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June 28 2017

Commentary by Eoin Treacy

Pound Jumps as Carney's Hawkish Tone Sends Gilts Tumbling

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

The pound soared by the most in two months and U.K. bonds slumped as Bank of England Governor Mark Carney said the Monetary Policy Committee may need to begin removing stimulus.
Sterling climbed against all but one of its major peers as the comments marked a shift in emphasis for the governor, who signaled last week that now was not yet the time to start the tightening process. The yield on two-year gilts touched the highest in more than a year as money markets adjusted to the change in language.

Sterling has borne the brunt of political and economic uncertainty since the Brexit vote, and has been further buffeted in recent weeks by a growing split among policy makers over the future path of rates. The bank’s Financial Policy Committee increased the countercyclical buffer Tuesday, marking the first unwinding of last year’s stimulus package put in place by the bank.

“The headlines appear to be in complete contrast to the Mansion House speech last week, when he said now is not the time for tightening,” said Jane Foley, head of foreign-exchange strategy at Rabobank in London. “There is the possibility that the Bank of England will, over the next few months, fire other shots across the bow really to reduce that downside potential for the pound.”

 

Eoin Treacy's view -

Central bank communication has a whipsaw feel to it over the last week. The Bank of England first said that it was not ready to remove stimulus and is now saying that an interest rate hike might be closer than we think. Meanwhile Mario Draghi fumbled his communication yesterday when he said the deflationary threat is gone which the market interpreted as a signal the ECB is discussing tapering and officials were back peddling today saying nothing has changed. 



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June 28 2017

Commentary by Eoin Treacy

Today's Bank Stress Tests May Mean a Windfall for Warren Buffett

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

The Federal Reserve's stress tests of major Wall Street firms last week didn't determine how much they can increase dividends and stock buybacks over the next 12 months. But they did produce some good omens for a review due today that does.

All of the institutions met the central bank's minimum capital standards on the first stage of the two-part evaluation, which measured their stability after the past year's payouts if the economy suffered a downturn with unemployment of 10% and a stock-market decline of 50%.

The results indicate the Fed is more likely to approve the firms' dividend and stock-buyback plans during the second stage -- a forward-looking review that measures what their strength would be after the expenses, using the same recession scenario. On a net basis, the payout ratio may rise to 85% of net earnings from 73% last year for the large banks tracked by Credit Suisse, analyst Susan Roth Katzke said in a note to clients.

Since the Fed reiterated that it would still scrutinize dividend ratios higher than 30% more closely, the mix of announced payouts is likely to favor stock buybacks at the biggest banks, which are still subject to a qualitative review that includes the strength of risk-planning practices, Katzke said.

 

Eoin Treacy's view -

The banking sector has had to hold a great deal of capital in reserve to meet increased regulatory demands resulting from tighter regulation in the aftermath of the financial crisis as well as the need to rebuild their balance sheets over the same timeframe. The evolution of policy which recognises the strides made by the sector in rebuilding are likely to be beneficial to investors seeking potential for dividend growth or increased buybacks. 



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June 28 2017

Commentary by Eoin Treacy

Seattle's Painful Lesson on the Road to a $15 Minimum Wage

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

And particularly be prepared to rethink very high minimum wages, like those supported by the “Fight for $15” folks. For as the authors note, the first round of hikes had relatively small impacts, while the second round had huge ones, suggesting that the effects may be nonlinear. And that makes sense. Relatively few people in this country make the minimum wage, so a small increase doesn’t make that much difference to most workers, or most employers. But a large jump affects more people, and the wage increases are much bigger for the lowest-paid staffers. If you make $9 an hour, but generate $10.50 in revenue for your boss, a law that raises the wage to $10.45 may cause her to shrug and decide it’s easier to keep you on as long as she’s making something. But a wage that forces her to pay you far more than you bring in…. Continuing to employ you would just be bad business.

It’s worth noting that Card and Krueger’s famous study involved an increase in the minimum wage from $4.25 an hour to $5.05. That was a significant increase -- about 18 percent. But Seattle’s minimum wage has already increased by 37 percent, and it still has roughly another 20 percent to go.

At some level, we all intuitively understood that this was true. If the minimum wage increases by a penny an hour, probably even most rock-ribbed conservatives would not predict mass firings. On the other hand, if the wage was arbitrarily set to $100 an hour, even ardent labor activists would presumably expect widespread unemployment to follow.  You can’t flat-out say “minimum wages don’t increase unemployment,” because the size of the increase, and the level of the resulting wage, obviously matter at some margin.

 

Eoin Treacy's view -

As this article highlights, very few people in the USA earn the minimum wage. However about a third of the population earns less than $35,000 a year. $15 an hour for a 40-hour, 52 weeks a year comes out to $30,200. Therefore by raising the minimum wage to $15 either those earning slightly more than the current minimum wage will demand more for their work or they will be equated with first time job applicants at fast food restaurants. 



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June 27 2017

Commentary by Eoin Treacy

June 27 2017

Commentary by Eoin Treacy

Draghi Sees Room for Paring Stimulus Without Tightening Policy

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

The ECB president repeated his mantra that the Governing Council needs to be patient in letting inflation pressures build in the euro area and prudent in withdrawing support. At the same time, there’s room to tweak existing measures.

“As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments -- not in order to tighten the policy stance, but to keep it broadly unchanged.”

The comments echo an argument first made by Bundesbank President Jens Weidmann as early as November that, all else being equal, ECB policy would become more accommodative as inflation picked up. With his nod to a frequent critic of quantitative easing who has been calling for an end of the 2.3 trillion-euro ($2.6 trillion) program, Draghi may have set the stage for a discussion in the coming months on phasing out asset purchases. They are currently scheduled to run until the end of the year.

“Draghi moved his first step toward indicating that ECB monetary policy will become less accommodative in 2018,” Marco Valli, an economist at UniCredit in Milan, wrote in a client note. “Unless an unexpected shock materializes, a formal tapering announcement is likely to come at the ECB monetary- policy meeting scheduled on 7 September.”

 

Eoin Treacy's view -

Here is the sentence which probably had most influence on the bond markets today “that “the threat of deflation is gone and reflationary forces are at play,”. The ECB, through massive monetary accommodation, is beginning to achieve the same kind of asset price inflation that the Federal Reserve did in the USA. That is contributing to an uptick in the type of economic activity the central bank measures while the low value of the Euro has boosted the competitiveness of the region’s significant exporting base. 



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June 27 2017

Commentary by Eoin Treacy

Fast, Precise, Cancer care is coming to a hospital near you

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

On Thursday, the Food and Drug Administration approved the first next-generation-sequencing-based test, from Thermo Fisher Scientific, that can tell you how different drugs will work for you, based on the genetic makeup of each tumour. And it only takes four days to get back results. In many ways, it represents the leading edge of precision medicine’s maturation from a buzzword in grant applications and investor pitch decks to a real, workable product that can actually improve patient outcomes.

Getting the FDA’s approval took nearly two years and 220,000 pages of data. (That’s like reading Karl Ove Knausgaard’s 6-book autobiographical memoir front to back 61 times in a row. Talk about My Struggle.) But the process has helped clarify the agency’s thinking about how to regulate personalized treatments going forward, opening up doors for tech that's still in the pipeline.

The panel, called Oncomine Dx Target Test, takes a tiny amount of tumor tissue and reports on alterations to 23 different genes. All that information is useful for physicians, but three in particular—ROS1, EGFR, and BRAF—are the most crucial. That’s because those mutations have drugs to match: Precision medicine chemotherapies from Pfizer, Novartis, and AstraZeneca. The test can be performed at any CLIA-certified lab, and it’s already being offered by two of the largest oncology-focused ones.

Getting the FDA to approve that amalgam of tests wasn’t easy. “Putting multiple genes and multiple drugs on the same test; all of these are firsts,” says Joydeep Goswami, Thermo Fisher’s president of clinical next generation sequencing. “That put the technology under extraordinary scrutiny.” The FDA usually approves one diagnostic for one product or drug—that’s it. But the whole point of precision medicine is to tailor treatments for patients based on their genes, and a bunch of one-off genetic tests aren’t going to deliver on that promise. So a multi-gene, multi-drug panel is kind of a big deal.

 

Eoin Treacy's view -

I have written previously about the rotation into biotechnology shares because of the overextensions present in other sectors and the potential for base formation completion in the healthcare sector. However the above story represents an additional bullish catalyst for the sector. 



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June 27 2017

Commentary by Eoin Treacy

Muppet drops gold price to 6-week low

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

This bears the hallmarks of a fat finger 'muppet' – a trade of 18,149 ounces would be a very typical trade, but a trade of 18,149 lots of a futures contract (which is 100 times bigger) would not be… it leaves us wondering if a junior had got confused between "ounces" and "lots"… or maybe an incorrectly programmed algo ahead of options expiry on COMEX … we just don't know.

The gold price had recovered much of the lost ground in afternoon trade in New York, exchanging hands for $1,243.60 an ounce.

Norman points out that if the trade, which may also have been carried out by a central bank or a large-scale speculator opening a short position, was indeed an error the gold price bear who made the move is nursing a $36 million loss at this point.

 

Eoin Treacy's view -

The gold price experienced a $20 pull back yesterday morning. Two contrasting points are worth mentioning. The first is that despite the high volume the pullback was only $20. The second is that the price did not snap back up immediately afterward, suggesting that while the market was able to absorb the volume there was no surfeit of orders to reassert demand dominance. 



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June 26 2017

Commentary by Eoin Treacy

June 26 2017

Commentary by Eoin Treacy

Nestle Targeted by Dan Loeb in Activist's Biggest-Ever Bet

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

“The L’Oréal stake could be divested via an exchange offer for Nestle shares that would accelerate efforts to optimize its capital return policies, immediately enhance the company’s return on equity, and meaningfully increase its share value in the long run,” said Third Point, which retained former Sara Lee Corp. Executive Chairman Jan Bennink to advise on the investment.

A L’Oréal spokeswoman declined to comment.
Consumer companies have become popular targets for activist shareholders. In 2015, billionaire hedge fund manager Bill Ackman amassed a $5.6 billion stake in snack giant Mondelez International Inc. and called for management to improve the company’s performance, leading to cost cuts. Procter & Gamble Co. attracted Nelson Peltz’s Trian Fund Management LP, which revealed its position in the consumer-products maker in February and has since amassed a stake valued at about $3.3 billion, according to its latest regulatory filing.

Loeb is aiming high with Nestle as activist investors enjoy a resurgence of client inflows and returns. Third Point’s flagship fund gained almost 10 percent in the first five months of 2017, part of an industrywide rebound that saw event-driven funds return 5.6 percent on an asset-weighted basis, the most among the main strategies tracked by Hedge Fund Research Inc.

 

Eoin Treacy's view -

Nestle has a large number of businesses and, in order to remain competitive, needs to reorient itself towards growth sectors in its largest developed markets. It is interesting however that the thrust of the activism is towards highlighting the significant cross ownership Nestle has in other European companies. 



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June 26 2017

Commentary by Eoin Treacy

Why Business in India Will (Probably) Get Easier

This article by Iain Marlow and Unni Krishnan for Bloomberg may be of interest to subscribers. Here is a section:

1. Will it really happen?
It’s been a long time coming -- the tax was first proposed in 2006 -- but in April, India’s president cleared the final procedural hurdle by signing off on some GST-related bills. The last flurry of activity will include rolling out the tax’s technological backbone (known as the GST Network) and training around 58,000 tax officers. Some companies want more time to ready for the new regime, but the government is sticking to its timetable.

2. What’s so good about the new tax?
Those 17 or more state and federal levies on everything from electricity to Gucci handbags complicate efforts to sell products to India’s population of 1.3 billion (about four times bigger than the U.S.). Under the current system, a product will be taxed multiple times and at different rates. In another change, the GST will apply to goods at the point of consumption, rather than where they are produced. That will reduce the cascading effect of taxes, allowing producers to easily claim credits and minimizing the opportunity for corruption.

 

Eoin Treacy's view -

Many of the issues India faces are of its own making, so simplifying the sales tax structure is a major endeavour which should have a significant positive impact on both trade and investment. Many observers have commented on the slow pace of reform during Modi’s administration but this is a landmark piece of legislation which highlights the scope of the government’s ambition to push through meaningful economic change. It also potentially suggests to the electorate that Modi will need a second term to deliver more of what people want. 



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June 26 2017

Commentary by Eoin Treacy

On Target June 26th 2017

Thanks to Martin Spring for his topical newsletter. Here is a section on the potential for a military strike against North Korea:

The diplomatic route that is being pursued by Donald Trump, as it was by his presidential predecessors, is not going to work. China is never going to take actions tough enough to force Pyongyang to give a “victory” to the US-led coalition.

Secondly, because the consequences of another war in Korea, even if brief and limited, would not be catastrophic for Americans... only for Koreans, and perhaps Japanese.

Thirdly, US willingness to act so decisively would convey the strongest possible message to a potentially much more dangerous would-be nuclear power, Iran, to forget the whole idea and behave.

Fourthly, foreign adventures are a classical method for national leaders to divert attention from political difficulties at home. “Trump, facing ever-expanding scandals, continually-low polling numbers, and even potential impeachment proceedings, may decide that a pre-emptive strike on North Korea is worth the costs and consequences,” Micah Zenko writes in Foreign Policy.

Much-respected analyst George Friedman of Geopolitical Futures concludes that the US continues to be “on the path to war.”

The US is not likely to unleash an attack until it has a casus belli, or a challenge from North Korea that it can point to as a defensible cause for going to war.

That hasn’t happened yet. But the situation could change very quickly if the US becomes convinced that the North has developed intercontinental ballistic missiles. Sudden falls in the South Korean and Japanese stock-markets would be an early warning of pending military conflict.

 

Eoin Treacy's view -

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

North Korea currently has three US hostages which it is undoubtedly hoping will be a deterrent to a US military strike. That may prove to be a vain hope if it persists in pursuing development of an intercontinental ballistic missile. Simple maths would suggest the lives of millions of possible US casualties outweigh the near certain death of three. 



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June 23 2017

Commentary by Eoin Treacy

June 23 2017

Commentary by Eoin Treacy

Email of the day on feeling intimidated by the speed of a breakout

In today’s video you made two very valid points:

•    The five largest stocks account for 45% of the US Biotech Index.
Biotech stocks present a short to medium term investment opportunity.

The chart for a leading biotech ETF (see below).  This potential investor finds the chart more than a little frightening.

Eoin Treacy's view -

Thank you for this email and I agree explosive breakouts can be hard to deal with. At The Chart Seminar we define ranges as explosions waiting to happen. Ranges are boring relative to the trending phases so we tend to be surprised by the ferocity of breakouts when they occur even though when a range is completed we expect prices to rise quickly because the breakout punctures a vacuum of supply above the range. 



