Despite the obvious benefits of digitisation of the economy, the upgrading of mobile networks from 2G to 4G and the slow and steady pace of reform, the parlous condition of the banking sector was the one reason I heard more than any other that deterred investors from participating in the Indian market.  



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October 25 2017

Commentary by Eoin Treacy

Xi Jinping Unveils China's New Leaders but No Clear Successor

This article by Chris Buckley for the New York Times may be of interest to subscribers. Here is a section:

The five new Standing Committee members are party leaders with long careers in Chinese politics, including one of Mr. Xi’s longtime allies and a scholar of international relations. But the party declined to name a younger leader to the committee who might succeed Mr. Xi when his second term as president ends in 2023.

That was a departure from China’s carefully scripted transfers of power in recent decades and a possible signal that Mr. Xi intends to govern beyond this next five-year term. Mr. Xi may also want more time to test possible successors, while avoiding lame duck status with an heir waiting in the wings.

But by discarding the unspoken conventions that have ensured relatively stable leadership changes in recent years, Mr. Xi has pushed Chinese politics into new territory that critics have warned could lead to turmoil, or a cult of personality with echoes of Mao.

“If Xi goes for broke and breaks precedent by not preparing for an orderly and peaceful succession, he is putting a target on his back and risking a backlash from other ambitious politicians,” Susan L. Shirk, the chairwoman of the 21st Century China Center at the University of California, San Diego.

“By taking such a risk, he shows himself to be more like Mao than we originally thought — he demonstrates his power by overturning institutions,” said Professor Shirk, a former State Department deputy assistant secretary for China policy.

 

Eoin Treacy's view -

Xi Jinping is 64 years old which means he will be older than the “unofficial” retirement age of 68 when the next Party Congress is next held in 2022. He has not anointed a successor so there is going to be a hiatus in promotions for ambitious party cadres over the next five years. Meanwhile the trajectory of his rule points towards his desire to extend his tenure beyond two consecutive terms.



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October 25 2017

Commentary by Eoin Treacy

Robotics in the running for Nike's factories of the future

Thanks to a subscriber for this article by Jennifer Bissell-Link which may be of interest. Here is a section:

Since 2015, Nike has been working with Flex, the high-tech manufacturing company better known for producing Fitbit activity trackers and Lenovo servers, to introduce greater automation into the otherwise labour-intensive process of making a shoe.

Flex’s facility in Mexico has become one of Nike’s most important factories, responsible not just for a growing slice of the company’s production but also for a string of innovations to be rolled out across Nike’s supplier base, such as laser-cutting and automated gluing.

For Nike, the shift to greater automation has two huge attractions. By driving down costs, it could lead to a dramatic improvement in profit margins. It would also allow the company to deliver new designs more quickly to fickle, fashion-conscious customers at a premium. A pair of Nike Roshe shoes costs $75 without Flyknit uppers, compared to as much as $130 with Flyknit. 

Eoin Treacy's view -

Nike has been talking for at least five years about its plans to introduce greater automation into the process of making shoes. The fact it has taken this long to get a factory up and running attests to the complexity of achieving its objective but also to the inevitability of the process. 



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October 25 2017

Commentary by Eoin Treacy

October 25 2017

Commentary by Eoin Treacy

Bitcoin splits again, creating a new cryptocurrency called bitcoin gold that then plunged 66%

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

There are differences of opinions within the bitcoin industry as to whether a fork is good or bad.

"These forks are very bad for bitcoin. Saturating the market with different versions of bitcoin is confusing to users, and discredits the claim that there are a limited number of bitcoins — since you can always fork it and double the supply," Sol Lederer, blockchain director at Loomia, said in an emailed statement Tuesday.

But some have said forks are a good part of any cryptocurrency ecosystem.

"If a crypto-community has irreconcilable differences, then you can go your separate ways and that is just fine," Bob Summerwill, chief blockchain developer at Sweetbridge, a company creating blockchain solutions, said in a statement Tuesday.

Still, there is bullishness around bitcoin. A survey carried out by CNBC last week asking where the bitcoin price was headed found that 49 percent of the 23,118 people who voted answered "above $10,000."

 

Eoin Treacy's view -

There is a certain Darwinism to the evolution of Bitcoin where mutations split off and are weighed individually by the market. The two hard forks since July resulted from intractable disagreement about the nature of what the evolving market for Bitcoin should be. 



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October 24 2017

Commentary by Eoin Treacy

October 24 2017

Commentary by Eoin Treacy

The birth of the surplus

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

Surplus about to increase significantly as higher discount rates are adopted…
In addition, we expect DB schemes are about to see a step change improvement driven by an increase in the assumed rate to discount the liabilities. Under IAS19, the assumed discount rate is a high quality corporate bond yield. However such corporate bonds are few and far between at durations in excess of 30 years. Therefore discount rates tend to be based on gilt yields at those long durations. Actuarial consultants are starting to encourage schemes to adopt a (higher) corporate bond yield at long durations. We expect schemes will increase discount rates by 0.3%, in line with the move by Tesco, and calculate that the aggregate surplus will improve by £41bn. The triennial funding valuation, which determines the employer contribution, should be unaffected.

…which adds to mortality gains…
This positive thesis adds to our work on life expectancy. In Death of the deficit, we flagged that UK pension schemes are using older mortality tables which have not yet taken account of the slowdown in life expectancy improvement since 2011. We expect scheme liabilities will reduce by £12bn when the latest tables are adopted.

...leading to a surplus of £54bn
The combination of the expected imminent increase to discount rates and the adoption of the latest mortality tables would boost the aggregate FTSE100 pension position to a surplus of £54bn. We do not believe share prices have factored in this improvement and recommend investors buy a basket of pensions-exposed stocks highlighted in this report.

 

Eoin Treacy's view -

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

The ultra-low interest rate environment which has led to a compression in yields across just about all asset classes has been a causal factor in the deficits many pension schemes now experience. Over the course of the last decade there have been a large number of reports predicting the low returns to be expected when yields are so depressed and asset prices already inflated. 



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October 24 2017

Commentary by Eoin Treacy

Xi's China a boon for mining

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

And Xi's enormous power also means his pet projects should receive the full backing of the state.

The One Belt One Road initiative to recreate the Old Silk Road connecting Asia with Europe was mentioned five times during the speech. (Mao Zedong and Deng Xiaoping received four mentions each)

Another mega-undertaking, Beijing-Tianjin-Hebei integration, which includes the Xiongan New Area, Xi mentioned twice.
And even if the party's priorities are shifting away from market-orientated reforms, Beijing's transformation of its heavy industries coupled with programs to fight pollution has already benefitted mining.

For instance, eliminating overcapacity has boosted profitability in the domestic steel industry and in the process steelmaking raw material prices have been dragged higher. At the end of last year consensus forecast for the iron ore price was $57 a tonne during 2017. Year-to-date it's averaging $71.

 

Eoin Treacy's view -

Building new cities is nothing new for China but the Xiongan New Area will move the administrative hub from central Beijing to a new city which will remove a substantial number of people in one fell swoop. This also means that the new city will need to be both architecturally secure and technologically capable enough to house one of the world’s largest and most ambitious bureaucracies. 



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October 24 2017

Commentary by Eoin Treacy

Musings from the Oil Patch Ocotber 24th 2017

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

If you are Saudi Arabia, a one-product (oil) economy, and you are watching the aggressive adoption of government policies around the world to stop the sale of internal combustion engine cars, you have to be concerned.  Given that France and the UK have announced bans on the sale of ICE vehicles by 2040, auto industry executives are assuming China will adopt a similar date.  The Netherlands just adopted a 2025 ban on the sale of new ICE cars, with a 2030 date for all ICE cars to be off Dutch roads.   

For China, the world’s largest car market, having sold over 28 million cars last year (nearly a 14% year-over-year increase), the banning of ICE vehicles will shrink the need for, and eventually eliminate motor fuels, which will have a material impact on Saudi Arabia’s long-term oil export opportunities.  When considering that Saudi Arabia has been fighting Russia and Iran to gain an increased share of the Asian, and especially Chinese, oil markets, anything threatening the long-term success of that fight is of concern, even if it is a future event.
   
 Is the industrial policy to ban ICE vehicles a signal of the impending end of the Petroleum Age, much like Sheik Yamani predicted?  Is that prospect part of the motivation behind Crown Prince Salman’s plan to sell off a portion of Saudi Aramco, either in an initial public offering or through a direct sale to sovereign wealth funds to raise money now for diversification investments?  In a way, current industry developments and future prospects are similar to the forces that drove OPEC’s formation in 1960.  A brief review of history may help put into perspective why OPEC is struggling to remain relevant now, and will likely continue to struggle in the future. 

 

Eoin Treacy's view -

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

The argument about the exact timeline for when renewables will represent a dominant position in the energy mix and in the transportation sector continues to receive a great deal of attention. However, the bigger picture is that energy providers, who have little choice but to adopt very long-term perspectives, have already concluded that the heyday of the oil market has passed. That should help to inform our view of what the medium-term perspective on the energy markets is. 



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October 24 2017

Commentary by Eoin Treacy

Volatility and the Alchemy of Risk

Thanks to a subscriber for this report from Artemis which I consider the best one I’ve read on volatility and what is contributing the record low levels currently evident. Here is a section:

The death of the snake…
Volatility fires almost always begin in the debt markets. Lets start with what volatility really is. Volailitiy is the brother of credit… and volatility regime shifts are driven by the credit cycle. Volatility is derived from an option on shareholder equity, but the equity itself can be thought of as a perpetual option on the future success of a company. When times are good and credit is easy, a company can rely on the extension of cheap credit to support its operations. Cheap credit makes the value of equity less volatile, hence tightening of credit conditions will lead to higher equity volatility. When credit is easily available and rates are low, volatility remains suppressed, but as credit contracts volatility rises. 

 

Eoin Treacy's view -

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

This report confirms, much more eloquently, the points I have been making in the Subscriber’s videos regarding the factors contributing to low volatility, how positions are sized in automated trading systems and the influence high yield spreads are likely to have on market structure. 



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October 23 2017

Commentary by Eoin Treacy

Video commentary for October 23rd 2017

October 23 2017

Commentary by Eoin Treacy

World's Most Daring Monetary Experiment Powers on With Abe's Win

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

"Globally, the BOJ’s continued policy accommodation should help cushion the blow from the Fed’s balance sheet normalization and the ECB’s expected tapering next year," said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. "The BOJ will not be able single-handedly to keep rates low everywhere, but its commitment to continued monetary accommodation should restrain any possible global yield rise."

Indeed, a sharper divergence between its policy outlook and the rest of the developed world may aid the BOJ’s cause should the yen continue to weaken, helping to accelerate inflation by making imports pricier. The yen slumped to its weakest since July on Monday and shares moved higher as markets digested Abe’s landslide.