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June 23 2017

Commentary by Eoin Treacy

Narrowing Arabica-Robusta Coffee Spread to Lure Buyers

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

Lowest premium in nine years will spur arabica demand, Julio Sera, risk- management consultant at INTL FCStone in Miami, says in telephone interview.

* “Who’s going to buy robusta if you can get cheaper arabica?”

* Recent sell-off is overdone and gives roasters and other end- users a chance to lock in supplies in coming months, while speculators unwind some bearish bets

* Prices will probably swing widely before end of month, 2Q

* On Thursday, futures spread between arabica in N.Y. and robusta in London narrowed to 24.4c/lb, lowest since Jan. 14, 2008, when Bloomberg data starts; on Friday, premium rose as much as 17% to 28.5c; average in 2016 was 58c

* On Friday, arabica coffee for Sept. delivery jumps 5.4% to $1.2275/lb

* On Thursday, price slumped as much as 5.4% to $1.155, lowest since March 3, 2016

 

Eoin Treacy's view -

There is a key difference between the CRB Index and the CCI Index or as they are often referred to as the CRB and the Old CRB. The CRB is liquidity weighted so it is heavily influenced by oil. The CCI (Continuous Commodity Index) is unweighted to it should give us a better reflection of investor interest in the commodity sector. 



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June 23 2017

Commentary by Eoin Treacy

June 23 2017

Commentary by Eoin Treacy

Canada Ponders an Unusual Drug Problem: a Shortage of Marijuana

This article by Josh Wingrove  and Jen Skerritt for Bloomberg may be of interest to subscribers. Here is a section:

“Ultimately the biggest problem that appears after today’s discussion is one of supply,” Sousa said in an interview this week. Finance ministers were told demand is “quite high” for marijuana already in Canada, he said. “So we want to make certain that, when we do proceed, there is sufficient supply to accommodate the activity because what we’re trying to do is curb the illicit use and organized crime that now exists around it.”

Trudeau’s framework for legalization, unveiled in April, will rely on Canada’s provinces to set up sale and distribution regimes, while at minimum selling recreational pot by mail beginning some time before July 2018. Key details including taxation remain up in the air. Federal Finance Minister Bill Morneau has said he favors a tax rate that will starve out the black market, one of the government’s key objectives. “That as a conclusion would lead us to say taxation rates have to be low,” Morneau told reporters after the June 19 meeting, where he said they discussed the need for a “coordinated” approach.

Initial Shortage
Canada’s burgeoning marijuana industry has ballooned in value amid optimism over Trudeau’s plan for recreational sales, which Canaccord Genuity Group Inc. said in November could reach C$6 billion ($4.5 billion) annually by 2021. Combined demand for recreational and medical marijuana may reach 575,000 kilograms by 2021, according to the report.

The government says a key aim is to shrink or altogether kill the black market, and any shortage of legal weed would hinder that effort. Trudeau’s plans also allow people to grow up to four plants in a home.

 

Eoin Treacy's view -

November 4th was a mixed blessing for the cannabis sector. On the one hand an increasing number of US states, including California, adopted recreational cannabis laws which in many cases go into effect on January 1st 2018. The flip side was that President Trump has made no secret of his ambivalence towards the sector which has decreased the potential of the Federal ban to be lifted during his tenure. 



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June 22 2017

Commentary by Eoin Treacy

June 22 2017

Commentary by Eoin Treacy

The Senate Health Bill Is a Travesty on a Fast Track: Editorial

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

Efforts to shame Republicans for this attack on the poor, old and sick, who will face the brunt of the cuts, are unlikely to succeed. The bill puts some of the party's most cherished goals in a single package:

It fulfills their promise to repeal Obamacare, eliminating individual and employer mandates for insurance coverage and reversing the trend toward universal access to health care in America.

It caps Medicaid payments to the states and slows the program's growth while enabling states to reduce standards for private insurance.

It cuts more than $900 billion in taxes on the wealthiest.

 

Eoin Treacy's view -

There are substantial questions about what the cost of insurance is likely to be over the coming years as the new administration tinkers with the system without seeming to have a clear vision for what the result will look like. While that is likely to be of particular interest to consumers but there are broader considerations for related stocks. 



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June 22 2017

Commentary by Eoin Treacy

Foxconn Dangles $10 Billion Tech Investment to Create U.S. Jobs

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

The billionaire however focused primarily on Hon Hai’s plans for the longer term. Apple’s main manufacturing partner, which does most production in China, makes everything from smartphones to PCs with a growing clout that has seen it courted by governments around the world.

Gou promised to ramp up investment in the U.S., possibly helping with a rust-belt economic revival. Dubbed “Flying Eagle,” Foxconn’s plan to build a U.S. facility could create tens of thousands of American jobs during Trump’s first year in office. The company is considering a joint investment with Sharp, but details have yet to be hammered out.

In the nearer term, Hon Hai’s shares are riding high as Apple prepares to unveil its latest iPhone -- one of the most- anticipated devices of 2017. The shares closed little changed in Taipei after reaching a record earlier this week.

Hon Hai reported first-quarter earnings short of estimates after a stronger Taiwan dollar squeezed profit in the lull before the new iPhone. That came after a year in which smartphone shipments grew at their slowest pace on record and PC demand continued to flounder. In 2016, Hon Hai’s sales fell 2.8 percent while net income rose just 1.2 percent. Gou said Thursday that revenue and profit this year would be better.
Over the longer term, Gou is re-tooling Foxconn for the future, installing robots to offset rising labor costs in China.

It’s also investing in emergent fields from virtual reality to artificial intelligence.
Hon Hai makes a wide range of electronic devices from HP laptops and Xiaomi handsets to Sony PlayStation game consoles.

But Apple is by far its most important client, yielding roughly half the company’s revenues.

 

Eoin Treacy's view -

Foxconn employs 1 million people in China but is also one of the largest investors in robotic technology to try and mitigate its reliance on human labour. Any factory built in the USA will likely employ a lot of people in the construction phase but will be highly automated to control headcount. 



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June 22 2017

Commentary by Eoin Treacy

High Yield Credit Handbook

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

HY total returns of 4.5% YTD have surpassed our YE target: In what has been a continuation of a strong 2016, total returns surpassed our Credit Strategists’ full year target of 3% by the end of the first quarter. We attribute much of the surprise to the US Treasury move lower, but also point out that current HY spreads of 390bp are ~50bp tighter YTD.

And US Treasury rates are … lower. We entered 2017 with the expectation that three rate hikes could help drive the 10yr UST 50bp higher, to 3.00% (GS Economics view). At mid-year, UST rates have instead declined 35bp, to 2.15% (see Exhibit 1) and our Economics team recently lowered their YE2017 forecast to 2.75% (from 3.00%). To be clear, the revised target still implies a 60bp move higher which could drive a headwind of 2.85% for the HY market (based on an average market duration of 4.76 years).

Spreads are tighter despite over $4.9bn of YTD HY outflows: With the rally in global risk assets, high yield market spreads have tightened ~50bp to 390bp, or inside the 20th percentile relative to the last 30 years. This spread move is even more surprising given it has unfolded in the face of $4.9bn of cumulative HY net outflows YTD. In fact, the HY market has experienced net cumulative outflows this late into the year only once in the last 10 years (see Exhibit 2).

Robust primary volumes continue: HY new issue activity surpassed $300bn in each of 2012, 2013, and 2014, and breached the $250bn mark for 2015. Despite dipping in 2016 (not surprising given the weak macro backdrop in 1Q2016) to $227bn, HY issuance appears poised to make a rebound this year with volumes trending up 6% yoy.

US policy is evolving and remains a key variable: The ramp in soft economic data (see Exhibit 3) suggests the outcome from last year’s election has positively impacted economic sentiment. However, hard economic data (like GDP), as measured by the GS Economics team has yet to inflect. For risk sentiment to remain elevated, we expect investors to be looking to the potential for the hard data to improve and growth to accelerate.

Disruption has been dangerous… what’s the next Rental/Retail/RLEC story? As the HY market has steadily marched higher, not all credits have participated. The market has been particularly unforgiving to stories where secular disruption has emerged. The rental, retail and RLEC sectors are prime examples here (see Exhibit 4) but we also have concerns over legacy software providers, the auto sector, the hospital facilities space and certain parts of media (see p. 4).

Eoin Treacy's view -

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

The bond market has been the surprise outperformer this year particularly following the accelerated pullback following the election. The broader question is whether that is likely to continue if the Fed does indeed follow through on shrinking its balance sheet. 



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June 21 2017

Commentary by Eoin Treacy

June 21 2017

Commentary by Eoin Treacy

Amazon Cometh to Grocery What Does it Mean?

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

2) Removing Consumers’ Online Grocery Pain Points…to Better Attack the$780bn US Grocery Market: The addition of WFM materially improves AMZN’s grocery user proposition and its ability to penetrate the ~$780bn US grocery market (See Exhibit 6). Grocery eCommerce penetration is still low (estimated 3% see Exhibit 7) in part because (per our AlphaWise survey data) consumers enjoy selecting their own food, value the in-store experience as well as the certainty that the food is correct (See Exhibit 5). The addition of WFM and its 465+ stores (across 3 countries and 42 US states) solves these points of friction. Bigger picture, this speaks to the importance of brick and mortar in certain e-commerce categories as AMZN (through WFM) and BABA (though Intime) continue to expand their attack on consumers’ wallets

3) WFM + Prime Now = A 1-2 Hour Prime Personal Shopper: The combination of WFM’s store footprint and grocery inventory with Prime Now will enable AMZN to improve the Prime Now product…as Prime Now will be able to offer consumers grocery delivery in 1-2 hours. AMZN will also be able to leverage the store footprint to house other inventory, to expand its Prime Now selection. Prime Now just became a 1-2 hour personal shopper.

4) Changing Consumer Behavior Again as 1-2 Hour Delivery Could Replace 2- Day Delivery Expectations: In our view, AMZN’s core business is behaviour modification, and a stronger 1-2 hour offering has the potential to further increase consumers’ expectations for e-commerce shipping times. Just as AMZN pushed expectations from a week delivery time (13 years ago) to 2 days (with Prime, introduced in 2005), a more robust Prime Now could further move the goal-posts to 2 hours. This will only further AMZN's competitive offering vs other retailers.

5) A further driver of Prime Subscriber growth. Our Alphawise data show that ~62% of Whole Food Shoppers are Prime Members (See Exhibit 2). Amazon's ability to convert more Whole Foods shoppers into its Prime membership has the potential to lead to faster long term growth and wallet share growth. Bigger picture, 2 hour delivery could also drive faster Prime sub growth. In the words of Jeff Bezos on April 2016 "We want Prime to be such a good value, you’d be irresponsible not to be a member". 

Eoin Treacy's view -

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

There has been a great deal of media coverage of Amazon’s foray into brick and mortar grocery stores, albeit at the high end side of the market. Kroger and Target extended downtrends on the news amid widespread speculation that the middle of the market is being hollowed out and that is an argument I have sympathy with as German discounters Aldi and Lidl expand in the US. 



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June 21 2017

Commentary by David Fuller

China shares get MSCI nod in landmark moment for Beijing

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

Inclusion in the index marks a key victory for the Chinese government, which has been working steadily over the past few years to open up its capital markets, investors said.

"Given the size and importance of China as an economic superpower, I think this is a historic moment," Kevin Anderson, senior managing director of State Street Global Advisors and head of investments in the Asia Pacific region told Reuters.

"It's a long-awaited and much-debated decision in the past, and I think it's more than symbolic as it will create additional flow of capital and potentially a new segment of institutional investors in the China market."

Traders said MSCI's widely expected "Yes" decision had been largely priced in, with the announcement triggering some profit-taking in blue chips, which are no longer cheap after strong rallies this year.

David Fuller's view -

MSCI admitting mainland Chinese shares to the Emerging Markets Index is a major event for China since it has been campaigning for entry for years already. However if we look at what the composition of the new Index is going to be then China does not get a much larger foothold. What the decision does create is the option for MSCI to include mainland shares but it would have to be at the expense of overseas listed shares which have clearly outperformed over the last year and more. 



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June 21 2017

Commentary by Eoin Treacy

Why Britain Has to Be Really Nice to Norway and Russia

This article by Anna Shiryaevskaya  and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

Already buffeted by political chaos at home and abroad, the U.K. gas market must now operate without its biggest stabilizing force: the giant Rough gas storage facility under the North Sea.
     
The planned permanent shutdown of the Centrica Plc site, able to meet 10 percent of peak demand in winter, means Britain is becoming even more reliant on imports of liquefied natural gas or pipeline fuel from Russia and Norway. That sets up the possibility that traders would have to outbid Japan, the world’s biggest LNG buyer, and others to keep millions of homes warm.

Political uncertainty is making the supply game even riskier, with rules for international gas pipelines clouded in mystery as the U.K. negotiates an exit from the European Union.

And the diplomatic crisis this month involving Qatar, the nation’s largest LNG supplier, caused gas prices in Britain to jump the most since January as two tankers were diverted.
     
“It takes two weeks for a cargo of LNG to arrive from Qatar, which is not a politically stable place right now,” Graham Freedman, principal analyst for European gas and power at Wood Mackenzie Ltd. in London, said by phone.“That does raise the political implications quite a lot, along with Brexit. So it’s a perfect storm in terms of security of supply for the U.K.”
     
Last winter as much as 94 percent of the country’s gas came from sources other than storage. More than half of that was imports, mainly through pipelines from Norway. Statoil ASA, Norway’s state-owned producer, has repeatedly said it doesn’t plan to significantly boost exports, but can divert more fuel to Britain if needed.

Eoin Treacy's view -

The graphic contained in this article highlighting the UK’s transition from being an energy exporter to importer represents a major inflection point for the economy which was exacerbated by the repercussions of the global financial crisis. 



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June 21 2017

Commentary by Eoin Treacy

Aussie Banks Seen Set to Dodge Debt Cost Pain After Moody's

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

Surging home prices in cities like Sydney along with rising household debt and sluggish wage growth pose a threat to lenders, according to Moody’s. But the four banks likely won’t have to pay more to issue debt for now, as they remain in the “rare company” of lenders around the world that hold AA level ratings, said Vivek Prabhu, Sydney-based head of fixed income at Perpetual Ltd.

“Any further downgrade would take them into the A rating band and could lead to a more meaningful increase in the cost of wholesale debt funding if this were to occur,” he said.

Australian banks are lenders to some of the most indebted people on the planet. The combination of eye-watering house prices and anemic wage growth has pushed the ratio of household debt to disposable income to 189 percent -- one of the highest levels globally. Every basis point paid to borrow counts for the lenders, who source about two-thirds of their funding from deposits and the rest from debt markets from Australia to the U.S.