Abe’s decisive win on Sunday will embolden supporters of Abenomics, the prime minister’s signature economic policies centered around monetary and fiscal policy accompanied by structural reforms. It also increases the likelihood of BOJ Governor Haruhiko Kuroda being reappointed when his term comes up in April, according to Bloomberg Intelligence analyst Yuki Masujima, meaning the central bank’s policy framework won’t change.

Naohiko Baba, chief economist for Goldman Sachs in Japan, noted in a report on Monday that "the largest tangible result" of Abe’s commitment to the very ambitious inflation target has been to keep the yen weak and boost equities. The currency has declined more-than 20 percent since Abe took office in December 2012, while the Nikkei 225 Stock Average has roughly doubled.

 

Eoin Treacy's view -

It is arguable whether Abe has a mandate to change the pacifist constitution. However, the original reason he called the election was to receive approval for redeploying revenue from the increased sales tax for spending rather than paying down debt. Therefore, by holding his majority, he can claim resounding approval for his stimulus program. 



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October 23 2017

Commentary by Eoin Treacy

Macro Morsels October 17th 2017

Thanks to a subscriber for this report from R. Harding at Maybank which takes a cautionary tone in this issue. Here is a section:

As the Federal Reserve just recently reported, while the mainstream media continues to tout that the economy is on the mend, real (inflation-adjusted) median net worth suggests this is not the case overall. As stated, the recovery in net worth has been heavily skewed to the top 10% of income earners

Of course, this explains why the largest number of the population over the age of 65 is still employed as they simply can't afford to retire.  

The multi-generational households are on the rise, not by choice but by necessity. These are long-term headwinds that suggest economic growth will remain weak, and the rise in delinquencies, slow-down in auto demand, and weak retail sales all suggest consumers may have reached the limits of the debt-driven consumption cycle for now. 
In other words, individuals are ratcheting up debt, not to buy more stuff, but just to maintain their current "standard of living."

The disconnect between the stock market and real economic growth can certainly continue for now. Exuberance and confidence are at the highest levels on record, but the underlying stories are beginning to weave a tale of an economy that is very late in the current cycle. 

Importantly, these are not short-term stories either. The long-term picture for the economy and the markets from the three biggest factors (Debt, Deflation, and Demographics) continues to build. These factors will continue to weigh on economic growth, and market returns, during the next generation as the massive wave of baby-boomers shift from supporters to dependents of the financial and welfare system.

 

Eoin Treacy's view -

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

Quite apart from Federal Reserve figures we also know that a significant majority of Americans have not participated in the economic recovery to any measurable extent because of the success Donald Trump had in tapping into resentment in the Presidential election a year ago. 



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October 23 2017

Commentary by Eoin Treacy

Deep Dive into Digital Era of Gaming

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

Gaming data points available today point to an industry facing challenges: The number of physical games sold in the US has declined every year for the better part of the last decade, the install base of consoles is well below the prior cycle peak, and the physical attach rate of software is below where it was in the last two console cycles. However, this is the old way of analyzing this business and in the new “Digital Era” of video games, the business has shifted from one that is hit-driven and reliant on physical retail to an industry that is largely online (over 60% digital and could arguably shift completely online longer term), more recurring and predictable, more monetize-able, and significantly more profitable. 

When we consider that the number of games sold as digital copies continues to grow at 20- 30% each year, notably the market for console software is actually growing – albeit at a single-digit rate. Add to that, the install base of hardware continues to progress towards 100mn+ HD units and, while the physical attach rate of software is below where it was in the last two console cycles, the focus on deeper engagement and higher player monetization through digital content appears to be largely offsetting the impact of fewer game sales. We remain optimistic that newer hardware including Nintendo’s Switch and Microsoft’s Xbox One X can re-invigorate the market for games and are encouraged by some early trends. US retail sales are tracking up mid-single digits year over year in 2017 and, adjusting for sales of digital games, it appears that the number of games sold each year in the US is stable y/y. 

In the Digital Era, gaming content will always be available and players will have access to games in more ways than ever. The industry will become far more global and fragmented across devices than before, which will increase the potential audience for gaming content substantially. We are cautiously optimistic on the potential for traditional video game publishers to further penetrate the rapidly-growing markets in China and on Mobile, however, and we remain on the sidelines regarding the emerging interest in eSports and VR. Nonetheless, we still believe the value proposition of games remains very high relative to other forms of media and we are encouraged that the new revenue TAM in the Digital Era is dictated only by the amount of time players have to engage with games, rather than by the number of consoles in their hands.

 

Eoin Treacy's view -

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

Gaming is evolving into a much larger industry than movies. Audiences at theatres continue to decline, not least because of the lackluster “cookie-cutter” nature of many movies but also because audiences have more to do and have both online games and content available 24/7. That represents a significant migration within the media sector which is easily observable in the performance of respective shares. 



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October 23 2017

Commentary by Eoin Treacy

Venezuela's Behind on Its Debt and Facing Two Huge Bond Payments

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

Venezuela could still also make the payments on time. While $10 billion in foreign reserves isn’t much for a country that now owes some $140 billion to foreign creditors, it’s still enough to pay the bills for a while.

And the Maduro government has surprised the bond market before, making payments the past couple years that many traders had anticipated would be missed. Some of those now betting that these next two payments will also be made actually point to the $350 million currently overdue on the other notes as an encouraging sign. Those arrears indicate, they contend, that officials are prioritizing the payment of bonds with no grace period at the expense of those they can put off without penalty.

Even if Venezuela can make the payments due this year, investors say that, unless oil prices stage some sort of miraculous comeback, they still see default as an inevitable outcome. Credit-default swaps show they’re pricing in a 75 percent chance of a PDVSA default in the next 12 months and 99 percent in the next five years.

 

Eoin Treacy's view -

Venezuela represents a problem for bond investors because it could either be a one-off default or be the thin end of the wedge for distressed energy producers. The fact PDVSA sinkable bonds are now trading at a spread of 526 basis points, versus 200 last week, suggests investors are increasingly skeptical the government is going to be able to make principal payments when they mature on November 2nd. 



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October 20 2017

Commentary by Eoin Treacy

October 20 2017

Commentary by Eoin Treacy

Email of the day on China's yield curve

Thank you for such an eloquent financial service! Further to your comment on China today, according to Tracy Alloway of Bloomberg, the Chinese 5-10 Yield curve inverted yesterday. Is this a bad omen or can China be different!? 

Eoin Treacy's view -

Thank you for your kind words and this email which may be of interest to subscribers. The Chinese yield curve is inverted between the 5 and 10-year maturities but, generally when we talk about the yield curve spread, which is what I believe you are referring to, we look at the difference between the 2 and 10-year maturities. 



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October 20 2017

Commentary by Eoin Treacy

Machine Learning in Finance

Thanks to a subscriber for this how-to report from Deutsche Bank covering quantitative strategies and how they are applied to finance. Here is a section from the introduction:

Machine learning is everywhere 
“Machine learning” repeatedly appears in the news, from the game of go to autonomous cars: what can those algorithms do for us in finance? 

Supervised learning and its pitfalls in finance 
In this first report in the series, we focus on supervised learning and note that while machine learning is very relevant to us, there are dangerous pitfalls, sometimes specific to the type of data we deal with. In particular, we examine penalized regression (lasso and elastic net), decision trees, and boosting – we also mention, in passing, support vector machines and random forests. 

Application to the Japanese equity market 
To make things more concrete, we try to use those algorithms to combine the investment factors in our database in order to build a stock ranking system for the Japanese market; this shows the limitations and pitfalls of traditional machine learning practices in finance. 

Eoin Treacy's view -

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

Long Term Capital Management represented something of a genesis for quantitative strategies and their sophistication has been enhanced considerably since. The pace of adoption has accelerated in the last few years as the breadth of data from both conventional and unconventional sources has increased at an exponential rate and companies like Google and Baidu have demonstrated in real terms what is possible with these tools. 



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October 20 2017

Commentary by Eoin Treacy

Investment Implications of the Final Frontier

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

We estimate that the ~$350b Global Space Industry will grow into a $1.1+ Tr Global Space Economy by 2040. However, there is significant execution risk, and we, accordingly, estimate a wide range of potential outcomes, from ~$600 bn (-60 bps v. Global GDP) to ~$1.75 Tr (+400 bps v. Global GDP). Working with our aerospace & defense, internet, satellite, and telecom analysts, we estimate a $400 bn+ incremental revenue opportunity from providing internet access to under- or unserved parts of the world, and a ~$725 bn revenue opportunity for internet companies focused on social media, search/online advertising, and, in particular, e-commerce, if global internet penetration reaches 100%. Ultimately, this will depend on the success of the new low Earth orbit (LEO) satellites from players like OneWeb and SpaceX.

In the short to medium term, most of the value of the industry is linked to internet bandwidth. Satellite broadband is responsible for ~50% of the Global Space Economy, and ~70% of our Bull Case. The demand for data is growing at an exponential rate, while the cost of access to space (and, by extension, data) is falling by orders of magnitude. However, over the long term, the discussion expands to topics such as national security, research, deep space exploration, high speed travel, … even mining asteroids. In this report, we discuss the potential for the BFR from SpaceX to disrupt the freight transportation industry.

Space is the "ultimate high ground" for national security. With the United States military's expenditures exceeding $600 bn/ year, and global military expenditures ~$1.7 Tr, compared to NASA's budget of ~$20 bn, there appears to be substantial room to increase the investment in space. While we expect the topic of space to increase in importance, our view is balanced by a recognition of realworld budgetary constraints, and other priorities.

Eoin Treacy's view -

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

How do companies that depend on the number of internet users reach the 3 billion or so potential customers not already under their purview? For leading technology/social media companies it’s a big question because it is what their continued organic growth depends on. That is why investment continues to pour into space related ventures. 



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October 20 2017

Commentary by Eoin Treacy

Electric Vehicle Revolution and Implications for the Nickel Market

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

 

Electric vehicles will usher in a new age for nickel

A more balanced nickel consumption profile between stainless and non-stainless applications

Batteries need high purity nickel sulphate, cannot readily use Class II such as nickel pig iron or ferronickel units – today, only ~50% of global production is suitable

Nickel industry needs to grow significantly in suitable units to meet demand for battery manufacture

Growing in suitable nickel units is expensive

Eoin Treacy's view -

A link to the full presentation is available in the Subscriber's Area.

The message from this report is very clear. The global economy is going to need a lot more nickel and Vale is going to need to raise quite a lot capital if it is to have any chance of meeting demand. 



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October 19 2017

Commentary by Eoin Treacy

October 19 2017

Commentary by Eoin Treacy

Email of the day on the Dow Jones Industrials outperformance

You already commented a bit on the state of the US stock market yesterday (October 17). But I want to share with you FT story on similarities and differences between today's market and the one 30 years ago, "How big is the risk of another Black Monday equities crash?"- While reading it, I looked at Dow Jones chart. It is not visible on 1- or 2- or even 3-year charts, but 5- and 10-year ones show rather obvious acceleration this year, don't they? What do you think?

Eoin Treacy's view -

Thanks for this question which others may have an interest in. The Dow Jones Industrials Average has been among the best performing indices globally this year and has been led higher by shares like Boeing, Caterpillar, Visa and McDonald’s, while General Electric has been a notable underperformer. 

Here are two charts of the Index, a candle chart and a point and figure chart



 



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October 19 2017

Commentary by Eoin Treacy

Email of the day on p&f charts

I love PnF charts but these are getting as rare as hens’ teeth these days. Sad really. I notice you don’t use them in your newsletter. I use them in the Chart Library and prefer to customise mine (the 3 box reversal variety). They seem to work with Indices but not with individual stocks. Tried the Aussie stocks eg. Kingsgate Consolidated(KCN), Codan (CDA) but I get a blank page. What am I doing wrong?

Eoin Treacy's view -

Thank you for this question. I created this video to demonstrate how to use the Chart Library’s p&f facility. I tend to rely on candle charts and will occasionally look at a p&f chart when trading activity is noisy or subject short-term volatility. 



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October 19 2017

Commentary by Eoin Treacy

From Cells to Cities: A Conversation with Geoffrey West

Thanks to a subscriber for recommending this 2-hour podcast with the author Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies. I’ve been working my way through this book for a while now. It’s a dense read but certainly worth the time. 

Eoin Treacy's view -

What I find particularly interesting is the discussion of fractals which is a topic we discuss at The Chart Seminar. You can observe exactly the same interplay of crowd psychology and supply and demand in very short-term charts as long-term charts. Of course, we see these trends play out in slow motion on long-term charts but that does not challenge the fractal view. 



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October 19 2017

Commentary by Eoin Treacy

Why We Don't Trust Government Inflation Statistics...

Thanks to a subscriber for this interesting report from Oppenheimer which may be appreciated by the Collective. Here is a section:

We all know that nominal interest rates are a function of real interest rates and inflation expectations. The nub of our argument is that the consumer price index (CPI) as measured by the Bureau of Labor Statistics (BLS) sharply understates what bond investors should incorporate into their inflation expectations. 

The first component of our three-part argument is that CPI measures inflation where the people are, not where the money is. That is an appropriate stance for BLS since CPI is used to set government benefit levels, but consider that the top 20%, who effectively own all the bonds, generate as much consumer spending as the lower 62%. The basket of goods that 20% buys likely differs significantly from the basket of the average person. 

Second, we look at the healthcare anomaly. Healthcare accounts for 17.7% of GDP and 14.5% of the S&P 500 but only 8.5% of CPI. Most private sources estimate healthcare costs have been increasing by ~6%+ in recent years, but BLS puts the number at 2.8%. A recent study found that the average health insurance plan now costs ~$19K (with ~$6K from the employee), but healthcare insurance is just 1.004% of CPI.

Third, in looking at how CPI is calculated, we suspect there is a "streetlight effect," where one searches where the light is good rather than where the sought object is likely to be. In the case of CPI, we suspect they measure what is easily quantified. There is incredible granularity on the cost of apples, bananas and peanut butter but only big sweeping categories for healthcare and housing. 

The bottom line is that we think CPI substantially understates the inflation expectations that investors should incorporate into the pricing of bonds and that long-term rates should increase. One does not have to believe this to own bank stocks as they remain cheap in any case at a 66% relative P/E, but if we are correct about CPI, the upside should be even better.

 

Eoin Treacy's view -

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

Anyone who lives in the real world and pays their own bills, mortgage and taxes knows inflation is understated. Additionally, since government spending is integrally tied to official statistics, politicians have an interest in the understatement persisting not least because fiscal deficits are already wide. However, it is reasonable to conclude that we have had such an uptick in reactionism against the status quo is because consumers have direct experience of inflation which the statistics refuse to acknowledge. 



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October 19 2017

Commentary by Eoin Treacy

October 18 2017

Commentary by Eoin Treacy

Video commentary for October 18th 2017

October 18 2017

Commentary by Eoin Treacy

Email of the day on Brexit, Ireland and Political Polarization

Well said Eoin. My vote was 'remain' but if there was another vote it would now be 'leave'. I admit I was wrong. I lost income from the leave vote (I used to consult for the EU) but, unlike others with vested interests, I will think independently and logically about what is best in the long term, as also you exemplify. My feelings at the time of the referendum were a reflection of the UK population, close to 50:50, but events since the referendum have made me absolutely a leaver, and the sooner the better. If we decided to 'crash out' tomorrow I would cheer, whatever the turmoil. Actually, I think that would be the best solution now. (Ironically, the EU would then beg for a deal.) There will not be another referendum, but if there was I strongly suspect the remoaners would get a shock at the increased majority for 'leave'. 

The EU has several serious and possibly terminal problems. 

1. It is frighteningly anti-democratic. Note I say 'anti-democratic' not just 'undemocratic'. It's shown its colours several times - vote until you give the 'right' answer then you are not allowed to vote again. Now they are moving to not allowing any democratic votes at all. EU leaders are not elected and not removable by Europe's voters. Voters have no say about federalisation - except by leaving!

2. Taxes in Europe and already cripplingly high, causing slow growth and massive unemployment, yet the EU wants to raise taxes even higher. How can Europe compete with emerging economies if it maintains crippling tax rates? It's a death spiral. That will become increasingly apparent as interest rates rise. EU taxation on top of country taxation is coming. the opposite needs to happen - Both EU and government spending needs to reduce and taxes to fall. 

3. What is the definition of a country? For me, control of its own borders; control of its own defense, control of its own taxation and spending; control of its own judicial system. (Maybe you can add more). All are being lost by EU members. How many will truly give up everything to become a 'region' or 'state' of the EU, and no longer a country? 

There are battles ahead, and the voters of the UK were wise to make the first move. I only wish Ireland would do the same. I love the country and its people, and worry how much it will suffer now the EU is removing all its competitive advantages for the future.

Once again, Eoin, thank you for your very clear views on this and many other matters. You are impressive.

 

Eoin Treacy's view -

Thank you for this balanced email and your kind words. Brexit represents a challenge for Ireland because of the difficulties that would arise from both creating and policing a land border with Northern Ireland. Additionally, the UK is Ireland’s largest trading partner and the only other major economy in Europe it shares a language with. The challenges are far from insurmountable since neither country is party to the Schengen agreement but it is being used as a political football during the current negotiations. 



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October 18 2017

Commentary by Eoin Treacy

Big Data and AI Strategies Machine Learning and Alternative Data Approach to Investing

Thanks to a subscriber for this invaluable primer from JPMorgan covering the evolution of quantitative strategies in a world where the quantity of data is exploding.  Here is a section:

Machine Learning methods to analyze large and complex datasets: There have been significant developments in the field of pattern recognition and function approximation (uncovering relationship between variables). These analytical methods are known as ‘Machine Learning’ and are part of the broader disciplines of Statistics and Computer Science. Machine Learning techniques enable analysis of large and unstructured datasets and construction of trading strategies. In addition to methods of Classical Machine Learning (that can be thought of as advanced Statistics), there is an increased   focus on investment applications of Deep Learning (an analysis method that relies on multi-layer neural networks), as well as Reinforcement learning (a specific approach that is encouraging algorithms to explore and find the most profitable strategies). While neural networks have been around for decades10, it was only in recent years that they found a broad application across industries. The year 2016 saw the widespread adoption of smart home/mobile products like Amazon Echo11, Google Home and Apple Siri, which relied heavily on Deep Learning algorithms. This success of advanced Machine Learning algorithms in solving complex problems is increasingly enticing investment managers to use the same algorithms.

While there is a lot of hype around Big Data and Machine Learning, researchers estimate that just 0.5% of the data produced is currently being analyzed [Regalado (2013)]. These developments provide a compelling reason for market participants to invest in learning about new datasets and Machine Learning toolkits.  

 

Eoin Treacy's view -

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

Over the years I’ve seen a great deal of commentary about the petrodollar and the oil economy and no doubt that has been lynchpin of economic growth for much of the last century. After all every country uses oil but not every country produces it and the fact it is denominated in Dollars gives the USA, as the onetime largest consumer, an important advantage. However, if we look forward rather than backward, there is a compelling argument for considering that the data driven economy is what is likely to drive economic growth in future. 



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October 18 2017

Commentary by Eoin Treacy

Xi Skips Old Growth Pledge as China Seeks Quality Not Quantity

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

"China’s policy makers are likely to tolerate growth to have another leg down to 5 to 6 percent in the next five years, so that they could have bigger room to fix the structural problems and make growth more sustainable," Hu wrote.

That’s in line with earlier messages of tolerance of slower growth in exchange for stable development. Xi told a meeting of the Communist Party’s financial and economic leading group last year that China doesn’t need to meet the objective if doing so creates too much risk, Bloomberg News reported in December.

Xi’s speech, which ran for more than three hours and mapped out a grand strategy for China’s development by 2050 implies "a change in growth and development objectives," said Chen Xingdong, chief China economist at BNP Paribas SA in Beijing.

The party is seeking to share "growth and prosperity for the majority of people through reformation of income distribution," Chen said

 

Eoin Treacy's view -

The larger an economy becomes the more difficult it is to sustain double digit growth rates. China is a perfect example of this and its size is a clear example for why smaller economies like India or the Philippines are currently outpacing its expansion. 



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October 17 2017

Commentary by Eoin Treacy

October 17 2017

Commentary by Eoin Treacy

Market and Volatility Commentary

I asked around for this note from Marko Kolanovic for JPMorgan back in June but it finally turned up in my inbox today. Despite the fact the trading advice is dated, the discussion of the animating factors behind low volatility remain valid and I commend it to subscribers. Here is a section: 

Low Volatility is not a new normal or fundamentally justified – it is result from macro de-correlation and massive supply of volatility through yield generation products and strategies. Finally, Big Data Strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come. 

And

What is really driving the low volatility? As we discussed recently low correlations (driven by quant flows, sector and thematic trading) are temporarily reducing volatility by 2-4 points, and a massive supply of volatility pressures implied and extension realized volatility by another 2-4 points. We estimated that supply from yield seeking risk premia strategies grew by $1Bn vega (30% of the S&P500 options market). In addition to these, large inflows in passive funds put further pressure on volatility. Keep in mind that passive investors almost never sell. Quant investors don’t take large directional bets and don’t overreact either (at least not for the same reasons humans do). Regardless of those, we think current low levels of volatility is not a new normal and will not last very long given the amount of leverage, rising rates, and the approaching reduction of central bank balance sheets. 