Australians piling on mortgage debt has been a key concern of Moody’s, Frank Mirenzi, a senior analyst, told Bloomberg TV Tuesday. “We just don’t know how these mortgages will perform during a real downturn,” he said.

 

Eoin Treacy's view -

While being a net exporter of gas is certainly preferable to being an importer. However the reality is that when the fundraising for developing Australia’s gas supplies was done it was estimated prices would be significantly higher than they are right now. Meanwhile iron-ore and coal prices are in a funk  



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June 20 2017

Commentary by Eoin Treacy

June 20 2017

Commentary by Eoin Treacy

Fed plan to reverse QE is fraught with danger

This article by Ambrose Evans-Pritchard for The Telegraph must have touched a nerve among investors because I received multiple emails asking about it. Here is a section: 

It typically takes about 500 basis points of Fed cuts to fight bad recessions. It was even worse after the Lehman crash in 2008. The Fed ran out of ammunition after 475 points and had to flood the system with liquidity through QE. The total was, in synthetic terms, 850 points of loosening.

As matters now stand, the Fed has just 100 basis points of cuts to play with in a crisis. Prof Blanchflower said: “We should be getting as far away as possible from the zero-lower-bound [zero rates] before selling off any assets, otherwise we are going to have a disaster.”

What makes this so sensitive is that the window for QE in the future is closing. The two new Fed members floated by the Trump administration, Randal Quarles and Marvin Goodfriend, are both staunch conservatives hostile to QE. The bar will be higher. This means the Fed may have to fight the next downturn with little in the arsenal.

It is going to be pretty unpleasant if we hit a crisis with only four rate cuts to play with and no QE.

One ex-Fed official said: “It is going to be pretty unpleasant if we hit a crisis with only four rate cuts to play with and no QE. The whole universe of asset prices is built on the assumption there will always be a ‘Fed put’ and bond yields will never be allowed to rise.”
Professor Tim Congdon, founder of the Institute of International Monetary Research, said quantitative tightening would compound the monetary squeeze just as big banks were already having to boost their loss-absorbing capital to 16pc of risk-weighted assets under the Basel rules.

 

Eoin Treacy's view -

The logical conclusion is that if monetary accommodation contributed to asset price inflation then removal of accommodation should represent a headwind. The Fed is betting inflation and growth will pick up enough to compensate for the impact of the shrinking of its balance sheet. I agree it’s a big bet and I discuss the issue in most big picture Friday audios. 



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June 20 2017

Commentary by Eoin Treacy

June 20 2017

Commentary by Eoin Treacy

Email of the day on companies benefitting from cryptocurrency mining:

Re. your companies associated with Crypto mining - would Softbank come into this after purchasing ARM last year - or were their chip designs of a different application?

Eoin Treacy's view -

Thank you for this question. I’ve done quite a bit of digging and I can’t find ARM listed as a manufacturer of chips that can be used to mine cryptocurrencies.  

While the number of cryptocurrencies is proliferating it is important to highlight that not all use the same kind of technology. For example bitcoin mining is largely confined to ASIC machines manufactured in China and sold on Amazon for example. This article contains quite a bit of detail of which are the best machines. 

 



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June 20 2017

Commentary by Eoin Treacy

Musings From the Oil Patch June 20th 2017

Thanks to a subscriber for this report by Allen Brooks’ for PPHB. Here is a section on the rig count:

At the same time, U.S. oil output continues growing in response to the increase in the number of working drilling rigs. As a result, the International Energy Agency (IEA) is projecting that U.S. oil output will grow by almost 5% on average this year, and by nearly 8% in 2018, overwhelming projected demand growth and re-establishing the glut environment. This forecast is creating concern about the success of OPEC’s strategy of cutting its output. The pessimistic view of crude oil prices rests on the belief that the slow pace in reducing oil inventories will create an environment where cheating on production cuts occurs, making it impossible for demand growth alone to drive oil prices higher. The optimists, including OPEC, believe that its strategy is working, it will merely need more time – hence the nine-month extension rather than a six-month one.

What we know is that the lift in oil prices sparked a drilling rig recovery in 2016, which has continued into 2017, and has become the fastest industry recovery in history. Although the recovery has been the fastest, it has yet to reach the levels of the recoveries of 1979 and 2009. The current weakening of crude oil prices is likely to cut short this rig recovery below the levels reached in those earlier recoveries, unless something else is at work in the oil patch.

 

Eoin Treacy's view -

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

Something interesting has occurred in the oil market as prices have declined almost $10 over the last month. When the front month price was close to the $60 in January the spread between it and the two-year future was about $1. Now it’s closer to $4. 



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June 19 2017

Commentary by Eoin Treacy

June 19 2017

Commentary by Eoin Treacy

UK appears to capitulate on sequencing on first day of Brexit talks - as it happened

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

Britain has abandoned attempts to force the EU to start talks on a future trade deal immediately, and instead the UK’s “exit bill”, and other issues, will come first. David and Barnier have agreed a two-page schedule for talks (pdf), including the dates for five rounds of negotiations stretching into October. As the EU demanded, this involves the “exit bill”, the rights of EU nationals and Ireland being discussed before talks on a future trade deal start later in the process. Davis rejected claims that this amounted to a climbdown, arguing that later trade talks will take place in parallel with talks on the exit arrangements , but there is no doubt that the UK has had to back down from its original
demands. (See 6.07pm and 6.33pm.)

Barnier has said that a “fair deal” for the UK is possible. And he has promised never to work against the UK. He said:

For both the European Union and the United Kingdom, a fair deal is possible and far better than no deal. That is what I said to David today. That’s why we will work all the time with the UK and never against the UK. There will be no hostility on my side. I will display a constructive attitude firmly based on the interests and support of the 27.

Davis also sounded positive. He said that the talks had been “very productive” and that a deal was “eminently achievable”.

But Barnier has also said he is not planning to make “concessions” to the UK. Asked if there would be any concession from the EU, he said:

I am not in a frame of mind to make concessions, or ask for concessions. It’s not about punishment, it is not about revenge.

Basically, we are implementing the decision taken by the United Kingdom to leave the European Union, and unravel 43 years of patiently-built relations.

I will do all I can to put emotion to one side and stick to the facts, the figures, and the legal basis, and work with the United Kingdom to find an agreement in that frame of mind ...

The United Kingdom has decided to leave the European Union, it is not the other way around. The United Kingdom is going to leave the European Union, single market and the customs union, not the other way around. So, we each have to assume our responsibility and the consequences of our decisions. And the consequences are substantial.

 

Eoin Treacy's view -

While much has been made of the EU’s advantages in the Brexit negotiations, as I see it the UK has three primary bargaining chips. First is the size of the exit bill which already forms part of the EU’s budget. The EU is very keen to get this matter settled quickly because it represents a significant hole in what the group has to spend. It looks like the EU has won the right to negotiate this first because the prospect of the UK withholding the money over the course of a two-year negotiation process is something they cannot handle. 



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June 19 2017

Commentary by Eoin Treacy

Email of the day - on bitcoin

“Since you've been commenting on bitcoin recently. You may find it interesting for posting on Fuller Treacy Money site, but I am also asking for your comment for our article. Since the article is in Russian, I will summarize for you. 

Moscow is experiencing an acute shortage of videocards. Actually, there are none in computer shops now (you have to order and wait for 7-10 days). Also, due to feverish demand, prices grew twofold in the last six weeks. Sellers in shops tell us that this is because buyers have been often buying 200-300 videocards at a time. The demand comes from a growing number of PC users mining bitcoin and other cryptocurrencies on their computers, i.e. using complex mathematical methods to create and get a bitcoin. Videocard processors, it appears, are the best for such mathematical calculations. This activity jumped recently, with bitcoin rising from about $1,000 in late March to $3,000 on June 12. While another popular cryptocurrency, Ethereum, increased more than 20-fold since early March to June 13. 

I noticed, that in late May you mentioned Russia among several countries whose activity in creating bitcoins increased significantly. Here, we've got hard evidence of that. Dear Eoin, could you please provide a comment on this from the market point of view? Can this herd behavior be a sign of a bubble and market reaching its high? The bitcoin chart seems to suggest just that, with violent correction in recent days. 

 

Eoin Treacy's view -

Thank you for this topical question. The supply of bitcoin might be limited but the number of different cryptocurrencies is limited only by the imaginations of anyone who wants to create one. Therefore we can conclude a bubble is evident because supply within the asset class is increasing rapidly, as is investor interest with the explosion in demand for mining equipment i.e. graphics cards.



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June 19 2017

Commentary by Eoin Treacy

Clovis's ovarian cancer drug set for label expansion, shares soar

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

Clovis's late-stage trial was designed to move its drug, Rubraca, up to a second-line treatment and later, a maintenance treatment. Maintenance therapy immediately follows initial treatment to keep patients cancer-free if they go into remission.

Rubraca, like Tesaro Inc's Zejula and AstraZeneca Plc's Lynparza, belongs to a closely watched class of new medicines called PARP inhibitors, which blocks enzymes that repair damaged DNA, helping kill cancer cells in the process.

Rubraca was granted accelerated approval in December by the U.S. Food and Drug Administration (FDA) to treat patients whose cancer tested positive for defective BRCA genes, and whose disease had advanced despite two or more rounds of chemotherapy.

BRCA gene mutations are known to raise the risk of breast and ovarian cancers.

Clovis's latest study included 564 patients and tested Rubraca against a placebo in patients with various gene mutations who had undergone initial platinum-based chemotherapy.

When given Rubraca, women with recurrent ovarian cancer lived a median 10.8 months without their disease worsening, compared with 5.4 months for women on a placebo, Clovis said.

Eoin Treacy's view -

Immuno-oncology represents an exciting evolving subsector within the much broader biotechnology theme. It represents the cutting edge of customised medicine where an increasing number of therapies are being developed for very specific attack vectors to target cancers even in late stage patients as detailed above. Considering the fact that tools to measure the immune system’s response to infections didn’t really exist until at least the 1950s, immunology and its many iterations from rheumatism to cancer represent significant growth themes. 



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June 16 2017

Commentary by David Fuller

Tim Cook on Donald Trump, the HomePod and the Legacy of Steve Jobs

MEGAN MURPHY: You’ve talked about Steve Jobs and how you revere him. How much time do you spend thinking about what people will say about your legacy at Apple?
 
TIM COOK: None. To be totally honest with you, I don’t think in those terms. I think more about doing stuff. I hope people remember me as a good and decent man. And if they do, then that’s success.

Steve’s DNA will always be the base for Apple. It’s the case now. I want it to be the case in 50 years, whoever’s the CEO. I want it to be the case in 100 years, whoever’s CEO. Because that is what this company is about. His ethos should drive that—the attention to detail, the care, the ­simplicity, the focus on the user and the user experience, the focus on building the best, the focus that good isn’t good enough, that it has to be great, or in his words, “insanely great,” that we should own the proprietary technology that we work with because that’s the only way you can control your future and control your quality and user experience. And you should have the courage to walk away and be honest with yourself when you do something wrong, that you shouldn’t be so married to your position and your pride that you can’t say, “I’m changing directions.” These kind of things, these guardrails, should be the basis for Apple a century from now. It’s like the Constitution, which is the guide for the United States. It should not change. We should revere it.

In essence, these principles that Steve learned over many years are the basis for Apple. It doesn’t mean the company hasn’t changed. The company’s going to change. It’s going to go into different product areas. It’s going to learn and adjust. Many things have changed in the company, even in the last six to seven years. But our “Constitution” shouldn’t change. It should remain the same. I think of it as a North Star. It’s always important to have that in mind as you make decisions. It ­actually makes decision-making much simpler.

I was a little surprised the HomePod was pitched primarily as a music device when the competitive talk is of Amazon Echo’s Alexa and the immersive experience in the home. How will the HomePod better integrate Apple inside people’s lives?

We’re actually already in the home through the iPhone you take with you everywhere. It’s in your pocket or laying on a stand. Today, pre-HomePod, I can control my home using Siri through the iPhone. When I get up in the morning, my iPhone is my alarm clock. I say, “Good morning,” and all of a sudden my lights come on. The temperature adjusts and a series of things occur. We’re also in the home through Apple TV. Many people use iPad as their computing device. The desktop Mac enjoys a place in the home. The thing that has arguably not gotten a great level of focus is music in the home. So we decided we would combine great sound and an intelligent speaker.

So it’s going to be a holistic process joining up all those touch points so people can exercise control over their lives, whether through Siri or iPad?

To put it in perspective, Siri is getting requests from 375 million devices right now. My guess is it’s the largest by far of any kind of assistant. Some of those requests are done in the home. Some of those are done on the go. That’s the platform that we build off. It’s very different from our starting point. We’re also in so many languages around the world: Siri isn’t just in English. We’re well-positioned around the world. So, again, what is the thing that’s missing in this equation? The combination of quality audio and instinct.

David Fuller's view -

Apple is the market capitalisation leader of a dozen or so mega-tech shares which are almost independent of the pathetic political storms so often brewing in Washington D.C.  The main long-term challenge for these tech giants remains governance and competition. While obviously his own man, Tim Cook shares his mentor’s passion for excellence in this competitive field, including functionality, design and reliability.  Hopefully, Apple’s record cash balance will continue to be used wisely in terms of the share’s long-term development.

This item continues in the Subscriber’s Area.



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June 16 2017

Commentary by David Fuller

The Lady is Not for Turning as Tories Aim to 'Plough On' With Brexit Plans Despite Election Result

In short, the Government’s original plan has become unworkable. Many Brexiteers do not yet see it that way, imagining they might be able to ram a deal through Parliament by presenting it, at the last minute, as the only alternative to no deal at all. But because of the many new areas of law Britain plans to take back from Brussels, Brexit requires Parliament to pass a series of bills – on immigration, fisheries, agriculture and so on – and MPs cannot therefore be held to ransom at the eleventh hour.

The decision to press ahead obliviously is fraught with risk. Negotiators in Brussels will be entitled to question whether May can actually deliver any promises or concessions she offers, and will also wonder why they ought to give any ground when it’s not clear if Parliament would vote through any deal. This heightens the risk of the talks collapsing.

For businesses, this is a nightmarish cocktail of political risk. Everything suddenly seems to be back on the table, from a “hard” Brexit with no deal to none at all. Those hoping that Brexit can now somehow be averted are ignoring the toxic electoral politics of such a move but, equally, Brexiteers who think nothing changed last week are in for a surprise.

The simplest way out of the current mess would be for Theresa May to seek a transitional arrangement that buys more time for both politics and business to adjust. She would probably have had to do so anyway, because it is unlikely that a comprehensive trade agreement could have been finalised in the next 18 months. Her shaky support at home makes a transitional arrangement even more important as a way of creating parliamentary consensus and protecting the economy from an unnecessarily sudden shock.