 

Eoin Treacy's view -

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

Volatility has not increased to any meaningful extent since April but there have been occasional pops on the upside which have not been sustained. These occurred in May, June and August so it has been two months since the last one. 



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October 17 2017

Commentary by Eoin Treacy

Amazon to make sportswear push in industry-jolting move

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

Amazon has developed its own brands in part because they fill gaps in its inventory. If customers are searching for a certain type of shoe or skirt, and don’t see much of a selection from established brands, Amazon wants to be able to offer its own options. Oftentimes, shoppers may not realize that the names -- such as Scout + Ro and North Eleven -- are owned by Amazon.

This also sends a message to brands reluctant to sell their full inventory on Amazon. If shoppers can’t find your products on the site, Amazon will make its own substitutes and become your competitor.

For suppliers like Eclat, forging alliances with e-commerce companies reflects shifting demand from consumers, Chiu said in a note.

“Online apparel sales accounted for 19 percent of all apparel sales in 2016, up from 11 percent in 2011,” Chiu said.

“Online sales are primed for strong growth.” Eclat expects new clients to contribute as much as 12 percent of 2018 sales, she said. The shipments to Amazon began in August, according to Chiu. “The contribution this year will be small, but the potential is high,” she said.

Eoin Treacy's view -

Amazon has a wealth of data about what people search for and can also cross reference that with what people in fact end up purchasing and returning. That puts it in an enviable position to design product lines around what people want rather than guessing what the next fashion forward idea is going to be. 



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October 17 2017

Commentary by Eoin Treacy

London House Prices Fall Most Since Financial Crisis

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

In London, values fell for a sixth consecutive month. If the provisional estimates are confirmed, the average price of a home in the capital was less than 582,000 ($773,000), the lowest since the end of 2015.

The downbeat picture was confirmed in a separate report from Rightmove Plc, which said asking prices in London fell an annual 2.5 percent in October. While they rose 3.1 percent on the month, driven by owners of more expensive properties, achieving these prices is far from assured as buyers now have more choice, according to Rightmove director Miles Shipside.
Values at the top end of the market have come under the most pressure, with prices falling in almost half of London’s 33 boroughs in the year through August, according to Acadata. It illustrates the toll being taken by Brexit uncertainty, higher property taxes for landlords and the prospect of the Bank of England raising interest rates for the first time in a decade.

 

Eoin Treacy's view -

Increasing supply is finally beginning to come to market in London at just the same time that property taxes have risen and the Bank of England’s looks likely to raise rates.  



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October 16 2017

Commentary by Eoin Treacy

October 16 2017

Commentary by Eoin Treacy

The World Turned Upside Down

Thanks to a subscriber for this edition of John Mauldin’s note which may be of interest. Here is a section:

* the excess liquidity provided by the world’s central bankers,
* serving up a virtuous cycle of fund inflows into ever more popular ETFs (passive investors) that buy not when stocks are cheap but when inflows are readily flowing,
* the dominance of risk parity and volatility trending, who worship at the altar of price momentum brought on by those ETFs (and are also agnostic to “value,” balance sheets,” income statements),
* the reduced role of active investors like hedge funds – the slack is picked up by ETFs and Quant strategies,
* creating an almost systemic “buy on the dip” mentality and conditioning.  
when coupled with precarious positioning by speculators and market participants:
* who have profited from shorting volatility and have gotten so one-sided (by shorting VIX and VXX futures) that any quick market sell off will likely be exacerbated, much like portfolio insurance’s role in a previous large drawdown,
* which in turn will force leveraged risk parity portfolios to de-risk (and reducing the chance of fast turn back up in the markets),
* and could lead to an end of the virtuous cycle – if ETFs start to sell, who is left to buy?

 

Eoin Treacy's view -

It’s 30-years since the 1987 crash which has likely been a contributing factor in why so many bearish reports have been hitting my desk in the last week. 



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October 16 2017

Commentary by Eoin Treacy

Email of the day on Brexit

I guess the young voted for Corbyn out of a form of rebellion because they feel they got screwed by the old with Brexit? that's very much my take on those election results... I also think that another Labour, with an explicit no Brexit agenda, not feeling compelled to ratify the referendum result in Parliament (effectively abdicating to the Daily Express and such-likes) would have wiped away the Tory easy. 

Re the difficulty of leaving the EU: that had been made abundantly clear by the so much derided experts. Shame they were not listened to, maybe risks and rewards would have been weighted more accurately. 

For the rest: we live in highly structured and complex societies with sophisticated regimes (governments and central banks) that accommodate and fulfil the needs of most people through an apparently undisputed economic model; with much to lose and - as you say - a full belly it is hard to see revolutions erupting across Europe as we have seen in e.g. Northern Africa. This is an extraordinary achievement, although it presents some obvious risks: institution will still need to continue to innovate and change, and what will prompt innovation if not even a financial crisis such as the one endured 10 years ago prompted significant change? 

Democratic regimes - almost by definition - have resisted reforms implying austerity (e.g. cost cutting, restructuring of debt, tax increases) and have often diverted from putting in place measures to improve productivity (rather than it being - as it should - their everyday obsession). Monetary policies have dampened the effects of the crisis, yet the QE presented its collateral effect (in the case of the UK: inequality). 

Various detours were offered as distractions to the voting public, and the illusion of revolution via direct participation was a perfect cathartic offer to make to the electorate after such economic shock: change everything (to not change anything). The whole digression of the idea of sovereignty we have seen in the UK and the willingness of the ruling party to push the narrative of the evil enemy EU should be seen in this context, with the tragedy (I can't stress this enough, as it has been badly overlooked) of the misuse of the referendum and the permanent damage this inflicted to the very core of the democratic process. 

As for Catalonia, or Scotland, the desire to join the EU does not derive by the fact there is no other choice, but by the desire to fall back into a set of regulations that allows to operate internationally with highest degree of freedom and protection, while dissociating from their enemy entity (be it Spain or the UK); the EU on the other hand has done nothing to promote or aid these attempts of independence, as it represents the sovereign states these regions are part of.

It may sound simplistic or a bit of a conspiracy theory. But I find impossible to see the EU is as a superstate (why did we have a Euro Crisis then? and it could potentially still happen! spreads still open from time to time); it may become one (extremely unlikely after the last elections in Germany), and it is still very open to debate whether this is appropriate or not. Also, assuming it has taxing power because it is asking what is due is forgetting a much more simple fact: what is not paid by the UK will be paid by the citizens of other countries (that simply won't happen, hence the mandate to solve this issue given by the other governments: the UK government voted for those expenses, hence it will tax its citizens - and me - to pay for them... anything different may not be exactly like a classic default, but it is very very close to it). Sadly, the current attitude on this matter suggests no deal is the most likely scenario yet. I think however that the UK stance is untenable, and that we will see a capitulation on the GBP before being confident support has been found: a change of government may provide the trigger?

 

Eoin Treacy's view -

Thank you for this additional email which highlights a number of additional points. The difficulty of leaving the EU is not an argument to support the current structure. Which of us as a child was not told that persevering in a difficult pursuit will allow us to reap outsized rewards in future? The very fact that the UK is willing to forgo short-term gain for the opportunity to achieve long-term benefit is a powerful example that democracies are in fact capable of choosing delayed gratification. Germany’s labour market reforms and reunification are another example, as are India’s market reforms of the last few years. 



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October 16 2017

Commentary by Eoin Treacy

Ray Kurzweil's Most Exciting Predictions About the Future of Humanity

This article from Futurism.com contains of video of Kurzweil’s presentation at SXSW which may be of interest to subscribers. Here is a section: 

Kurzweil continues to share his visions for the future, and his latest prediction was made at the most recent SXSW Conference, where he claimed that the Singularity — the moment when technology becomes smarter than humans — will happen by 2045. Sixteen years prior to that, it will be just as smart as us. As he told Futurism, “2029 is the consistent date I have predicted for when an AI will pass a valid Turing test and therefore achieve human levels of intelligence.”

Kurzweil’s vision of the future doesn’t stop at the Singularity. He has also predicted how technologies, such as nanobots and brain-to-computer interfaces like Elon Musk’s Neuralink or Bryan Johnson’s Kernel, will affect our bodies, leading to a possible future in which both our brains and our entire beings are mechanized.

This process could start with science fiction-level leaps in virtual reality (VR) technology. He predicts VR will advance so much that physical workplaces will become a thing of the past. Within a few decades, our commutes could just become a matter of strapping on a headset.

 

Eoin Treacy's view -

Technological innovation is occurring not only at a rapid pace but is affecting many different areas at once. Nvidia’s CEO believes the CPU is going to be left in the dust by the GPU which is being used in everything from VR to Ethereum mining, artificial intelligence systems and self-driving cars. At the same time, the evolution of cloud computing and quantum computing means the market for computing as a service is on a growth trajectory. 



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October 16 2017

Commentary by Eoin Treacy

Email of the day on investing in Africa

Thank you for a very informative big picture on Friday. Do you know of any fund managers that are investing in Africa with good track records for us to consider investing with?

Eoin Treacy's view -

Thank you for this question which I’m sure will be of interest to subscribers. Investing in Africa is not a simple matter. The entire continent has 1649 listed companies with major markets like South Africa, Nigeria and Egypt representing significant weightings.  



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October 13 2017

Commentary by Eoin Treacy

October 13 2017

Commentary by Eoin Treacy

Email of the day on the revolutionary zeal of youth

Was listening to your market commentary and re GBP specifically… don’t think it I s fair to draw comparisons between Brexit and the Catalunya independence attempts… the 2 things are different: 

• Catalunya is a region within a national state, the UK is a sovereign state part of a supranational union… so for example the EU has no taxing power on citizens of the member states, there is no conscription in a EU military service, and generally speaking the bare minimum for having a functioning Economic Union is agreed between member states via the Council and the Parliament;

• If looking for a parallel, the situation in Spain is similar to that in Scotland, the Basques region, Sardinia, Corsica, some part of Northern Italy (by the way there is a referendum coming in a few days there)… it is significant that all these regions seek immediate shelter from and within the EU;

• The movement for the independence of Catalunya has a long history, and various degrees of independence have been negotiated between Madrid and Barcelona over the years after a lengthy period of violent repression; 

Also I disagree on the argument of Brexit being a success because there are more young people in the UK: it has been shows several times the young were overwhelmingly in favor of remaining in the EU; it was the old who voted out.

As for the so called “Brexit bill” that you also mention: this is an obligation the UK has towards the EU whatever the local politicians feed to the public (i.e. it is not a matter of what the EU “feels”, there is no ambiguity regarding its nature). Not paying this obligation is equivalent to defaulting on debt, which I doubt any government would do. The current narrative is the result of the government trying to leverage whatever it can to obtain concessions on access to the EU market.

Eoin Treacy's view -

Thank you for this email which gives me the opportunity to clarify some of my thoughts. 

I believe it is a measure of just how dysfunctional the status quo has become that we are getting revolutions in the political make up of Europe, led by older people. Throughout history revolution has been a young person’s endeavour and the lack of food or its high price is usually the catalyst. The dawn of the Arab Spring in Tunisia is a classic example of this. 

 



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October 13 2017

Commentary by Eoin Treacy

October 13 2017

Commentary by Eoin Treacy

Email of the day on recent trades

I bought the Nikkei as it broke out of its range and it has been doing well on the back of an Abe victory which would lead to increased monetary spending and a lower yen, thus boosting the Nikkei.

I have read that very frequently pre-Japanese elections, the market runs up as people look to buy shares in industries that have been targeted by politicians for help, but that on the day of the election the market usually corrects. A buy the rumour, sell the news scenario. I wondered your thoughts on this. I know you are long the Nikkei and wondered if this was a potential long-term or short- term position, or what the charts are saying?

Also bought the US Tech 100 which broke out of its range but has been travelling sideways since it broke out and I wondered if that was not a good sign, since you usually talk about explosions waiting to happen either up or down. Best regards,

 

Eoin Treacy's view -

Thanks you this email and congratulations on grasping opportunities. 
 

 



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October 13 2017

Commentary by Eoin Treacy

Email of the day on the wool price

Hi Eoin, There is a chart in the library in commodities for Fine Wool (OS2 COMB COMDTY). But it stopped updating in 2014. Can it be 'switched on' again, or is there another fine wool price chart available? Thanks in advance 
P.S. will email you an update on the sewing machinery exhibition that we attended in Shanghai soon

 

Eoin Treacy's view -

Thank you for this inquiry but, unfortunately, I can no longer find a wool price that is updated regularly. The US, Australian and South African futures no longer have any liquidity. I look forward to hearing your insights from the garment industry. 



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October 13 2017

Commentary by Eoin Treacy

Here's why City analysts aren't getting too excited about Provident Financial's soaring share price

This article by Rebecca Smith for Cityam.com may be of interest to subscribers. Here is a section:

Meanwhile, Laith Khalaf, senior analyst at Hargreaves Lansdown, said the share price showing some relief "in these circumstances is natural", but said a "long rocky road" was ahead for the firm.

"The market clearly likes what it sees with the shares rising sharply," he said.

Khalaf added: "There are still reasons to be cautious though. Companies in recovery can go one of two ways, and the rewards, or losses, are usually high. Provident still doesn’t have a CEO, and the financial watchdog is investigating sales of its repayment option plan to Vanquis Bank customers, a product which looks a lot like PPI.

"Meanwhile the group’s credit rating is teetering on the edge of being downgraded to junk, a step down which would limit the availability of creditors, and push up the price of borrowing."

 

Eoin Treacy's view -

Provident Financial was a leader in the fast and loose consumer credit market aimed at doorstep lending and has collapsed as its business model came under scrutiny. Quite whether it is capable of recovery is an open question but a lot of bad news has certainly been priced in. However, while Provident has been garnering headlines there is another area of the consumer credit market worthy of mention. 



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October 13 2017

Commentary by Eoin Treacy

The big questions for Africa's next three decades

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

There will be 1.3 billion more Africans by 2050, according to a UN estimate.

As a young African entrepreneur, what that number means to me is 1.3 billion more consumers of goods and services. This is a staggering increase that equates to more than double the continent's current population.

Africa needs to begin preparing and planning for this tremendous growth, not just economically but from a social and infrastructural perspective. Three decades from now, we as a continent surely cannot be singing the aid song. With the number of qualified Africans today who have received education and practical work exposure in some of the world's best institutions and corporations, we surely have what it takes not only to imagine, but to begin to shape the Africa we want to see.

We African millennials are now tasked with the responsibility of transforming the continent and growing the economy significantly for the benefit of future generations. This growth can and should be led by Africans, both in the diaspora and those back home. As someone who is and always has been based in Africa, I often engage in conversations with my peers who are now based in the diaspora, and I listen to how they dream and long for the day they will come back home and begin to make a difference. This is great and refreshing to hear - but without a timeline or commitment it will only remain a distant hope. I believe that when someone feels the need and the urge to make a difference, they should begin doing so from wherever they are and in the smallest of ways, rather than wait for a perfect time.

Eoin Treacy's view -

If economic growth is dependent on population growth then the 21st century belongs to the African continent. That is of course dependent on standards of governance improving, which can only occur on a country by country basis. 



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October 12 2017

Commentary by Eoin Treacy

October 12 2017

Commentary by Eoin Treacy

An Investor's Guide to Understanding Gene Therapy: A Paradigm Shift Whose Time Has Come

Thanks to a subscriber for this heavyweight 239-page report from Raymond James which may be of interest. Here is a section: 

What started off as a clinical off-shoot of molecular biology in the 1970s has moved from a therapeutic concept to a viable therapy to address various rare and not so rare genetic diseases. While the gene therapy field has gone through nearly three decades of ups and downs, in our opinion, we are at the cusp of ushering in a new era of therapies that can address the underlying biology of many inherited disorders.

Two therapies have already been approved for commercialization in Europe, although calling either a commercial success is a stretch. UniQure’s Glybera, the first approved in Europe in 2012, experienced extremely limited usage in the commercial setting and was withdrawn from the market early this year. GlaxoSmithKline’s Strimvelis, approved in 2016 at a price tag of $594,000 euros (about $665,000 USD), is currently treating patients with ADA deficiency, although given the size of the patient population, we see this platform more as a good will gesture as compared to a robust money generating machine.

That said, we view these two products largely as proof of concept therapeutics whereby clinical trials were able to show efficacy and long-term safety, both of which helped clear regulatory hurdles with flying colors. While the pessimist might view the turbulent history of the gene therapy space as more of what’s to come, we view this field as a potential revolution. In short, within the next few years, we expect multiple U.S. approvals of gene therapy products…

 

Eoin Treacy's view -

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

Subscribers will be familiar with my enthusiasm for the immuno-oncology sector which is rapidly approaching commercialisation and has been the focus on enthusiastic M&A activity. Car-T cell reprogramming is an exciting field which has led to considerable success in previously untreatable leukemia and research is now underway to employ similar strategies in solid tumors. 



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October 12 2017

Commentary by Eoin Treacy

Hammond Warns U.K. Must Prepare For "Bad-Tempered Brexit"

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

“There will be some areas where we need to start spending money in the new year if we can’t tell ourselves we’re moving steadily and pretty assuredly towards a transition agreement,” Hammond told parliament’s Treasury committee on Wednesday.

Earlier, he pushed back at the suggestion that he should release cash now.

“I don’t believe we should be in the business of making potentially nugatory expenditure until the very last moment where we need to do so,” he said. “We will be ready, we will not spend it earlier than necessary just to make some demonstration point.”
He added, in a sign of defiance to EU negotiators: “Some are urging me to spend money to show the EU we mean business. I think the EU know we mean business.”

 

Eoin Treacy's view -

Rather than state categorically there will not be another referendum Theresa May refused to say how she would vote in one. That’s created a messy situation which has thrown the onus for talking up Brexit onto her cabinet colleagues. The Chancellor was castigated in some sections of the media today for his ambiguous support for Brexit because of his refusal to begin instituting plans for separation. Meanwhile Michel Barnier reportedly agreed to the idea of a transition today suggesting perhaps Mr. Hammond knows more about the negotiations than commentators baying for his ouster. 



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October 12 2017

Commentary by Eoin Treacy

Australia Doesn't Have the Answers

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

Finally, the system may well fail in its primary objective -- that is, to minimize the need for the government to finance retirement. The typical accumulated balance at retirement age is around A$200,000 for men and around A$110,000 for women. The averages are artificially increased by a small pool of people with large balances, yet they're still well below the A$600,000 to A$700,000 estimated to be necessary for homeowning and debt-free couples to finance their retirements, which may last 20 or more years.

The Australian government will need to cover the shortfall for a large proportion of the population. In fact, it will lose doubly, having already suffered a loss of revenue from the generous tax breaks provided for the schemes (estimated at A$30 billion annually and increasing), which have been used, especially by wealthy individuals, as a way to reduce their tax burden.

Future generations will also be affected adversely, having to finance payments to older generations through higher taxes or additional government debt, reduced wealth transfers from parents, and lower benefits than those awarded to their predecessors.

 

Eoin Treacy's view -

Australia has gone decades without a recession not least because it has benefitted from the evolution of commodity demand from China, the growth associated with inward migration of a highly educated workforce and the evolution of the services sector. That has allowed it to retain the mantle of a AAA rated credit while much larger economies like the USA and UK have been downgraded. 



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October 12 2017

Commentary by Eoin Treacy

Rally Restored? Bitcoin Is Up 75 Percent from 30-Day Lows

This article by Omkar Godbole for Coindesk may be of interest to subscribers. Here is a section:

Fresh off setting a new all-time high this morning, bitcoin is once again increasing its 2017 gains.

Yet for those just tuning in, it might not be immediately obvious how strong the cryptocurrency's recent performance has been or the conditions under which it's seen the boost. After all, as recently as mid-September, bitcoin's perceived bubble had all but burst when the price fell from $5,000 levels to below $3,000.

Yet, out of this doom and gloom, bitcoin has seen a phenomenal rally, delivering more than 70 percent returns in under 30 days.


Further, it's done so in the face of powerful headwinds – China, the world's largest market had just banned ICOs, throttling a thriving use case, and there is still the silent specter of yet another upcoming fork that could split the network, this time more acrimoniously.

 

Eoin Treacy's view -

In a bull market prices will advance on both good and bad news. What are the trend’s consistency characteristics?



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October 11 2017

Commentary by Eoin Treacy

October 11 2017

Commentary by Eoin Treacy

Email of the day on over representation of tech in emerging market indices

Think, this issue discussed in Reuters article may be of interest to you and subscribers. The boom in emerging market technology stocks is becoming a problem for fund managers of all stripes. The soaring market capitalization of a handful of companies such as China’s Alibaba (BABA.N) and Tencent (0700.HK) is steadily lifting their weighting in the MSCI emerging equities index. This means investors in funds that track indexes (exchange traded funds or ETFs) - who want exposure to a range of companies for a lower fund management fee - are finding themselves increasingly exposed to a single sector. Meanwhile, active fund managers, who justify charging higher fees for their individual stock-picking expertise, are under pressure to buy those tech stocks to ensure their funds keep up with the index’s gains. And with both sets of investor chasing the same thing, the risk of dramatic outflows increases if the sector falters.