There is only one obvious, ready-made template suitable for a transition: joining the European Economic Area. This would not yet allow the Government to deliver on its immigration promises, but would set Britain on a smooth path out of the EU while we get our house in order and negotiate the finer details of whatever our new relationship is.

Joining the EEA would require the permission of its current non-EU members – Norway, Iceland and Liechtenstein – but assuming they can be persuaded, it is the obvious halfway house. Shunning the EEA and seeking just to join the European Free Trade Association, as some Brexiteers advocate, isn’t actually much simpler than going for a fully complete Brexit, because in order to maintain full market access it would be necessary to negotiate a lot of bilateral agreements with the EU, as Switzerland has done.

EEA membership, by contrast, is relatively straightforward. It allows unfettered market access in return for an agreement to obey whatever regulatory diktats come out of Brussels. Britain would get back control of home affairs and could request, separately, to remain part of the customs union until we are ready to sign our own, new trade deals and work out a new tariff schedule.

Before any Remainers get too excited by the prospect of this watered-down Brexit, however, it should be made clear that EEA membership is not a permanent solution, as a permanent arrangement it is the worst of all worlds, requiring obedience to Brussels but allowing no input into its rule making. The fact that it denies the Government the ability to control immigration will also be unacceptable to voters in the long-run.

It makes sense, therefore, to set a clear time limit on the transitional arrangement. Five years, extendable by mutual agreement, should allow enough time to work out a proper long-term trade agreement between Britain and the EU, while giving businesses and investors time to understand and adjust to the changes.

Most Brexiteers understand that Brexit cannot be pulled off in the blink of an eye. Their fear that it might never happen does not, however, justify a headlong rush into the unknown when there are better ways to approach it.

Voters have forced the Government’s hand and it is no longer possible for May to set her own pace and priorities. Parliamentary involvement might be annoying and inconvenient, but there is now no way around it. The Government will negotiate more effectively if it recognises its new situation at the outset, rather than facing a crisis later when it can’t deliver on its promises.

David Fuller's view -

Joining the European Economic Area (EEA) for a limited time period makes sense to me as I have said earlier this week. However, there is a risk that Norway, Iceland and Liechtenstein might try to block this, especially if the EU puts pressure on them.  A prior agreement with the three EEA countries needs to be arranged now, rather than assuming that they will have no objection.  David Davis should negotiate this on behalf of the UK rather than Theresa May.

A PDF of this article is posted in the Subscriber's Area.



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June 16 2017

Commentary by David Fuller

Email of the day

On the politics of Brexit:

Dear David, In your latest contribution on Brexit you have referred to the comments by Mrs Merkel, President Macron and Mr. Juncker about the possibility of the UK remaining in the EU. This is a sign that they see in the internal political chaos of the UK the possibility of freeing themselves from the complexities of Brexit and the probable negative effects on the economies of the rest of the EU. However, one should not forget that the price for remaining in the EU would probably include a end to the various opt outs that the UK enjoys at the moment. At this moment, politics is dominating over the realities of business and economics. It is the moment when the leaders of UK agriculture, finance, manufacturing and services should stand up and be counted. They should come forward and contribute actively to the UK's internal debate. They have a duty to tell the UK politicians and public exactly what the various alternatives being discussed actually imply. They have the daily experience of these realities and they have been absent from the debate so far. It should not be left to journalists, academics and politicians to fashion our future.

David Fuller's view -

Thank you for this very helpful email. I agree entirely.

As far as the EU is concerned, politics have always dominated over the realities of business and economics. It would be sensible if this changed but I see no evidence that it is doing so. I assume that a punitive ending of Margaret Thatcher’s opt outs would certainly infuriate most of the UK electorate and turn them against dropping any form of Brexit.

I agree that businesses and their representational organisations should come forward and contribute positively to the UK’s debate regarding its best long-term interests. 



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June 16 2017

Commentary by Eoin Treacy

June 16 2017

Commentary by Eoin Treacy

Amazon to Buy Whole Foods in $13.7 Billion Bet on Groceries

This article by Nick Turner and Selina Wang for Bloomberg may be of interest to subscribers. Here is a section:

Amazon.com Inc. will acquire Whole Foods Market Inc. for $13.7 billion, a bombshell of a deal that catapults the e-commerce giant into the supermarket business with hundreds of stores across the U.S.

Amazon agreed to pay $42 a share in cash for the organic- food chain, including debt, a roughly 27 percent premium to the stock price at Thursday’s close. John Mackey, Whole Foods’ outspoken co-founder, will continue to run the business -- providing a lifeline to the embattled executive after a fight with activist investor Jana Partners.

The deal sends a shockwave across both the online and brick-and-mortar industries, uniting two brands that weren’t seen as obvious partners. But Whole Foods came under pressure to find a buyer this year after Jana acquired a more than 8 percent stake and began pushing for a buyout. Jana’s move irked Mackey, who has referred to Whole Foods as his “baby.” By enlisting Amazon, he gets to keep his job as chief executive officer of the grocery chain.

Whole Foods shares jumped 27 percent to $41.99 as of 10 a.m. in New York, bringing them close to the transaction price. Amazon shares gained 3.2 percent to $995.

 

Eoin Treacy's view -

If you thought the grocery business was competitive before, the polarisation of the market is only growing more intense with Amazon taking a role in the luxury end of the market while Aldi and Lidl are investing heavily in the lower end of the market. Companies in the middle are being squeezed and may represent an additional headwind for the already ailing mall sector. 



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June 16 2017

Commentary by Eoin Treacy

Many Rivers to Cross Decarbonization breakthroughs and challenges

Thanks to a subscriber for this report from J.P. Morgan Private Bank which may be or interest. Here is a section: 

New York. This is more of a theoretical exercise, since in NY, wind/solar comprise only 3% of electricity generation. But in principle, NY could also reduce CO2 emissions to 90 MT per GWh in exchange for a ~15% increase in system costs. One difference vs California is that NY’s build-out would start from a much lower base. The other difference is that storage is less optimal given lower NY solar capacity factors. Instead, a more cost-effective approach to reaching the deeper 60% emissions reduction target would be to build more wind/solar and discard (“curtail”) the unused amount, and not build any storage.

Conclusions. Scale and innovation are creating cost-benefit tradeoffs for decarbonizing the grid that are more favorable than they were just a few years ago, even when including backup thermal power costs. However, this is likely to be a gradual process rather than an immediate one. Bottlenecks of the past were primarily related to the high capital cost of wind, solar and storage equipment. The next phase of the renewable electricity journey involves bottlenecks of the future: public policy and the construction/cost of transmission are two of the larger ones7. As is usually the case with renewables, there’s a lot of hyperbole out there. The likely trajectory: renewables meet around one third of US electricity demand in 2040, with fossil fuels still providing almost twice that amount

Eoin Treacy's view -

Energy storage solutions have been evolving for a long time but the advances in battery technology has potential to revolutionise the sector. However he cost of those batteries still needs to come down a lot for them to truly have a transformational impact on the cost of generating and storing energy. What is clear from the above report is that the continued build out of renewable energy solutions, with or without storage, represents an additional cost for consumers over the lengthy medium term without a major advancement in battery technology.  



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June 16 2017

Commentary by Eoin Treacy

China Banks Endure Record Costs as Squeeze Leaves No Choice

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

When cash supply tightens, small- and medium-sized lenders are usually among the hardest-hit because they lack the retail deposit arsenal of larger banks, said Yulia Wan, a Shanghai- based banking analyst at Moody’s Investors Service. They also may not have enough bonds to use as collateral to borrow money in the repo market. The banks need the money to finance longer- term and less liquid assets, such as debt and investment in loans and receivables, she added.

The PBOC has begun to take note of the stress on the financial system.

The monetary authority has injected a net 160 billion yuan through open-market operations this week, the most since the five days through May 19. The central bank-run Financial News said on June 10 that the “abnormal market swings” of June 2013 won’t happen again -- a reference to a record cash crunch four years ago.

Still, China’s seven-day repurchase rate -- the money- market benchmark -- has averaged 2.74 percent so far in 2017, compared with 2.32 percent a year ago. The gauge climbed four basis points this week to 2.95 percent, while the one-day rate rose three basis points to 2.86 percent.

“Some lenders don’t have better sources of funding to replace NCDs,” said Moody’s Wan. “Issuing such debt at such a high price will have a negative impact on their profitability.”

Eoin Treacy's view -

There is a lot happening in the Chinese financial sector right now. First off there is an official drive to contain speculation. The question is why now? Leverage, speculation and infrastructure development, all backed by government support, have been part and parcel of China’s economic growth model for decades. The question now is why is it such a problem today? I can think of two answers. 



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June 15 2017

Commentary by David Fuller

A Hard Brexit Risks No Brexit at All

Here is the latter section of this forceful and inevitably controversial column by Ambrose Evans-Pritchard for The Telegraph:

Like others, I have floated the Norwegian option as a half-way house for five to ten years. The European Economic Area allows to Britain to retake farming and fisheries, and to remove itself from the EU's widening competence of foreign, policy, defence, justice, and home affairs.

It would give Britain access to the EU single market without being a member of the customs union, which we should avoid like the plague. Outside the customs union the UK could negotiate trade deals with the US, China, India, Japan and others over time. To remain in the union - the latest media fashion -  is completely wrong-headed. It would leave the UK trapped inside the EU trade net.

The elegance of the EEA is that if we wish to withdraw  later, we could do so in less traumatic circumstances than withdrawal from the EU today under the cliff-edge clause of Article 50. 

It would become progressively easier to break free entirely - if desired - as trade deals stacked up. This would create some implicit leverage. Britain would probably have just as much effective say over EU market legislation as it does now under qualified majority voting, where it has no veto.  

Outside the customs union, the UK would have to comply with rules of origin codes to prevent China, the US, or any other third country, using our market a duty-free back-door into the EU market. Companies already do this routinely to comply with NAFTA rules in North America. It amounts to no more than a minor friction for large firms using modern software.

The EEA option greatly reduces the reach of the European Court (ECJ), and certainly stops euro-judges creeping into all areas of law through the Charter of Fundamental Rights. The ECJ would still have sway (through the EFTA court) over market matters but this would be tightly focused.

I do not wish to rehearse the argument over whether you can control free movement in the EEA. Clearly there is a bias towards free flows, but some controls are possible. There is already a precedent for Australian-style quotas. Liechtenstein does exactly that. I have no problem with this.

One can overstate the attraction of the EEA. Lorand Bartels, an international law don at Cambridge and senior counsel at Linklaters, has convinced me that Britain UK would have to join as a new member, subject to veto by others.  

It would not inherit the right of membership automatically as it steps out of the EU, as I previously thought. This would make us a supplicant - more vulnerable to horse-trading on other matters - and somewhat reduces the appeal of the EEA. 

There are others ways to skin a cat. John Springford from the Centre for European Reform has written an excellent paper on the possibilities of the EFTA-based 'Swiss' option. 

The Helvetophile Tory MEP Dan Hannan - once of this parish - has been a tireless advocate for such an arrangement, deeming it the closest possible relationship with the EU that is also compatible with full sovereignty. Call it medium-soft if you want.

What we hear instead are war cries from Tory ultras telling us that a soft Brexit is code for no Brexit. My fear is that the Government, frightened of such backbenchers, will bluff and bluster its way into the coming Brexit talks, with the wrong priorities, with too little public support, and against the backdrop of a deteriorating economy. 

This will lead to a showdown that can end only one way, since Downing Street has no credible back-up plan. Europe would call that bluff. Such a 'Greek' debacle would discredit Brexit beyond repair. 

The cardinal objective is to restore the primacy of UK law and to escape the expanding writ of the ECJ. It is to regain self-government under the supremacy of Parliament. How this is achieved is a secondary. How long it takes is immaterial. Ten years is nothing in the life of a nation.

To those readers who balk at any compromise, needed both to smooth this extraction process and to keep the great middle of British society on side, I can only reply: you risk losing the one chance in over forty years to jump off the federal express. The best is the enemy of the good.

David Fuller's view -

I think what AEP says makes good sense from the British perspective.  What concerns me and what he does not discuss, is how the EU will respond. We have already heard Schaeuble say that the UK would be welcomed back if Brexit was overturned.  Macron has said virtually the same thing, so we can assume that many other European leaders hold similar views. Meanwhile, Jean-Claude Junker says it is a ‘tragedy’ that EU is celebrating its 60th anniversary without Britain.

The EU is in a position to block Britain’s efforts to join either the European Economic Area (EEA) or the European Free Trade Area, as I have said before, should it wish to. If so, what then?

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



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June 15 2017

Commentary by David Fuller

Broke and Angry is a 'Circus'

MOSCOW —  Facing a wave of popular unrest not seen in years, Russian President Vladi­mir Putin took to the nation’s airwaves Thursday to assure citizens that their lives will be getting better. Judging from the questions the Kremlin leader fielded over four long hours, Russians aren’t feeling it.

Just three days after tens of thousands of people turned out in more than 180 cities across Russia to express their dissatisfaction with the government, Putin used his annual “Direct Line with the President” call-in show to say that the Russian economy is showing signs of growth after a long recession and that “in general things will start moving to where people feel a change for the better.”

The questions that came in from viewers across the country reflected little of that. A Siberian teacher asked him how she’s supposed to live on $280 a month. The residents of a Moscow suburb complained about a giant pile of garbage that they said is visible from space. A 24-year-old cancer patient from a polar mining town demanded to know why health care is in a shambles.

And:

The carefully choreographed show has traditionally been a showcase for Putin to show he understands his people’s problems, and how he’ll get to the bottom of them.

But unedited texts from viewers that popped up on the bottom of the screen revealed the anger and frustration some Russians feel about their leader and the system he has created.

“Putin, do you really think people believe in all this circus with staged questions?" read one.

“All Russia believes you have sat on the throne too long,” read another.

Yet another asked when Putin would get around to firing officials who have faced corruption allegations, including Prime Minister Dmitry Medvedev.

 If Putin saw these comments — he said he was watching them — he did not react. When a young man in the Moscow studio where Putin sat asked a sharply worded question about official corruption, the Russian leader shot back, “Did you prepare that yourself, or did someone suggest it to you?”

“Life prepared me for it,” the man responded.

More than 1,700 people were arrested in protests on Monday, the most widespread in Russia since Putin returned to the presidency in 2012. The nationwide rallies were spearheaded by anti-corruption crusader Alexei Navalny, who was jailed for moving a Moscow demonstration from its designated venue to a central street where it disrupted official Russia Day festivities

David Fuller's view -

Dictators often appear to have the most secure jobs in politics.  The often do, especially if they can hold the whip over an uneducated, downtrodden population.

Elsewhere, they can buy the loyalty of a large Praetorian Guard, just as we have seen since the days of Augustus, Rome’s first emperor in 27 B.C.

 



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June 15 2017

Commentary by David Fuller

Email of the day

On Markets Now

It was good to hear your usual excellent presentation at Markets Now and I hope you have recovered from your exertions – an amazing performance, considering! It was also good to hear David Brown talking on a big picture theme – that’s my favourite subject.

David Fuller's view -

Many thanks for your interest and participation.



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June 15 2017

Commentary by Eoin Treacy

June 15 2017

Commentary by Eoin Treacy

The Old Are Eating the Young

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

This growing burden on future generations can be measured. Rising dependency ratios -- or the number of retirees per employed worker -- provide one useful metric. In 1970, in the U.S., there were 5.3 workers for every retired person. By 2010 this had fallen to 4.5, and it’s expected to decline to 2.6 by 2050. In Germany, the number of workers per retiree will decrease to 1.6 in 2050, down from 4.1 in 1970. In Japan, the oldest society to have ever existed, the ratio will decrease to 1.2 in 2050, from 8.5 in 1970. Even as spending commitments grow, in other words, there will be fewer and fewer productive adults around to fund them.

Budgetary analysis presents a similarly dire outlook. In a 2010 research paper, entitled “Ask Not Whether Governments Will Default, But How,” Arnaud Mares of Morgan Stanley analyzed national solvency, or the difference between actual and potential government revenue, on one hand, and existing debt levels and future commitments on the other. The study found that by this measure the net worth of the U.S. was negative 800 percent of its GDP; that is, its future tax revenue was less than committed obligations by an amount equivalent to eight times the value of all goods and services America produces in a year. The net worth of European countries ranged from about negative 250 percent (Italy) to negative 1,800 percent (Greece). For Germany, France and the U.K., the approximate figures were negative 500 percent, negative 600 percent and negative 1,000 percent of GDP. In effect, these states have mortgaged themselves beyond their capacity to easily repay.

 

Eoin Treacy's view -

Plato’s Republic, probably his best known work, lays out five stages of political development. Democracy, as Plato defines it, does not equate with our constitutional democracy but there are definitely parallels. Our constitutions seek to protect the needs of the few from the appetites of the many. More importantly elections ensure we do not end up with tyrants while separation of powers and an independent judiciary keep a lid on despotic aspirations. 



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June 15 2017

Commentary by Eoin Treacy

Miners Drop as South Africa Escalates Black Ownership Rules

This article by Paul Burkhardt and Kevin Crowley for Bloomberg may be of interest to subscribers. Here is a section: 

South African regulators unveiled a new mining charter to force companies to give more ownership to black shareholders, sparking a selloff across the industry.

Anglo American Plc and Sibanye Gold Ltd. shares tumbled after the Department of Mineral Resources introduced requirements that local companies must ensure 30 percent of their shareholders are black, up from a previous level of 26 percent. Several of South Africa’s biggest mining companies may have to sell new stakes, raising the risk of dilution for existing owners.

The new rules “could pull the rug right from under the industry’s feet,” said Andy Pfaff, chief investment officer of Vanguard Derivatives, a South Africa-based broker. “It’s certainly not going to help with attracting foreign investment into South Africa.”

 

Eoin Treacy's view -

Jacob Zuma’s government has been under pressure with a slew of corruption allegations and the firing of his finance minister. Introducing another mining charter which gives greater ownership rights to the people who vote is a populist move no doubt aimed at shoring up support. 



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June 15 2017

Commentary by Eoin Treacy

Goldman-backed startup Circle launches no-fee foreign payments service

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

Circle Internet's international money transfer service, built on a type of blockchain called Ethereum, will allow customers to send payments between U.S. dollars, British pound sterling or euros on their mobile phones. There are no fees or foreign exchange mark-ups.

International payments, according to Circle's chief executive officer and founder, Jeremy Allaire, should not take days to be processed and should be as easy and frictionless as sending an email.

"When's the last time you sent a 'cross-border email'?" Allaire said in an interview. "The idea of cross-border payments is going to completely go away. ... Our vision is for there to be no distinction between international and domestic payments."

Circle, which processed over $1 billion in transactions in 2016 and whose customer base increased more than 10-fold in the year up to last month, does not make money from its payments service, nor does it plan to, as it reckons consumers expect these services to be free.
"We don't think there is any money to be made in payments anymore," said Allaire. "The entire business model of extracting a toll or having time delays around the movement of value is going away completely."

Instead, the company makes money by trading bitcoin and other cryptocurrencies, both on digital currency exchanges and over the counter, at a time when the value of such web-based currencies has reached record highs. Last month alone, Circle traded over $800 million in digital assets, it said in a statement.

 

Eoin Treacy's view -

Blockchain technology is increasingly being viewed as a way of transferring data from one location to another in a secure manner that is immune from the types of threats that have assailed the SWIFT network; most spectacularly with the Bangladesh heist. However, speculating on the value of crypto currencies as a business model would appear to be fraught with dangers. 



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June 14 2017

Commentary by David Fuller

Germany Faces An Uncertain Future As the Eurozone's Magic Money Tree

The EU has had a good few weeks, starting with the election of Emmanuel Macron as President of France, backed up by a series of strong economic figures from just about everywhere in Europe, and culminating in the Remainers’ Revenge last Thursday in the UK.

Given the UK’s profound political uncertainty, it is now even possible that Brexit will not happen at all.  Yet the EU is facing a potentially bigger challenge.

Last week, I berated Germany for being partly responsible for the eurozone’s huge current account surplus and urged a relaxation of German fiscal policy. Such a relaxation would indeed contribute something to improving European economic performance and stabilising the euro. But on its own, it will not be enough. 

Leaders such as President Macron who want to ensure the euro’s survival support the construction of a fiscal union, which would ultimately involve the pooling of spending, taxing and borrowing. This is a much bigger deal than mere monetary union. Indeed, it is potentially much bigger than any integration yet attempted.

Forming the monetary union simply meant that member countries used the same currency. Forming a fiscal union means that they will share the same bank account. I fully understand why most German citizens are wary of this.  Interestingly, from a reading of most of the economics literature, you would not think that they had much to be concerned about.

In the imaginary unions discussed there, different parts undergo different shocks from time to time, and therefore alternate with regard to which part of the union helps out which. One of the defects in the design of the single currency was precisely that the system did not have this characteristic. Monetary union without fiscal union meant that there was no natural economic mechanism for the relief of less fortunate members on those occasions when the economic dice rolled against them.

By contrast, within existing fiscal unions such temporary transfers occur all the time.  But often this sharing of alternating ups and downs is not fiscal unions’ most important feature and it is not what German voters should be most worried about.

In most existing fiscal unions, as well as economic fluctuations that affect different parts differently, there tends to be a persistent discrepancy in the level of prosperity of different parts, and sometimes even in their growth rate, with the result that there is a one-way flow of fiscal transfers that persists over decades, and possibly over centuries. 

For instance, the Office for National Statistics announced last month that London effectively subsidises just about all of the rest of the UK, while England subsidises Scotland.  These features of our Union are not here today and gone tomorrow. They are deep-rooted in the nature and structure of the Union.

David Fuller's view -

The only chance of the Eurozone surviving is if it forms a fiscal union, as many experienced investors have known for decades.  This goal was never really stated because there had been considerable animosity between several European countries following WWII. 

Moreover, these were not newly formed nations seeking to form a union.  Instead, they had decades or even centuries of independence, with different languages and cultures.

Only Germany can decide whether or not most European states form a fiscal union.  It probably will because it benefits most from the EU and would have a much more expensive currency without it.

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



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June 14 2017

Commentary by David Fuller

June 14 2017

Commentary by David Fuller

Brexit Will Defeat the Government Unless it Recognises that Everything Has Changed

So what do they do now? On the face of it, Theresa May and her slightly reshuffled Cabinet face nearly insurmountable constraints and dangers.

The normal survival plan for a minority government is to pass little legislation, but preparation for Brexit requires a mass of complex and controversial law-making. Any threat to execute a “no deal” strategy and take the UK in a lower-tax, lighter regulation direction has lost much of its credibility, so our negotiating position in Europe is weaker.

The escape route of another dissolution is unattractive because the result might be the same again, or even worse. The election result has undermined confidence in an economy already facing the uncertainties of leaving the EU, threatening a downturn to compound the problems.

In the worst-case scenario, we end up with a poor Brexit deal rejected in parliament but with no alternative available, presided over by ministers suffering mounting public and business dissatisfaction, leading to the election of a Labour government led, in effect, by Marxists.

Faced with such dangers, sitting tight is not an option. Napoleon’s maxim that “the side that stays within its fortifications is beaten” applies fully to this situation. Breaking out of these problems will require a change both of style and substance, treating last week’s terrible outcome as an opportunity and a duty to tackle intractable issues in new ways.

Of course, many items in the Conservative manifesto will have to be abandoned. But other areas could be intensified. Take housing, for instance, which all parties agree is a major national priority. Ministers could convene a cross–party working group, including the new mayors of the big cities, to agree a plan to accelerate new home building across the country by changing regulation, taxes and spending in an agreed way. If successful this would boost the economy and help young people. It would signal a more open approach to problem solving. And if opposition parties did not play a constructive role, the blame for lack of progress would lie with them.

Such a simultaneous change of the style of government and the substance of its decisions is also the way to break through the most difficult problem of all: how to steer Brexit in a way that leads to a good agreement, gives confidence to businesses and creates a broader consensus among MPs.

This is formidably difficult, and a hundred times easier for me to write about than to pull off in reality. But the alternative of saying “nothing has changed”, and ploughing on against half the Commons, two thirds of the Lords and all of Europe will only end in disappointment and defeat.

David Fuller's view -

The UK’s Tory Party has a short to medium-term problem with Jeremy Corbyn’s Labour Party. More importantly, it has a longer-term problem with the EU following Mrs May’s disastrous election campaign.  She is still talking about mutually beneficial agreements between the UK and EU.  That might have just been possible if she still had the UK electorate heavily behind her, but she does not.

Europe has no interest in separate but beneficial trade agreements and is also emboldened by its recent economic recovery, greatly assisted by the European Central Bank. Europe’s political heavyweights led by Germany and France want humiliation for the UK, so that no other EU country will similarly try to break away.

On Tuesday, Wolfgang Schaeuble, standing in for Angela Merkel who faces re-election, said in a Bloomberg article: U.K. Welcome Back If Brexit Was Overturned. Emmanuel Macron just said the same thing to Theresa May in Paris.  In other words, the UK can return as a political supplicant, provided that it abandons policies currently favoured by over 70% of the electorate. 

A PDF of William Hague’s article is posted in the Subscriber’s Area.



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June 14 2017

Commentary by David Fuller

Email of the day 1

On Markets Now:

Just to thank you for the presentation Monday.

It was very uplifting & informative, a great antidote to all the rather unfortunate political goings on. As ever Dr Brown’s talk was full of detail & priceless information. A wonderful evening.

David Fuller's view -

Thank you for these kind words. 

Seeing subscribers of many years that these events has always been a most enjoyable and informative experience. The exchange of views with such experienced and knowledgeable investors never disappoints. 



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June 14 2017

Commentary by David Fuller

June 14 2017

Commentary by Eoin Treacy

June 14 2017

Commentary by Eoin Treacy

Fed Outlines Balance Sheet Unwind With $10b Reinvestment Cap

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

Federal Reserve said it intends to initially cap its Treasury reinvestments at $6b/month and MBS at $4b/month and increase both at three-month intervals over a 12-month period, according to statement.

Fed said it will begin balance sheet normalization this year if the economy evolves as the central bank anticipates

Cap on UST reinvestments will increase by $6b increments until reaching $30b/month; MBS cap will increase by $4b increments until it reaches $20b/month

FOMC anticipates caps will remain in place once they reach their maximums so the Fed’s holdings will “continue to decline in a gradual and predictable manner” until the committee decides that the Fed is “holding no more securities than necessary” to implement monetary policy

FOMC anticipates level of reserves will decrease to a level “appreciably below that seen in recent years but larger than before the financial crisis” 

While the fed funds rate will remain primary monetary policy tool, FOMC said it will be prepared to resume reinvestments “if a material deterioration in the economic outlook” were to warrant a sizable reduction in rates.

 

Eoin Treacy's view -

A great deal of debt needs to be refinanced between 2018 and 2021 so slow pace of balance sheet run off is positive news for the treasury market because it ensures the Fed will still be reinvesting at least some of its expiring debt in new issues. 



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June 14 2017

Commentary by Eoin Treacy

June 14 2017

Commentary by Eoin Treacy

June 14 2017

Commentary by Eoin Treacy

ADAS - who has the credentials to succeed?

Thanks to a subscriber for this report from Deutsche Bank focusing on auto parts suppliers focusing on autonomous driving. Here is a section: 

Three key drivers of wider ADAS adoption in China
Although there are no regulatory requirements for ADAS adoption, the inclusion of ADAS features will boost scores in China’s official safety rating (C-NCAP) starting 2018. Moreover, we note that local brand OEMs have been adding ADAS features in their new models, probably as a means to compete with similarly priced JV products, which lack those features. Last but not least, in China’s “Made in 2025” master plan, the government highlights new auto technologies as a focus for the country’s technology advancement, along with target ADAS penetration levels for local brands by 2020 and 2025. This gives China a more visible path for ADAS adoption growth than other countries.

We envision a long-term ADAS market of USD24bn
We have performed a proprietary ADAS market size analysis, mainly based on target ADAS levels and penetration across different timeframes. We use the sensor segment as an anchor to derive an overall ADAS demand forecast given the segment’s higher transparency vs. other fragmented ADAS component segments. In summary, we estimate that the Chinese sensor market could reach USD6bn in 2020 (2025E: USD12bn) and the total ADAS market could be worth up to USD12bn (2025E: USD24bn).

A few Chinese companies expected to outshine many others
Currently, major global part suppliers dominate the ADAS market. We can identify at least c.30 Chinese suppliers involved in the space. However, most of these local companies still have too limited an exposure for ADAS to make a difference to their profit and outlook. In this report, we identify six companies that we believe can become meaningful players in various ADAS markets. We value them using forward P/E vs. their growth prospects. Our top Buys are Nexteer and Joyson considering their advanced ADAS knowhow, which can rival global peers’. Sector upside risks include faster-than-expected ADAS adoption and positive scale effects. Downside risks include a slow pick-up in ADAS sales and local players’ inability to compete with foreign suppliers.