Eoin Treacy's view -

Capitalism trends towards concentration and the nature of bull markets is to increasingly favour winners as they mature. There is no doubt that the technology sector has been the clear leader in this economic expansion so it is to be expected it occupy an increasingly large segment of major market indices in both developed and developing markets. As you point out that contributes to deteriorating diversification in portfolios. 



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October 11 2017

Commentary by Eoin Treacy

Email of the day on negative sentiment

October 11 2017

Commentary by Eoin Treacy

Email of the day on Mexico

I'm forwarding to you the most recent free, weekly commentary of Michael Drury, in house economic analyst for McVean Traders, a Memphis (Tennessee) based commodities broker-dealer. I find the commentary, an evaluation of the current status of the Mexican economy, to be quite lucid and educative. Perhaps others of your readers would find it so, too?

Warm regards and with great appreciation for the service you render.

 

Eoin Treacy's view -

Thank you for your kind words and this report which may also be of interest to subscribers. Here is a section:

At the Bank of Mexico, much of the conversation centered on Mexico’s current very high rate of inflation – which is largely due to surging energy costs after deregulation of the electricity sector a year ago.  As with Japanese VAT tax increases, these reforms caused a pig in the python effect as they work their way through reported annual CPI increases.  Mexico’s CPI should plunge lower toward 4% early  next year as the energy hikes pass out of the data.  This is still high compared to the 3% target, but should drift within the 1% acceptable band around the target.  The Bank sees more recent data as confirming that new inflationary pressures (which were mostly from the pass through effect of higher energy cost) are small.  As a result, recent hikes in the central banks reference rate are expected to end – though they will not be quickly reversed.  The combination of sticky rates and plunging inflation suggest a threat to Mexican growth from sharply higher real interest rates.  However, real economic growth has surprised to the upside recently, while high inflation has reduced the burden of earlier debt accumulation.  Long term interest rate appear already to have peaked as Bank rate hikes are ending. 

One perennial problem for Mexico is a low domestic savings rate and underdeveloped financial markets.  Combined with the earlier commitment to the view that all Mexican oil is a resource for the people and so no foreign ownership should be allowed, this meant that Mexican oil resources were underutilized and inefficiently operated.  However, as the deregulation of the telecom industry has shown, competition increases consumer options and lowers prices.  Private firms (from Italy and Houston) have recently found 3.4 million barrels of oil – out of an estimated 9 billion in Mexican reserves.  Perhaps those figures will have to be revised higher.  However, issues concerning crossownership and the upcoming election – where Obrador is campaigning for a roll back of energy reforms -- are clouding the speed with which these huge finds will be developed.  

 



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October 11 2017

Commentary by Eoin Treacy

JD Logistics Launches World's First Unmanned Parcel Sorting Centre

This video is representative of the highly or fully automated future of logistics. 

October 10 2017

Commentary by Eoin Treacy

October 10 2017

Commentary by Eoin Treacy

Not Business as Usual

Thanks to a subscriber for this heavyweight 329-page report from Deutsche Bank which may be of interest. Here is a section:

Not business as usual for the oilfield services industry 
This is an industry that is still in transition, and these are companies that still need to navigate this transition. The commercial development of tight oil reserves in the US was disruptive and it derailed the normalization of the cycle. The business models that worked last cycle will not necessarily work again this cycle. We believe in the long term, the oilfield service franchises that will be the winners will be those that evolve with innovative business models, and those that acquire or invest in niche technology leaders. 

Pressure pumping demand poised to recover to 2014 highs 
The biggest common denominator among our top picks is exposure to pressure pumping. As US producers tailor their drilling programs to focus increasingly on their core acreage and best wells, there will be a disproportionate mix of leading edge, longer lateral wells with tighter stage spacing and higher sand loadings. This will drive the average completion intensity per well even higher, which should restore the demand for horsepower to the 2014 highs despite a lower rig count.

 

Eoin Treacy's view -

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

Oil service companies have been among the primary targets for cost cutting by major oil producers. As wave after of wave of rationalization gripped the sector during the oil price collapse the major oil producers cancelled green field sites, abandoned deep-water drilling and committed to a lower for longer price forecast which dramatically altered their spending plans. The result was that the oil service sector is now a fraction of the size it attained at the oil peaks in 2008. That is before one considers the current optimism for electric vehicles, renewable energy and domestic batteries. 



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October 10 2017

Commentary by Eoin Treacy

Funding Battle Heats Up for World's Strongest Material

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

“Our revenue is starting to come through but it’s not substantial enough yet to offset the costs in the business,” Applied Graphene Chief Executive Officer Jon Mabbitt said in a phone interview, adding that its number of graphene-related projects has quadrupled to about 100 during the past year. “The momentum is building and the U.K. is doing pretty well."

Applied Graphene has little competition in its specialty of using the material in coatings and composites, according to the CEO. The company is working with about 50 manufacturers including Sherwin-Williams Co. on displacing traditional additives like chromates, phosphates and glass flakes used by coatings industry.

Eoin Treacy's view -

Graphene is often referred to a wonder material and for good reason. However rather than speculate on the myriad uses it can conceivably be put to the obstacle to widespread adoption has been mass production. That is the area where the majority of R&D money is being spent. A race is on to gain market share as the sector evolves and explains why small companies are attempting to source fresh capital. 



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October 10 2017

Commentary by Eoin Treacy

Commodities report

Thanks to a subscriber for this report from MacQuarie which may be of interest. Here is a section on precious metals: 

In the PGMs, we have again reduced our platinum price expectations. The rally we had been calling for from July did happen, but when it came it was so unconvincing, mainly based on a higher gold price, it might have been better if it had not happened at all. When gold lost steam it was exposed for what it was. A number of bullish factors we had cited – such as strong Chinese imports – have faded, and our expectations of a stabilisation of the European diesel share look to be premature. We continue to believe – absent a sharp decline in the rand – that platinum’s worst days are behind it, and our gold and FX forecasts imply decent gains in 2018/2019. A better world economy should help platinum jewellery demand, while the Chinese diesel sector offers some respite from the European negativity. But platinum simply isn’t in short supply at present. 

Whereas palladium is. We still can’t quite believe it should be worth more than platinum, and we don’t think it will be for long. But the internal forces that would bring this about are currently quite weak – gasoline engines continue to gain market share vs diesel, and substitution of platinum, while now making more sense than the reverse, is not an immediate thing. So while palladium is still set to fall back over 2018, that will be largely on external factors – weaker US and Chinese car sales – and that process has been delayed by the stronger-for-longer world economy we now see. Adding to this, investor sales have dried up. This matters as the market is in deficit, and we had expected investors, scared by the prospect of EVs, to fund it. That EVs haven’t scared them is perhaps understandable given limited volumes so far, but the deficit still needs funding, and a higher price for longer is the result. 

 

Eoin Treacy's view -

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

Palladium has been outperforming the other precious metals and indeed the industrial metals all year but it has paused in the region of $1000 and some consolidation has been underway for the last couple of months. Nevertheless, a sustained move below the trend mean would be required to question medium-term scope for additional upside. 



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October 10 2017

Commentary by Eoin Treacy

October 09 2017

Commentary by Eoin Treacy

October 09 2017

Commentary by Eoin Treacy

Beneath Hurricane-Hit Payrolls, U.S. Labor Market Shows Strength

This article by Patricia Laya and Sho Chandra for Bloomberg may be of interest to subscribers. Here is a section: 

“You have to qualify a lot in this report,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. That said, outside of the hurricane effects, the labor market “seems to be still solid.” The drop in unemployment and rise in participation are positive signs, and “we’re still creating more than enough jobs to absorb new entrants. The slack is diminishing.”

Average hourly earnings jumped from a year earlier by the most since the expansion started in 2009, in part because the storms boosted utility workers’ overtime pay and kept people away from work, especially in low-wage industries such as leisure and hospitality. There was also a calendar quirk that tends to produce stronger wage growth when the 15th of the month falls within the survey week.

 

Eoin Treacy's view -

Labour force participation has been a worrisome missing ingredient for the Fed as it moves towards raising interest rates. However, it stands to reason that with plenty of jobs on offer it is only a matter of time before wages increase enough to encourage people back into the workforce. 



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October 09 2017

Commentary by Eoin Treacy

During Irma's Power Outages, Some Houses Kept The Lights On With Solar And Batteries

This article by Adele Peters for fastcompany.com may be of interest to subscribers. Here is a section: 

Of course, if a storm is strong enough to tear solar panels off a roof and the battery can’t recharge, this type of system wouldn’t work for long. It’s also expensive: A single Powerwall unit, which can store 14 kilowatt-hours of energy, costs $5,500 plus supporting hardware and installation that can cost up to $2,000. A similar battery from Mercedes-Benz ranges from $5,000 to $13,000 for a 20 kilowatt-hour system including installation. In the U.K., where Ikea now sells both solar panels and batteries, its batteries are also nearly $4,000 at current exchange rates. Beyond cost, if someone rents an apartment or house and can’t install solar panels, it’s not an option.

But the cost is likely to drop, and battery storage and solar power could also be used in community solar projects, where customers don’t have solar panels at their own homes, but invest in or buy power from a nearby microgrid. In Orlando, customers can buy solar energy from a 12-megawatt solar farm built on top of a landfill; while the power is currently sent back to the grid, in the future, it’s possible that it and other community solar farms could use batteries to provide local backup power from multiple locations in emergencies.

 

Eoin Treacy's view -

Microgrids, batteries and solar cells have the potential to grow exponentially as costs come down and business models evolve. There are two additional points that are likely to prove attractive to consumers as well as government. The first is that the utility network is likely to be a target in any future war and foreign governments have already demonstrated both the intent and ability to tamper with it. 



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October 09 2017

Commentary by Eoin Treacy

Spain Warns Catalonia Independence Bid Risks Economic Meltdown

This article by Maria Tadeo, Esteban Duarte, and Angeline Benoit for Bloomberg may be of interest to subscribers. Here is a section:

Spanish 10-year bonds rose, with the spread over German bunds narrowing by six basis points at 11:38 a.m. in Madrid to 119 basis points. Spain’s benchmark stock index has lost about 1.2 percent since Catalans voted in defiance of the Constitutional Court, while Catalan companies including lender CaixaBank SA are moving their legal bases out of the region.

Nadal, the energy minister, suggested Catalonia would be jeopardizing electricity supplies and communications networks. Catalonia has little control over energy supplies and is reliant on the big Spanish companies that, in theory, could suspend service and turn the lights off.