 

Eoin Treacy's view -

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

Traditional auto parts manufacturers are facing an existential challenge because the rise of electric vehicles means demand growth for their products is evaporating. That leaves open potential for wide disparities in performance between companies within the sector with the delineating factor being how well leveraged they are to supplying the kinds of sensors, cameras and motors new technologies require. 



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June 14 2017

Commentary by Eoin Treacy

Copper demand from electric vehicles to be nine times higher by 2027

This piece from the International Copper Association may be of interest to subscribers. Here is a section:

Electric vehicles use a substantial amount of copper in their batteries, and in the windings and copper rotors used in electric motors. A single car can have up to six kilometers of copper wiring. The metal is also required for busbars, used to connect modules and cells in battery packs, and in charging infrastructure.

Whilst most cars use internal combustion engines that require up to 23 kg of copper, the IDTechEX research found that a hybrid electric vehicle uses 40 kg of copper, a plug-in hybrid electric vehicle uses 60 kg, a battery electric vehicle 83 kg, and a hybrid electric bus 89 kg. A battery-powered electric bus can use 224–369 kg of copper, depending on the size of battery used.

“Copper has the highest conductivity of any non-precious metal, and plays an important role in all energy production, but it is particularly important for future sustainable technology applications such as electric vehicles,” said Colin Bennett, Market Analysis and Outreach, ICA. “Copper increases the efficiency and reliability of these vehicles and is itself a sustainable material, as it is 100% recyclable without loss of properties.”

 

Eoin Treacy's view -

The automotive sector is betting big on electric vehicles while also attempting to figure out how autonomy will function and what that means for ownership and miles driven assumptions. With battery technology improving all the time and with considerable investment flowing into the sector the potential for the electric vehicle market to grow from its current relatively modest footprint is considerable. 



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June 13 2017

Commentary by David Fuller

The Book of Jeremy Corbyn

My thanks to a subscriber for this Biblical version of events from The New Yorker. Here is the opening:

And it came to pass, in the land of Britain, that the High Priestess went unto the people and said, Behold, I bring ye tidings of great joy. For on the eighth day of the sixth month there shall be a general election.

And the people said, Not another one.

And they waxed wroth against the High Priestess and said, Didst thou not sware, even unto seven times, that thou wouldst not call a snap election?

And the High Priestess said, I know, I know. But Brexit is come upon us, and I must go into battle against the tribes of France, Germany, and sundry other holiday destinations. And I must put on the armor of a strong majority in the people’s house. Therefore go ye out and vote.

And there came from the temple pollsters, who said, Surely this woman will flourish. For her enemy is as grass; she cutteth him down. He is as straw in the wind, and he will blow away. And the trumpet of her triumph shall sound in all the land.

And the High Priestess said, Piece of cake.

And there came from the same country a prophet, whose name was Jeremy. His beard was as the pelt of beasts, and his raiments were not of the finest. And he cried aloud in the wilderness and said, Behold, I bring you hope.

And suddenly there was with him a host of young people. And he said unto them, Ye shall study and grow wise in all things, and I shall not ask ye for gold. And the sick shall be made well, and they also will heal freely. And he promised unto them all manner of goodly things.

And the young people said unto him, How shall these things be rendered, seeing that thou hast no money in thy purse?

And he spake unto them in a voice of sounding brass and said, Soak the rich. And again, Pull down the mighty from their seats.

And the young people went absolutely nuts.

And they hearkened unto the word of Jeremy, and believed. For they said unto themselves, Lo, he bringeth unto us the desire of our hearts. He cometh by bicycle, with a helmet upon his head. And he eateth neither flesh nor fowl, according to the Scriptures. For man cannot live by bread alone, but hummus is quite another matter.

David Fuller's view -

A light and very witty sketch on a serious subject.



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June 13 2017

Commentary by David Fuller

Email of the day 1

On wisdom:

Regarding the recent UK election result. It seems to me the population shows a distinct lack of a very important quality in life which one tends to accumulate with age, namely "wisdom". which can be distilled into just three words, knowledge, experience and judgement. As a result a period of political and perhaps economic turmoil lies ahead for my country.

David Fuller's view -

And tolerance as we were all young at one stage.



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June 13 2017

Commentary by David Fuller

June 13 2017

Commentary by David Fuller

Voters Have Disarmed Our Brexit Negotiators - We Will Get a Worse Deal

Deal or no deal? On Thursday, Britain took its best options for Brexit off the table. Although the Government said that “no deal is better than a bad deal”, its ultimate goal was to ensure that we never faced that choice.

The election has, however, made a good deal impossible and so the choice between “no deal” and a “bad deal” now looks inevitable. Unfortunately, the election has also now ensured that the consequences of “no deal” would be immeasurably more damaging.

Let me explain. Negotiations with the EU were always going to be difficult and nasty. I was cautiously optimistic, however, that shared interests and mutual reasonableness would eventually result in a workable deal, delivering Brexit without a crippling economic cost.

This option is now gone for the foreseeable future. The reason that is that implementing it requires passing a series of enormous, controversial Bills through Parliament, covering everything from immigration to fisheries. There is little chance that Theresa May, or any Conservative Prime Minister, can steer any such legislation through both Houses. From the most pious of peers to the pro-Remain Scottish Tories, our new Parliament heavily favours the softest of soft-boiled Brexits. The Government will not get the support it needs to implement anything else.

This will prove deadly to the Brexit negotiations. The British delegation will arrive for talks in Brussels carrying a pile of paper that no one can vouch for. It is like turning up to fight a duel with a dead fish. Britain can huff and puff and make as many demands as it likes. The EU’s negotiators will simply stare at us across the table and think to themselves: “Whom do they speak for? Can they deliver any of this? Will this Prime Minister even be here next week?”

Confident that our newly elected Parliament would do almost anything to avoid talks collapsing, the EU will have overwhelming incentive to concede nothing. Expect an enormous Brexit bill, EU court authority over its citizens’ rights, continuing regulatory meddling and so on. The deal on offer could be so bad that it would simply be better to stay in the EU single market or European Economic Area for the time being.

David Fuller's view -

I don’t think the UK can return to the EU with its tail between its legs, as much as Eurocrats in punishment mode would enjoy seeing that. It would create immense bitterness within the UK which would ultimately be damaging for the EU.  The EEA is the best compromise, provided it is not front-loaded with additional costs and penalties. Schaudenfreude, obviously a German word, is poisonous so wise heads need to prevail.

A PDF of Juliet Samuel's article is posted in the Subscriber's Area.



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June 13 2017

Commentary by David Fuller

Email of the day 2

On a potential difficulty in joining the EEA:

Dear David, I have read several articles in which it was pointed out that the other members of the European Economic Area might not agree to the UK joining it. Apparently they fear that the UK would become the dominant partner because it is so much bigger than any of the other members. Thus, joining the EEA is not as simple at it might appear to be.

David Fuller's view -

That is a possibility because Norway and particularly Iceland and Liechtenstein are much smaller than the UK.  However, I don’t see a dominant partner problem because their interests are entirely different, although the three states share residency agreements between unmarried couples.  

The basic difference, as I see it, is because the EEA agreement encompasses less that ten percent of EU lawmaking.

What does concern me is that following Mrs May’s General Election disaster, the EU may try to force the UK back into the EU.  That would lessen the region’s financial problems, restore some prestige and most importantly, deter any other country from trying to leave the EU.

We had an indication of this today in the Bloomberg article: Schaeuble Says U.K. Welcome Back If Brexit Was Overturned.  Emmanuel Macron has just  made similar comments in Paris during Mrs May’s visit earlier today.  Fortunately, both the latest Conservative and Labour administrations favour some form of Brexit.  Interestingly, Mrs May has appointed more cabinet ministers in the last few days who voted Leave in last year’s referendum. That could keep her in power for a little longer. 



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June 13 2017

Commentary by David Fuller

Email of the day 3

On UK shares following the election:

Being a pessimist by nature, my instinct is to be concerned that this Conservative government will not be able to effectively govern, and that we will end up with another General Election. Unfortunately I think that Jeremy Corbyn will continue to promise the young everything and anything he thinks they want, and on the back of his success this time around, he could easily win the next Election with disastrous results. My question is, should we be positioning our portfolios with that in mind now? And if so, how should we position it?

David Fuller's view -

Thank you for these extremely important questions for many of us. 

This item continues in the Subscriber’s Area.



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June 13 2017

Commentary by Eoin Treacy

June 13 2017

Commentary by Eoin Treacy

Fed Portfolio Runoff May 'Turn the Rally on Its Head,' RBC Says

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

Fed balance sheet normalization might cause banks to shorten their asset mix, causing “enough of a portfolio adjustment this summer to turn the rally on its head,” RBC rates strategists Michael Cloherty and Ash Kamat say in note.

QE created bank deposits and balance-sheet unwind will eliminate them; while “massive 2003-style bank sales” are not predicted, the market “has become extremely sensitive to flows,” and risk of outsized price action is higher during summer months

Main issue isn’t a funding shortfall, but “how modeling of deposits changes” and when; deposits modeled on recent data show extremely long average life; shortening the expected life of a deposit puts pressure on banks to shorten their assets

Bank buying of shorter-duration assets should lead to “outperformance of 15yrs and CMOs and a steeper curve”

RBC expects Fed likely to announce balance-sheet unwind in September, begin in October, with initial caps of $15b for USTs, $10b for MBS; they expect caps to rise by $15b and $10b every quarter and eventually be eliminated

 

Eoin Treacy's view -

When the biggest buyer in a market stops investing and starts divesting of its holdings it represents a sea change in the interaction between supply and demand. If high prices are to be sustained the remaining buyers need to increase their purchases to compensate for the absence of a once stalwart buyer. 



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June 13 2017

Commentary by Eoin Treacy

Email of the day on a Nasdaq ex FAAMG ETF

Could I amateurishly ask whether there is a Nasdaq ETF without the top 5 or 7?

Eoin Treacy's view -

Thank you for this question which I’ve been asking myself so I guess we are both amateurs. Goldman Sachs coined the FAAMG (Facebook, Apple, Amazon, Microsoft, Google) acronym last week; replaced Netflix with Microsoft. It would be a useful edition to the ETF universe to have a NASDAQ Ex-FAAMG ETF but there would probably not be much demand for it since the mega-cap shares have accounted for the majority of the Index’s performance over the last year. 



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June 13 2017

Commentary by Eoin Treacy

Russian hackers breached voting systems in 39 US states

This article by Cara McGoogan for The Telegraph may be of interest to subscribers. Here is a section:

Russian tampering with US voting systems ahead of the presidential election last November was more widespread than initially thought with almost double the number of states affected investigators have revealed.

Investigators told Bloomberg that hackers linked to Russia breached the voting systems of as many as 39 states ahead of the election in which Donald Trump became president.

Cyber attackers accessed voter databases and software used by poll workers, according to Bloomberg. Campaign finance details were accessed in at least one state. And in Illinois the hackers attempted to edit or delete voter information, investigators found.  

The Obama administration complained to Russia about the intrusions in an unprecedented use of a modern-day "red phone", a secure messaging channel between the countries.  

The news follows the leak of classified National Security Agency documents to the Intercept, which showed Russia's military intelligence department conducted a cyber-attack against at least one major US voting supplier.

 

Eoin Treacy's view -

This article from Wired focusing on the use of a new program to target key pieces of utility infrastructure is an additional aspect to the evolving cybersecurity theme. 



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June 12 2017

Commentary by David Fuller

Rejection of Theresa May's Little Englander 'Brexit' is Splendid News

The EEA would in principle allow Britain to preserve open trade with the EU single market and retain passporting rights for the City of London, the goose that lays the golden egg for a very vulnerable British economy.

“We should use the EEA as a vehicle to lengthen the transition time,” said Lord (David) Owen, one-time Labour foreign secretary and doyen of the EEA camp.

“Theresa May’s massive mistake has been to allow talk of a hard Brexit to run and run, and to refuse to frame a deal in a way that makes sense for the Europeans. The logic of the EEA is irrefutable,” he said.

Lord Owen said the EU’s withdrawal clause, ‘Article 50’, is designed as a deterrent to stop any country leaving. It leads to a cliff-edge, facing Britain with a take-it or leave-it choice when the clock stops ticking. “This puts us in a dangerous position,” he said. The EEA is a way to overleap this Article 50 trap.

Meredith Crowley, a trade expert at Cambridge University, says the great worry is that tariff barriers into the EU will jump to 12pc or 15pc overnight on UK exports of cars, engines, auto parts, and a range of machinery, setting off an exodus of foreign investment. “Joining the EEA would shut that threat down,” she said.

Critics argue that the Norwegian route is tantamount to remaining in the EU, but on worse terms, with no vote over policy: “While they pay, they don’t have a say,” said David Cameron before the Referendum.

This is a canard. EEA states are exempt from the EU's farming and fisheries policies, as well as from foreign affairs, defence, and justice. They are free from great swathes of EU dominion established by the Amsterdam, Nice, and Lisbon Treaties.

Above all, EEA states are not subject to the European Court’s (ECJ) limitless writ over almost all areas of law through elastic invocation of the EU Charter of Fundamental Rights. The ECJ would no longer be able to exploit the Charter - in breach of Britain’s opt-out under Protocol 30 - whenever it feels like it. We would no longer be under an EU supreme court asserting effective sovereignty. These are not small matters. They are elemental.

Yes, the Norwegian option is a compromise. We would continue paying into the EU budget. This would do much to defuse the escalating showdown over the €100bn bill for EU reparations, poisonous because of the way it is presented. The transfers would become an access fee instead. Norway’s net payments in 2014 were £106 a head. Let us not die in a ditch over such trivia.

Britain would have to tolerate relatively open flows of migrant workers. But contrary to widespread belief, the EEA does not entail full acceptance of the EU’s “four freedoms” - movement of goods, services, capital, and people. Nor does it give the European Court full sway on these issues.

The arrangement allows “a lesser degree” of free movement than within the EU. The language covers the issue of residence, an entirely different matter from the rights of EU citizenship created by the Maastricht Treaty. The EEA permits the sort of emergency brake on migrant flows that was denied to Mr Cameron in his last-ditch talks with the EU before the Referendum.

The point in any case is that the EEA would be a temporary way-station for ten years or so, giving us time to negotiate 80 trade deals with the US, China, Japan, India, Mercorsur, and others without a gun held to our head.

David Fuller's view -

Events can turn quickly in our modern world and not only due to technology. Theresa May’s sudden announcement of an election campaign, after she had repeatedly said there would be no new contest, was clearly an opportunistic gamble even if it appeared justified given the Tories lead in public opinion polls.

Unfortunately, her disastrous, control freakery, narcissistic campaign - including a silence order for other Tory MPs - resulted in what I had previously described as the worst Conservative Party campaign that I have ever seen. What possessed this otherwise nice and seemingly capable woman?

Everyone has a view but as we so often see in politics, Governance is everything. Having squandered the Tory majority Mrs May cannot survive as Prime Minister.  However, the UK and its Tory party need to avoid a lengthy, let alone contentious leadership contest at this vulnerable time.

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



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June 12 2017

Commentary by David Fuller

Email of the day 1

On British Socialism:

Despite the worst campaign by Tories in recent history and arguably the best ever by Labour, British Socialism is sill more than 50 seats shy of effective government in the UK. If this is the best Labour can do, I'd back a revitalized Tory party to romp home in a couple of years’ time, once Brexit brawls have provoked another election. First, wounds must heal and Brexit discussions take shape.

David Fuller's view -

I regard Jeremy Corbyn as a polite crypto-communist, capable of destroying the UK economy faster than the worst of Labour’s Socialist Prime Ministers over the decades. Hopefully, his current influence will have waned in a few years’ time but that depends on how quickly and competently the Tory Party can recover.  Meanwhile, the political risks are high and I assume that some EU officials would prefer Corbyn’s Labour to our Conservative PMs, given all the acrimonious discussions in recent years. 



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June 12 2017

Commentary by David Fuller

Email of the day 2

On politics in the UK versus Japan:

A bloated public sector is a major factor but now we have the demographic factor of cheerfully clueless young people, mostly first-time voters who desperately want to believe the false assurances of the hard left. They'll grow older and wiser as most do eventually but in the meantime massive damage will have been inflicted on the economy and society. I prefer the humdrum politics in Japan, where I live. The conservative LDP have been in power for decades, providing stable and mostly sensible stewardship which seems to satisfy the public. No Parliamentary Question Time theatrics (politicians' speeches are usually very boring) and very little ideological frictions. The one time the Left were elected they blew it and lasted just one term. They haven't been given a second chance.

David Fuller's view -

Fair point, although we can both remember when Prime Ministers in Japan seemed to change with the seasons. What is effectively the LDP’s one-party democracy in modern Japan has its disadvantages, ranging from obfuscation to corruption, although Japan’s civilised and consensual society seems to avoid the worst of these excesses.     

In other democracies it is often said that ‘we get the government we deserve’. There is some truth to this although I have heard responsible people lament that they ‘get the government that others deserve’.

We currently have too many populist governments, in my opinion, reminding me of the quote generally attributed to Churchill that ‘democracy is the worst form of government, except for all the others’.  Yes, and it is reassuring to know that at least we have an opportunity to vote the bums out at the next election.  



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June 12 2017

Commentary by Eoin Treacy

June 12 2017

Commentary by Eoin Treacy

Just Five Stocks Account for Nearly 75% of the Nasdaq's Plunge

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

When it comes to the ongoing technology beat-down in the stock market, it appears not all shares are created equal.

Indeed, just five names account for nearly 75 percent of the drop in the Nasdaq Composite Index, which has fallen more than 2.1 percent since June 7. Meanwhile, the Dow Jones Industrial Average and S&P 500 Index are roughly unchanged over the same time frame.

Much of this dynamic is due to giants like Apple Inc., Microsoft Corp. and Goggle parent Alphabet Inc. falling as much as 6.5 percent. Those companies account for nearly 30 percent of the index’s weighting, and their outsize impact has driven the gauge lower even though the bulk of the stocks are doing fine.

This selloff was “way overdue given the extreme out- performance and positioning in technology shares,” Morgan Stanley analyst Michael Wilson wrote in a note to clients Monday, Shares of Apple, for instance, are still up 25 percent this year, giving them room to fall.

But while Wilson expects the drubbing to continue in the short-term, he doesn’t think the market has seen a peak in tech shares.

“We would be surprised if this is the end for technology stocks given the very strong earnings growth we are witnessing,” he wrote.

Analysts now believe performance in technology will depend on the economic outlook. And if conditions change, finance will be the likely beneficiary.

“If the current economic ‘Goldilocks’ environment persists, technology and other growth stocks should continue to outperform, despite today’s price declines,” Goldman Sachs Group Inc. analysts led by David Kostin wrote in a note to clients late Friday. “However, if investors recalibrate expectations for inflation and Fed policy to match the growth optimism suggested by the S&P 500 level, higher rates should lead to financial sector outperformance.”

Eoin Treacy's view -

Mega-cap technology shares dominate the Nasdaq-100 and accounted for much of the Index’s outperformance over the last few months so it stands to reason they represent a headwind as a potential reversionary process unfolds.



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June 12 2017

Commentary by Eoin Treacy

Inflation 'Bonus'

Thanks to a subscriber for this heavyweight 168-page report from Deutsche Bank focusing on global emerging markets. Here is a section on India:

2) Growth-inflation balance has improved and should remain; time now to focus on quality of growth
India continues to be one of the fastest growing economies in the world, but what has changed in recent years is the quality of growth-inflation mix. Currently India’s real GDP growth is in the 7-7.5% range, with CPI inflation anchored around 4.5%. This is markedly different from FY10-11 period, when real GDP growth averaged about 9.5%, but with CPI inflation running around 11.5%. While achieving high economic growth is important, it is more important in our view to achieve this along with low or acceptable inflation. In fact we would argue that it is imperative to get inflation and inflation expectations down, to achieve higher (and sustainable) growth and investments. From this perspective, there is no trade-off between growth and inflation in the long term.

In fact, we believe that today’s corporate sector balance sheet stress can be traced back to the developments of the FY10-11 period, when a lot of mal-investments took place, with entrepreneurs believing (wrongly) that high nominal GDP growth, negative real rates and stable rupee environment would continue for the foreseeable period. In reality (and in hindsight), the FY10-11 high growth period was an aberration and led to the formation of macro imbalances, which later would unravel in the form of a currency crisis in mid-2013. In our view, a large part of those mal-investments were caused by persistent and large negative real rates, which gave a false sense of confidence and comfort to the Indian entrepreneurs about potential high return on investments.

We are reasonably certain that similar type of macro imbalances will not be tolerated or allowed to be formed in the first place, given the changes that have taken place particularly with respect to RBI’s inflation management policy. With RBI formally committed to keep CPI inflation low, in the 4-5% range, and real rates positive in the 1.5-2.0% range, we believe chance of misallocation of capital, based on faulty market signals remain low in the future and would be dealt with decisively and proactively, if it were to manifest somehow. This would ensure that India’s growth-inflation mix remains prudent in the period ahead, which should help investors make decisions regarding long-term investments based on realistic expectations of returns and profit.

India’s current growth rate is below potential, as per various metrics, including the composite PMI, which has remained stagnant in the last three years. Furthermore, growth is mainly supported by consumption at this juncture (10.5%yoy real growth in FY17), with private investment remaining anemic due to the high leverage of the corporate sector and weak demand. Or in other words, the quality of growth is not optimal at this stage. In our view, a healthy mix of consumption and investment growth needs to be achieved to prevent macro imbalances and inflationary expectations from building up and monetary actions should be calibrated keeping this in mind. The developments of the last two years, where RBI has cut policy rate by 175bps but private investment momentum has weakened further, have raised doubts about the efficacy of monetary policy action to solve the malaise of the private sector.

We think both RBI and the government have been prudent with their monetary and fiscal policy stance in the past few years, focusing more on sustaining macro stability, rather than choosing the easy way out to prop up growth in the short-term. The strategy instead to focus on long-term structural reforms, like improving ease of doing business conditions in the country, will in our view help support a more robust and sustainable private sector capex cycle in the future, once demand starts coming back. India, in our view, is buying higher growth for the future by adopting a prudent macro policy stance at the current juncture.

Eoin Treacy's view -

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

The RBI has done its best, through a change of leadership following Modi’s election, to stick to an inflation targeting strategy that delivers on real growth rates. That has allowed the currency to stabilise and the Rupee rallied from early this year to break a medium-term downtrend. 



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June 12 2017

Commentary by Eoin Treacy

SoftBank Agrees to Buy Robot Maker Boston Dynamics From Google Parent Alphabet

This article by Pavel Alpeyev  and Mark Bergen for Bloomberg may be of interest to subscribers. Here is a section:

This would be Son’s second venture into robotics. In 2012, SoftBank acquired French company Aldebaran Robotics SA and two years later unveiled Pepper, a $1,600 humanoid promoted as the world’s first robot endowed with emotions. Son envisioned building an ecosystem of apps that would let Pepper man storefronts as well as entertain people at home. But culture clashes between the Japan parent and French engineers as well as challenges of creating artificial intelligence capable of understanding natural language has left Pepper underwhelming and with lackluster adoption limited to Japan.

“SoftBank may not have struggled as much if they bought a better robotics company” instead of Aldebaran, Takahashi said.

The shares of SoftBank rose 7.4 percent in Tokyo, buoyed by Alibaba Group Holding Ltd.’s 13 percent jump in the U.S. that boosted the value of SoftBank’s stake in the Chinese e-commerce giant to $105.6 billion.

“Typically, when Son makes a big acquisition, the markets are worried,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co. “If this deal goes through the Vision Fund, no one will fret about the impact on SoftBank’s balance sheet.”

Eoin Treacy's view -

There are two reasons Google decided to sell Boston Dynamics as far as I can see. The first is that the agile robots the company produces are the equivalent of scaled up versions of remote control cars, lacking any artificial intelligence to speak of. The second is that the most obvious route to commerciality is through the military and that runs counter to Google’s culture. 



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June 09 2017

Commentary by David Fuller

Theresa May's Disastrous Failure

Here is the opening of this Bloomberg Editorial:

U.K. Prime Minister Theresa May's election gamble has faileddisastrously. The consequences are dire for her party and government, and could be equally bad for her country's relationship with Europe.

May had hoped to increase her Conservative majority in Parliament, and instead has seen it wiped out. The Tories are the largest party in the House of Commons and with the support of Northern Ireland's Democratic Unionists intend to form a government. Directing policy and passing legislation, however, will be vastly harder than before.

This would be a serious problem under any circumstances, as Britain's previous experience with hung Parliaments suggests. But these aren't just any circumstances. Brexit talks were due to start in 10 days. May's effort to prepare for that challenge has left her plans, such as they were, in shreds. The immediate prospect is great political disorder and maximum economic uncertainty.

Such is the humiliation of this setback that May might soon choose -- or be forced -- to resign. This offers no relief. The task of finding a new leader would only add to the chaos, and there's no obvious successor capable of uniting the party. But if she hangs on, the question of if and when she goes will linger. Her authority is irretrievably diminished.

David Fuller's view -

The UK stock market could be quite relaxed with the General Election result because it reduces the possibility of sudden changes within the UK, provided of course that Labour has no real chance of forming a government. 

Currently, Theresa May has the support of the Northern Irish party (DUP), so she can form a government with a very small majority.  However, we can be sure that Labour will agitate, claiming that it ‘won’ and has the support of the people.

Nevertheless, the UK would be susceptible to selling pressure elsewhere during this often choppy seasonal period.  Note the FTSE AIM 100 Index which is particularly susceptible to a correction following its strong advance and overextension near the 5000 roundophobia level.  The USA’s Nasdaq 100 Index of big-cap tech shares has also defied gravity recently and is now experiencing some sharp downward dynamics.

(See also: ‘I’m sorry Theresa May apologises over election disaster but vows to lead country with ‘certainty’, from The Sun)



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June 09 2017

Commentary by David Fuller

To the Millions of People Who Voted for Jeremy Corbyn: You Scare Me

If I'd suggested to you before yesterday that Jeremy Corbyn was on course to outperform every Labour leader since Attlee, you'd probably have thought me away with the fairies.

But that is exactly what happened. Under Jeremy Corbyn, Labour's share of the vote increased by 9.6 per cent – more than any other leader in any other election since Clem Attlee's 1945 landslide.

Forgive me if I don't congratulate him.

In fact forgive me, please, if I say this to each of the 12.8 million people who voted Labour on Thursday: you scare me.

For months on end – ever since he became leader in 2015 – Jeremy Corbyn's views and alliances have been rammed home.

You would have had to be living in a cave not to know that the Labour leader described Hamas terrorists as his "friends", that in a war between the IRA and Great Britain he wanted the IRA to win, or that he laid a wreath at the grave of one of the Munich Olympic's terrorists.

It has been repeatedly reported that he was, until becoming Labour leader, chair of Stop The War, an organisation whose senior members celebrate North Korea as a model society and defend any enemy of the West.

Then there's Labour's problem with Jews.

For a time, Mr Corbyn's decades-long ally Ken Livingstone was barely off the news with his Tourette-like spouting of the name Hitler. He might have turned Jew-baiting into a fine art, but that has not been enough for Jeremy Corbyn's Labour Party to expel him.

I could fill this entire page with examples of anti-Semitic hatred from Labour members and supporters, all of which have been constantly flagged up in newspapers and on broadcast media.

And I haven't even mentioned John McDonnell's praise of violent rioters or Diane Abbott's view that any defeat of the British state should be celebrated.

But none of this has made the least difference to 40 per cent of the electorate who were happy anyway to vote for Jeremy Corbyn's Labour Party.

A bit of Jew hate? Support for the IRA? Pah! Look at the inspiring manifesto.

David Fuller's view -

Corbyn might be a nice, gentle, polite guy but his alliances over a long career should worry any sensible adult. 

As to the positive campaign statements, he just promises to throw money at any problem his audiences might have.

It is am extreme example of a depressing cycle in UK politics.  Labour screws up and runs out of money. The electorate come to their senses and vote in the Tories to clean up the mess.

Labour counters in the next election cycle by saying that people are fed-up with Tory ‘austerity’.  Just as the economy is recovering, Labour says it will adopt ‘progressive’ policies to help everyone. Overspending increases government debt, weakening the economy once again. 

This cycle repeats because a high proportion of the electorate works for the government.  

A PDF of Stephen Pollard’s column is posted in the Subscriber’s Area.



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June 09 2017

Commentary by David Fuller

Email of the day

On before we get too negative:

Well, before we get too negative, let's remember the good things. This election knocked the SNP for six; and May has a bigger percentage of MPs than Angela Merkel is likely to get. Also, the weaker pound helps my non-UK shares! After that I'm struggling!

David Fuller's view -

In terms of real disasters, the UK election hardly registers, although it is depressing for some of us.  However, that would change if Corbyn became Prime Minister and ruined the economy for five years.  He is now a little too close to power for comfort.

It would be nice, not least for enduring Scots, if we heard less from Nicola Sturgeon in future.



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June 09 2017

Commentary by Eoin Treacy

June 09 2017

Commentary by Eoin Treacy

Wall Street analysts keep one-upping each other to be biggest bull on red hot Nvidia

This article from CNBC highlights some interesting psychological activity evident in the market right now. Here is a section:

 

Wall Street is falling over itself to have the most bullish call on Nvidia, the market's best performing stock in the past year. 