“It so terrible a scenario the idea of independence, that everything won’t work from the single moment from which independence is declared," Nadal said in a Bloomberg Television interview. "There will be a problem in the energy sector, there will be a problem in the telecom sector, in the financial sector of course.”

 

Eoin Treacy's view -

The only way an independent Catalonia can function would be to introduce capital controls. There is already evidence of capital flight with Caixa Bank, for example, moving its headquarters to Madrid. If the Catalan administration does in fact wish to declare independence they have no time to waste. 



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October 06 2017

Commentary by Eoin Treacy

October 06 2017

Commentary by Eoin Treacy

Macro Morsels

Thanks to a subscriber for this edition of Hardings report for Maybank which today includes a section by Russell Napier. Here is a portion:

While developed world central bankers claim and deserve some credit for saving the world from a depression in 2009, their colleagues in the emerging markets may also have been key players in staying disaster. As OECD broad money growth actually contracted in late 2009, China saw broad money growth around 30% and India around 20%. 

Could this have been a key factor in preventing a debt deflation? If so, we need to be concerned that as broad money growth in the OECD slows rapidly the growth of broad money in India and China has reached new lows. 

In China M2 growth year on year, at 8.9%, is the lowest level of growth recorded since records began. That is a marked slowing from the growth rate of above 11% when the world thought Chinese growth was collapsing in 1Q 2016. That tightening in monetary policy occurs as three-month interest rates in China have risen from a low of 2.7% in 2016 to 4.7% today.  

Eoin Treacy's view -

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

China is attempting to clamp down on property market speculation as prices continue to climb. That could well be behind the slow pace of money growth. However, it is also worth considering that the cuts to reserve requirements on its banks announced Wednesday were designed to act as some incentive to increase money supply

The Hong Kong Financials Index, which is comprised primarily of mainland banks and insurance companies, continues to outperform the China Enterprises (H-Share) Index. The 4000 level has acted as an area of psychological resistance since 2008 and it rallied above it on Wednesday. A break in the progression of higher reaction lows would be required to question medium-term scope for additional upside.

 

The Shanghai Property Index pulled back sharply before the mainland market closed for the Mid-Autumn festival and is now testing the region of the trend mean and the progression of higher reaction lows. It will need to bounce soon if potential for higher to lateral ranging is to be given the benefit of the doubt.

 

Russell Napier’s contention that risk is growing in the financial sector is far from a lone voice in the wilderness and there is some weight to the argument however if we assess the consistency of trends across global markets there is scant evidence of top formation development, at least right now.  



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October 06 2017

Commentary by Eoin Treacy

Baidu Invites China's Cybercops to Label, Rebut Fake News

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

The platform links 372 police agencies who will use sophisticated artificial intelligence-driven tools to monitor and respond to fake news, blogposts and other items across about a dozen Baidu services, including the popular search engine, the official Xinhua News Agency reported. More than 600 organizations and experts in different areas will be enlisted to weigh in on their respective fields, according to an email sent by Baidu. They included official organs such as the Chinese Academy of Social Sciences, as well as media outfits such as Shanghai United Media Group and Caijing.

Internet giants from Facebook Inc. to Twitter Inc. are struggling to deal with a proliferation of spurious news articles across social media services. Baidu’s approach allows the Chinese government to intervene directly and write articles in rebuttal. Items that its system decides are fake will be clearly labeled a “rumor” at the very top of search results, alongside an explanation penned by the relevant agency or organization, according to a sample page Baidu provided.

Eoin Treacy's view -

One of the reasons companies like Alphabet and Facebook cannot gain access to China’s market is because they are unwilling to acquiesce to the demands the central government makes in terms of unfettered access to user data. Domestic Chinese companies do not have the luxury of choice. 



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October 06 2017

Commentary by Eoin Treacy

Amazon Is Said to Test Delivery Service to Rival FedEx, UPS

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

 

Last year, Amazon introduced Seller Fulfilled Prime, which lets merchants who don’t stow items in Amazon warehouses still have their products listed with the Prime badge, meaning they’ll be delivered within two days. The merchants had to demonstrate they could meet Amazon’s delivery pledge, and many used UPS and FedEx for deliveries. The new service gives Amazon control over those deliveries instead, even if it continues to use third-party couriers.

Amazon has started looking beyond its own warehouse network to give shoppers quick access to an abundant assortment of goods. Its Fulfillment by Amazon offering already lets merchants ship goods to Amazon warehouses around the U.S., where they can be stored, packed and shipped to customers. That centralized approach can create logjams, particularly during the busy holiday shopping season.

Seller Flex would also give Seattle-based Amazon more visibility into the warehousing and delivery operations of its merchant partners, potentially helping it make full use of their product inventory, storage space and proximity to customers while still guaranteeing quick delivery.

Eoin Treacy's view -

Mrs.Treacy’s Amazon business was invited onto Seller Fulfilled Amazon yesterday so I will inform subscribers of how that works out once we have some experience of it. 



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October 05 2017

Commentary by Eoin Treacy

October 05 2017

Commentary by Eoin Treacy

India's Digital Leap - The MultiTrillion Dollar Opportunity

Thanks to a subscriber for this highly educative heavyweight 124-page report from Morgan Stanley which may be of interest. Here is a section:

Digitization is that idea in India, right now. The government and the Central Bank are on a mission to rapidly formalize and financialize the Indian economy. India has introduced a universal biometric identification system (Aadhaar), initiated measures to boost financial inclusion (Jan Dhan), moved to a new fully online value-added goods and services tax system and implemented real-time payment systems (Unified Payments Interface and Bharat QR). Coupled with rising smartphone penetration, likely doubling from 300 million to nearly 700 million by 2020, these changes are driving India's digitization. We expect a step change in India's per capita income, banking system and stock market performance over the coming years. The channels of change include more financial penetration,
greater tax compliance and increased credit to micro enterprises and consumers.

The result could be a multi-trillion dollar investment opportunity. Aside from the near-term teething issues involved in execution of such big changes and other cyclical problems faced by the economy, there is scope for visible shifts in economic activity starting in 2018 eventually leading to India being a) the third-largest economy in the world with a GDP of US$6 trillion, b) among the top five equity markets in the world with a market capitalization of US$6.1 trillion and c) the country with the third-largest listed financial services sector in the world with a market cap of US$1.8 trillion by 2027. We also expect India's consumer sectors to add about US$1.5 trillion to their current market cap of US$500 billion over this period.

There are implications beyond India. The concomitant increase in e-commerce, consumption basket, financial products and investments will make India a significant market for global corporations. Most importantly, if India succeeds, it will become the template for other emerging nations. While increasing financial inclusion has been the policy objective across emerging nations, India can provide leadership with its unique model. Hence, it is very important for corporates, investors and policymakers across the globe to observe and understand these developments in India. Indeed, there may be lessons for developed countries too.  

 

Eoin Treacy's view -

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

Governance is Everything but it is not an absolute designation. Governance is all about the trajectory of policy and in India we can unabashedly say the trend is upwards. That is of course in full realisation that is it coming from a low base. 



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October 05 2017

Commentary by Eoin Treacy

More Lean, More Green

Thanks to a subscriber for this report from Goldman Sachs dated June 5th which is no less relevant today and may be of interest to subscribers. Here is a section:

We expect the costs of wind and solar to fall below the level of European power prices in the early 2020s (Exhibit 4). As costs fall below the price of the marginal technology, we expect utilities to ramp up their renewables installations, to keep/gain market share in the generation mix. We expect this to significantly change the generation mix in Europe, and would expect thermal technologies (mainly coal and gas) to be negatively impacted in terms of output. We would expect most governments (aside from those keen to protect a particular technology, such as domestic coal) to support this, as it should help reduce carbon emissions and lower electricity tariffs.  

Profits for wind developers/manufacturers to accelerate We estimate that the reduction in costs for wind/solar that we forecast will trigger a 30% step-up in annual global renewables investment (MWs) globally, post 2020, for the main European developers (Exhibit 7). We expect this trend to accelerate net income growth to c.2.5% (2017-36E) from 1.5% currently (Exhibit 8). 

For the European wind turbine manufacturers, we expect an average step-up in annual revenues of c.17% globally over 2017-36E, vs. 2017E (9 pp higher than previously anticipated), boosting annual net income by 58%. We estimate that this will support an equity value c.15% higher than we previously anticipated for the manufacturers.  

Our forecasts assume a significant change in the generation mix only in Europe: therefore, we would see upside to our renewables estimates if we were to extrapolate this globally.

 

Eoin Treacy's view -

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

When thinking about the march of technology we need to force ourselves to think about the consequences of something that is happening today on the future. The pace of innovation is accelerating; often in an exponential manner so the linear trajectory of our personal experience is often not the best way to think about the how markets will evolve. It would be easy to look at the wind or solar sector today and conclude it is not yet competitive but technology is changing so quickly that it is almost inevitable it will be cost competitive in future. That is the whole point of the exponential way of thinking Ray Kurzweil pioneered. 



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October 05 2017

Commentary by Eoin Treacy

The Human-Robocar War for Jobs Is Finally On

This article by Aarian Marshall for Wired.com may be of interest to subscribers. Here is a section:

It’s a small but noteworthy loss for the burgeoning self-driving trucking industry and the innovators therein, like Uber, Tesla, and Amazon, which have all lobbied for clear national rules governing the autonomous big rigs they want to build, sell, or use. And it’s an early win for the labor unions, whose influence in Washington has taken a precipitous dive since the 1980s, and more specifically for the Teamsters, which represents almost 600,000 truck drivers nationally and had asked legislators to keep their commercial vehicles out of the discussion, at least for the time being.

“The issues facing autonomous commercial trucks are fundamentally different, and potentially more calamitous, than those facing passenger cars, and warrant their own careful consideration,” Teamsters rep Ken Hall told the Senate during a hearing on autonomous trucks earlier this month.

It makes sense that trucking is the focal point of nascent AV regulation. From a technological perspective, implementing self-driving in trucks is easier than self-driving personal cars, or even self-driving taxis. Big rigs primarily operate on highways with long, straight stretches and (mostly) clear lane markers and signs. (City driving, by contrast, includes more mercurial creatures: cyclists, pedestrians, traffic lights.) Autonomy offers clear safety benefits, because trucks are overrepresented in road fatalities, and kill about 4,000 people a year on US roads. The economic case is also obvious: Trucking is a $676 billion industry in the US. Shipping faster, more efficiently, and without paying a human driver could only make it more profitable.

 

Eoin Treacy's view -

Subscribers are probably more than familiar with our refrain that technological innovation is changing the world but it is also worth considering regulation represents the framework in which all businesses perform. This is why companies spend so much time lobbying. If they can bend rules to their favour or limit the abilities of others to compete the effort is worth it. Unions think along exactly the same lines, as they attempt to protect the interests of their members even if that curtails the roll out of innovative solutions.



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October 05 2017

Commentary by Eoin Treacy

on a missing link to a talk on bitcoin

Your Comment of the Day yesterday (Oct. 3) included an article regarding Bitcoin which referenced an 18min video which I would like to view. Perhaps I missed it but I do not see a link to the view. Perhaps you have one? Warm regards (to you and to David) and eternal thanks for your service,

Eoin Treacy's view -

Thanks for letting me know and I apologise for the omission. I've added the link to the original article and here is a link to the talk.



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October 04 2017

Commentary by Eoin Treacy

October 04 2017

Commentary by Eoin Treacy

Shale Oil What the Thunder Said

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

After a year-long investigation, we challenge the orthodoxy on shale oil. Breakevens will deflate from $50/bbl to c$25-30/bbl. Ultimate production potential is 25-30Mbpd by 2025-30, overwhelming agency forecasts for 5-7Mbpd. The implications extend far beyond the oil industry.

What has changed is our perception of shale oil as a new technology paradigm: a digital revolution, offering 50-70% further productivity gains. Unlocking the full potential requires $100bn pa of upstream investment to be attracted by improving economics. Requisite political support is also warranted by reshaping global geopolitics and manufacturing, in favour of the US.

But world-changing trends are rarely realised in smooth trajectories. The conventional oil industry will contest shale’s ascent. International costs will continue deflating. Tax regimes will be overhauled to reinvigorate investment. Incumbent producers must compete with shale. OPEC’s last resort may be to incite periodic oil price volatility, potentially as soon as 2018.

Investing in this era is challenging. Our models now assume sustained deflation, averaging $46/bbl oil to 2020. The forward curve is too optimistic. Complacent companies will disappoint shareholders. But the leading European Majors are becoming remarkably resilient and can at least preserve equity value.

The prize lies in shale, with 25% upside and lower risk than conventional oil, even amidst low, volatile oil prices. US Super-Majors will capture the opportunity, by pivoting to short-cycle investment. Chevron is preferred. Shorter term bottlenecks will also emerge, benefiting select Oil Services.

Eoin Treacy's view -

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

The energy sector is in a state of flux. That is the natural reaction to a prolonged period of high prices which encourage economisation, greater technological innovation and investment in more supply. We now see a broad spectrum of responses to high prices which have contributed to better efficiency and more potential options for both production of electricity and storage as well as uses for electricity. Meanwhile oil is likely to remain a vitally important commodity for the foreseeable future not least as the global economy continues to industrialise and the chemical industry innovates the cracking process to prioritise commodities as the market demands. 



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October 04 2017

Commentary by Eoin Treacy

Micro-grids at the threshold

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

Batteries allow micro-grids to tap multiple revenue streams: Storage is helping micro-grid to transition beyond suppliers of just back-up power. Aggregation of storage and generation assets within a micro-grid creates a VPP and is capable of providing much-needed resiliency services to the central grid. Demand for these services is more than doubling every five years due to rising renewables in the generation mix. In Europe, this trend will likely continue considering targets to increase renewables by 20% by 2020. 

Block-chain and batteries make electricity trading possible: Utilities in the US and Europe are trialling block-chain technology, which, coupled with storage, can enable electricity trading within and also between micro-grids. Unhindered electricity trading is necessary if we are to overcome the intermittent, geographical and seasonal limitations of renewables. Batteries only offer a limited solution as overcoming these issues in the absence of fossil fuel generation would need uneconomic oversizing of storage capacity. 

Smart grid will be based on storage, micro-grids and electricity trading: We forecast the grid-connected micro-grid market globally to grow to $10bn by 2021 from under $0.5bn in 2016. Battery storage (residential and large) is estimated to play a major role and we expect 30GWh of micro-grid, which translates into a $5bn market opportunity by 2021. Fuel cells could be important for micro-grids as they are the most efficient generation technology – 15% adoption of fuel cells in microgrids will translate into 7.5Gw of demand and a market worth more than $2bn.       

Eoin Treacy's view -

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

Electricity traders have represented one of the largest demographics at The Chart Seminar over the last few years. At least part of the reason for that interest in Behavioural Technical Analysis is because it is a market with a bewildering array of fundamental inputs; coming with a slew of local considerations which contribute to volatility. That is before one considers the innate volatility of the energy markets. Therefore, an understanding of crowd psychology, the rhythm of markets and how one market can affect another are valuable tools which are going to be all the more important as the energy markets fracture with the growth of microgrids. 



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October 04 2017

Commentary by Eoin Treacy

Space: The Next Investment Frontier

Thanks to a subscriber for this report from Goldman Sachs which is dated April 4th but is no less relevant today. Here is a section:

The commercial space economy has stood nearly still for decades. More satellites have gone up and growth has been solid, but the fundamental commercial landscape has remained relatively stagnant. We are witnessing an inflection point in the significance of the space economy, where it becomes central in providing Internet access and basic services to more than half the world’s population, compounding growth. The coming decade will be one of pruning, where only the strongest and most innovative survive the wave of new technology and business models, but that is necessary to propel the mainstay manufacturing and services industries forward. 

The commercial satellite services industry is entering an arms race to acquire the most capacity as pricing collapses in end markets. A single satellite is now being built with more Internet bandwidth than everything launched into orbit, ever. A constellation of small satellites will likely grow the amount of bandwidth on orbit by a factor of at least 10X, at a rapidly falling cost. At the same time, pricing in the launch industry is plummeting. On a cost per kg to LEO basis, prices will soon have fallen by about 90% over the last decade. Decreased launch cost lowers the barrier to entry and helps incumbents that may take advantage of lower capex to flood the market with additional capacity. 

We do not expect all existing players to survive the turbulence that is unfolding, but we also expect new companies to rise to the challenge to take the place of those that fail. The near term will present challenges, but in the back half of the next decade we see supply and demand balancing once prices have fallen sufficiently to fit the budgets of the rural populations of developing countries. Given our view on elasticity in the space economy, though with some stickiness, we expect lower prices to spur demand for launch, spacecraft, and satellite services.

Eoin Treacy's view -

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

A few years ago the 21st century was heralded as China’s century but advances in technological innovation suggest that provided standards of governance continue to improve the region most likely to benefit will be Africa. The introduction of microgrids for power, satellites for internet connectivity and the potential elimination of malaria will allow the focus of infrastructure development to focus on roads, schools and healthcare which should contribute to continued urbanisation and improving crop yields. Since Africa will account for the bulk of global population growth in the first half of this century the stakes couldn’t be higher for achieving a better standard of living for literally billions of people. 



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October 04 2017

Commentary by Eoin Treacy

How is David?

Eoin Treacy's view -

I made a pilgrimage down to Devon today to visit David in the most pastoral of settings. I was delighted to see he is well on the mend and is in high spirits following what was a traumatic time for him over the summer. His new team of specialists in Exeter have made all the difference, treating him like the individual he very much is rather than a commodity. He asked me to extend his thanks to all the subscribers who have sent through their well wishes.  



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October 03 2017

Commentary by Eoin Treacy

October 03 2017

Commentary by Eoin Treacy

European Equity Strategy

Thanks to a subscriber for this heavyweight 153-page report from Deutsche Bank which is chock full of charts many of which are worthy of additional consideration. Here is a section on Europe:

Flash Euro area composite PMI new orders rebounded to a six-year high of 56.3 in September, up from 55.5 in August and consistent with Euro area GDP growth of 3%+ (slide 6). However, PMI momentum – the six-month change in the PMI and a key determinant of European equity market momentum – remains close to zero, having peaked at +4 points in February. We think the current level of the PMI is unlikely to be sustained, given that: (a) PMIs are consistent with GDP growth significantly above our economists’ forecasts (2.2% for this year, 2.0% for 2018) and consensus (2.1% for 2017, 1.8% for 2018); and (b) the PMI has overshot the level suggested by the Euro area credit impulse, which, at 0.1% of GDP, is consistent with a PMI of 51. We expect the PMI to fade back to around 53 by year-end, consistent with our economists’ growth projections. This would imply PMI momentum turning negative over the coming months. Yet, because of the slower-than-expected fade in macro momentum and a sharper-than-expected fall in the European political uncertainty index, our models now point to a flat market by year-end (with temporary upside to 400 on the Stoxx 600, or 4% above current levels; slide 7), before renewed weakness in response to negative PMI momentum in Q1 2018 (with a projected trough below 360 on the Stoxx 600). We expect to turn tactically positive on European equities on signs that PMI momentum is troughing, which is typically associated with a strong rebound (slide 9). Our current projections imply a trough in PMI momentum in early Q2 2018.

Eoin Treacy's view -

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

The Eurozone’s impressive Purchasing Managers’ Index (PMI) survey was also a subject covered by Jeff Gundlach at his talk last week. It reflects both the fact we are in a period of synchronised global economic expansion and that the ECB’s monetary largesse has in effect bought an economic expansion. If the PMI weakens it will represent another reason why the ECB should hold off on tapering. 



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October 03 2017

Commentary by Eoin Treacy

Email of the day on blockchain

Been following some of your spreadbets successfully and thought I'd repay the favour with an interesting video on blockchain. Some readers may want to skip to about half way through this 18 min video

Best regards

Eoin Treacy's view -

Thank you for this thought provoking video and congratulations on taking opportunities as they appear in the markets.

The idea he proposed that each person can take back their identity and only share what they choose is a powerful notion and could easily be a rallying call around which people coalesce to support the technology. The continued rise of cyber criminality and the enormous profits of companies like Facebook and Alphabet could both become politicised topics which help to grow participation in blockchain applications. 



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October 03 2017

Commentary by Eoin Treacy

Chinese EV market nearing 2% penetration

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

In 2016 Chinese electrical vehicle makers represented 43% of the global EV market, or 873,000 units, overtaking the United States for the first time, according to a July report by McKinsey & Company. The report notes that not only did China up its share of the EV market by 3% compared to 2015, it also made gains on the supply side of EVs including components such as lithium-ion batteries and electric motors. "One important factor is that the Chinese government provides subsidies to the sector in an effort to reduce fuel imports, improve air quality, and foster local champions," McKinsey explained.

The Chinese government has announced that "new energy vehicles" (NEVs, which includes hybrids) should account for 8% of the passenger vehicle market by 2018, 10% by 2019 and 12% by 2020, according to EV Volumes.com.

Eoin Treacy's view -

Anyone who has spent any time in Beijing over the winter knows how badly the entire north east of the country needs to combat air pollution. On my first strip in 2005 I developed a cough as if I have been smoking my entire life that only let up once I got back on the plane home. If anything, the air is worse today than it was then. 



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October 02 2017

Commentary by Eoin Treacy