Right after Citi Research raised its Nvidia price target to a street high of $180 Thursday morning, another analyst decided to one-up its peer with a higher price target for the semiconductor company.

Bank of America Merrill Lynch analyst Vivek Arya told investors to buy the Nvidia shares, citing the large opportunity in the artificial intelligence market Thursday evening:

"NVDA is trading at a premium multiple, but the momentum could persist given: (1) Only 17% ownership by large-cap active US managers (vs. large-cap semi comps 25%-39% ownership; (2) Potential expanding ownership by Softbank vision fund, per media reports; and (3) Scarcity value as the only proven way to gain exposure to nascent AI/machine learning trend which could be a 10-20x growth opportunity. This weekend's E3 gaming show typically marks start of 2H seasonal strength."

SoftBank Group bought a $4 billion stake in Nvidia, according to a Bloomberg News report last month.

Arya raised his price target for Nvidia to $185 from $155, representing 16 percent upside from Thursday's close. He now has the highest price target on the company out of 34 analysts, according to FactSet.

 

Eoin Treacy's view -

Nvidia shares have been going up quickly which means analysts have been playing catch-up with their estimates for how high it will rise. In an effort to get ahead of the curve they begin to get more ambitious. That means they start projecting future growth rates rather than historic growth rates. Since all analysts are in the same situation they start competing for who can come up with the rosiest picture of the future. 



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June 09 2017

Commentary by Eoin Treacy

June 09 2017

Commentary by Eoin Treacy

Renault plans foray into energy market with mega battery

This article by Christoph Steitz and Edward Taylor for Reuters may be of interest to subscribers. Here is a section:

Large batteries can help stabilize the primary reserve electricity market, which is responsible for ensuring the grid has at least 50 Hertz. Carmakers can also earn money competing with conventional power stations to guarantee the provision of electricity during periods of high demand or volatility.

"We forecast the combined market for electric passenger vehicles, electric buses and battery storage to increase eight-fold to over $200 billion by 2020, a five-year compound annual growth rate of more than 50 percent," Berenberg analysts said.

With about 4 million electric cars expected to be on the roads by 2020, vehicle manufacturers looking at ways to recycle batteries, including Tesla, which already sells everything from solar panels to batteries and electric cars.

Daimler, BMW, Volkswagen and China's BYD Co Ltd are also exploring so-called second-life storage projects with batteries.

That includes partnerships such as the recent collaboration between BMW and Vattenfall, in which the luxury automaker will deliver up to 1,000 lithium-ion batteries to the Swedish utility for storage projects this year.

"What will end up happening is that BMW and Daimler will ... become utilities themselves," said Gerard Reid, founder of Alexa Capital LLP, a corporate advisor in the energy, power infrastructure and technology sectors.

"They use Vattenfall now because they need to learn but I think the amount of batteries coming back will be so big that I think they'll end up engaging directly with the end customer themselves. And they've got the brand name to do that."  

 

Eoin Treacy's view -

The diesel scandal took a heavy toll on the growth ambitions of a number of auto manufacturers. There are now scrambling to come up with a way of ensuring their next clean energy gambit is successful. Since the batteries going into electric vehicles are a lot like bigger versions of those in phones we know that they lose capacity after a few hundred recharges. That means finding new uses for old batteries is a major field of endeavour if the price is to be kept under control. 



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June 09 2017

Commentary by Eoin Treacy

Email of the day on monthly Index constituent performance data:

Hope you are well. I have a question : Where can I get, for any chosen stock market, the percentage of the number of shares whose prices have risen, fallen, remain unchanged, for each calendar month in the last 12 calendar months? Is it available for free in the Bloomberg website somewhere?

Eoin Treacy's view -

Thank you for this question. You can use the Chart Library’s Performance Filter to rank performance data over the last month, 3 months, 6 months, year etc. However I do not know of a service that gives month by month constituent performance data in a handy format. The only way I know of is to download the data and manipulate in Excel which quite a laborious process.



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June 09 2017

Commentary by Eoin Treacy

June 08 2017

Commentary by David Fuller

With Leaders Like This, Britain Should Panic

Here is the opening of this sadly accurate comment on the UK General Election campaign by Clive Crook for Bloomberg:

The U.K. election has been a contest of inadequates.

At a time when the U.K.'s most pressing need is for competent leadership, it's saddled with two of the most bungling party leaders in living memory. Even a well-run government would struggle to control the short-term damage likely to be inflicted by Brexit. Whatever happens in Thursday's vote, there's no prospect of a well-run government by Friday. On this evidence,  exaggerating how much trouble Britain is in would be hard.

Prime Minister Theresa May called this snap election -- after suspending a law requiring fixed-term parliaments -- because she was sure of a huge win. She had every reason to think so. Jeremy Corbyn is an unreconstructed old-school leftist and every Tory's dream of a Labour Party leader. His own parliamentarians wanted to ditch him but were overruled by the party's wider membership. May duly started with an immense lead. Over the succeeding weeks, Corbyn's shambles of a Labour Party came much of the way back.

Why? Bizarrely, Brexit has almost nothing to do with it. Labour isn't challenging the referendum result, partly because so many of its own supporters want out of the European Union; and its position on how to manage Brexit is as vague as the Tories'.

Labour's remarkable traction during the campaign also wasn't because Corbyn came up with a compelling election manifesto and sold it pretty well. Quite the opposite: Content and marketing were fully as bad as the Tories could have wished. Nationalize this, nationalize that, make higher education free, pour resources into every kind of public service, and no we aren't quite sure what all of this will cost.

David Fuller's view -

Unfortunately, I agree with this assessment.  The UK may manage to just avoid a General Election disaster at this critical time, although not because of any improvement by Theresa May. She is now less popular with most voters but has a small chance of clinging on if the exit polls are too pessimistic. Meanwhile, Jeremy Corbyn’s campaign momentum ground to a halt in the last few days, helped by a tragifarce role from Diane Abbott.    

What does this mean for the Tory government?

This item continues in the Subscriber’s Area where another article is also posted.



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June 08 2017

Commentary by David Fuller

U.K. Heads for Hung Parliament as May Election Gamble Fails

Here is the opening of this report from Bloomberg:

Britain’s political future was thrown wide open after a shock exit poll indicated that Prime Minister Theresa May might not win a majority after Thursday’s general election, casting doubt over her political future just days before Brexit negotiations were due to begin. 

The pound fell to the lowest since April after the BBC and other broadcasters said May’s Conservative Party is on course to win just 314 seats in the 650-strong House of Commons. That’s down from the 330 she held before calling the snap election seven weeks ago and less than the 326 needed for a majority. Jeremy Corbyn’s Labour Party will win 266 seats, compared with 229 before the election, according to the joint exit poll. 

Such polls have generally been reliable, although political leaders on both sides immediately said it’s too early to read too much into it. The first two results from northeast England indicated that Labour is not doing as well as the exit poll suggested.

Investors are balking at the prospect of another round of political turmoil less than a year after Britain voted to leave the European Union. While May could still win a majority, attention will turn to her future after the decision to call an early election and strengthen her mandate backfired. She will now need to decide whether to resign or try to form a new government. Another election is also a possibility.

David Fuller's view -

Obviously this creates even more uncertainty for the UK, reflected by sterling (GBP) which has slipped to £1.775 as I write, down -.0181.

Inevitably, it has weakened Britain’s Brexit negotiating hand with the EU. 

I expect another General Election within the year and possibly quite soon, although that would be unpopular with many voters.



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June 08 2017

Commentary by Eoin Treacy

June 08 2017

Commentary by Eoin Treacy

No One Has Ever Made a Corruption Machine Like This One

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

By Odebrecht’s admission in U.S. District Court in Brooklyn last December, Structured Operations doled out some $788 million in bribes in Brazil and 11 other countries, securing more than 100 contracts that generated $3.3 billion of profit for the company. Odebrecht and petrochemicals affiliate Braskem SA agreed to pay $3.5 billion in fines to Brazil, the U.S., and Switzerland tied to the activities of the division in Miami and beyond. It’s the biggest corruption-related fine ever levied on a company, eclipsing a $3.16 billion fine in Brazil tied to corruption allegations against another target of the Car Wash probe, Brazilian beef giant JBS SA.

For decades, Odebrecht has cultivated a certain corporate lore. It goes something like this: The company’s ascent to the upper ranks of the world’s engineering and construction companies came from an obsession with hard work, expertise, and customer service. Top executives imbibe the teachings of the company’s founder, the late Norberto Odebrecht, via his three-volume guide to best practices, the Odebrecht Business Technology system. But last Dec. 13, when Emílio Odebrecht, Norberto’s 72-year-old son, took a seat before a microphone in a 1970s-era attorney general’s building in Brasília, Brazil’s capital, he described a family empire built on graft.

 

Eoin Treacy's view -

The “Car Wash” scandal has enmeshed just about everyone in public office in Brazil including both sitting and past presidents as well as officials in a slew of neighbouring countries. Everyone has always known that corruption was part and parcel of doing business in the region but it has now been quantified and put on display for the world to see which has resulted in a blow to sentiment. 



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June 08 2017

Commentary by Eoin Treacy

Veggie Burgers Go Mainstream with Bloody Impossible Burger

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

While alternatives to meat won’t replace the real thing, more companies are investing in the industry and reformulating recipes so consumers can’t tell the difference, said Kenneth Shea, a food analyst at Bloomberg Intelligence in Skillman, New Jersey.

“Consumers, more and more, think in terms of sustainability,” Shea said. “They’re looking to eat more plants as opposed to red meat due to the perceived health benefits.”

While most consumers want to keep eating meat, they’re becoming more informed about the consequences on the environment and sustainability. It takes about 15,000 liters (3,963 gallons) of water to produce 1 kilogram (2.2 pounds) of beef, compared with 1,600 liters for a kilo of wheat, according to estimates from the Water Footprint Network. 

“Clean meat” production requires far less land and water than conventional meat, requires no antibiotics, and eliminates the environmental repercussions of animal waste and contamination during runoff, according to a report from Washington-based non-profit The Good Food Institute.
Still, most Americans don’t want to sacrifice taste.

“They’re hungry for a solution,” Beyond Meat’s Brown said. “It’s up to science and our efforts to get it to the point where it’s completely indistinguishable from its animal equivalent.”

 

Eoin Treacy's view -

I was flying back from a meeting in Las Vegas a couple of months ago when I overheard a conversation between two young men sitting next to me. The first was advising the second on what he needed to do in order to fit into Los Angeles’ culture. The advice was clear, become a vegan, after all that is what all the girls are doing. That also gels with the increased demand for vegan leather handbags (read embossed PVC) which the up and coming generation regard as more eco-friendly. 



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June 08 2017

Commentary by Eoin Treacy

Bail-Ins, Social Norms and Cows

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

But that is a weird coincidence! It is strange that the hole in Popular's balance sheet can be precisely filled -- well, precise to within 1 euro -- by the amount of capital securities (Additional Tier 1 and Tier 2) that it had outstanding. Naively you might expect the valuation to find that there's a little extra money after assuming the senior debt, so the Tier 2 holders should get 10 cents on the euro or something. Or else there's not quite enough money to assume the senior debt, so the senior debt holders should also get a haircut and get 95 cents on the euro or something. But, no: The senior debt holders get exactly 100 cents on the dollar, the Tier 2 holders get exactly zero. (Well, 1 euro between them, but we'll come back to that.)

That coincidence seems unlikely to be explainable by accounting; you will not figure out what is going on by carefully valuing each asset on Popular's books. Instead it is a matter of regulatory and negotiating dynamics. Additional Tier 1 and Tier 2 capital instruments are meant to assume the risk of a bank's losses, so by gosh they are going to assume some losses. As Aaron Brown points out by email: "When Santander, which wants the lowest possible price, negotiates with the government, which wants the least chance of future problems and perhaps wants to punish Popular investors, it's hard to think anyone is pushing hard for Tier 2 rights." If you are imposing some losses on capital securities, the temptation on both sides -- the buyer and the regulator, that is, not the buyer and the seller, who doesn't get much say -- is to impose maximal losses on those securities. George Whittle at FIIG Securities writes: "It is challenging to comprehend any circumstances where a regulator believes a liquidity crisis is sufficiently dire that it justifies the extraordinary step of bailing in capital instruments to facilitate a coercive equity raising or sale, but isn’t sufficiently concerning to bail in everything they can." 

On the other hand, there's also a temptation to stop there: Zeroing capital securities feels virtuous, but haircutting senior debt feels risky. A regulator will not want to trigger systemic worries about bank debt by haircutting one bank's bonds. (On the other hand some regulators might feel like haircutting bank bonds is also a virtuous thing to do: The notion of "total loss absorbing capital" bail-in-able senior bonds does rather encourage that.) Even the buyer might not want to pay less than the value of the senior debt: Santander is going to need to go back to the debt markets, and treating Popular's bondholders well might help its credibility in the future. 

So Popular's textbook result -- zeroing all the capital instruments, paying off all the debt -- is an equilibrium point that you would expect to occur a lot more often than is justified by the economics. That is ... fine, I guess? But it does rather wipe out the distinction between Tier 1 and Tier 2 capital, and between senior bank debt and risk-free debt. The choices are categorical as much as they are financial; they encourage holders of risky securities to worry about risk, and holders of senior securities not to, but it's not clear that they force anyone to quantify it carefully.

 

Eoin Treacy's view -

Banco Popular’s sale represents another example of Spain’s efforts to clean out the dross in its financial system following the creation of a bad bank and tighter regulation. The manner in which the Tier 2 bond holders have been wiped out highlights the emerging reality that there is increasing polarisation between secured and unsecured bond holders rather than the waterfall of credit exposure that has previously been assumed. 



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June 07 2017

Commentary by Eoin Treacy

June 07 2017

Commentary by Eoin Treacy

Demographically challenged

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

A deep dive into demographics suggests a dire outlook for property prices
Following an in-depth demographic study for Hong Kong, we have turned more negative on housing demand. Taking into account weaker demand and rising supply (we published a FITT report on supply in Sept-16) we have cut our medium-term (2018E-21E) residential price forecasts significantly. We now expect vacancy to surge to 9% (4% now) and ASP to slide 48% by 2026 from current levels. We reiterate our view that developers will be forced to change their business model from land-banking to asset turnover. Hence, we overhaul our valuation methodology from discount-to-NAV to SOTP, using P/E to value development businesses. We downgrade HLD, Kerry and NWD to Hold.

Several negative demographic trends
In this report, we identify several notable demographic trends in Hong Kong, with the most significant being: 1) natural population growth has already peaked and is likely to turn negative by around 2027; 2) reduced immigration; 3) the quick shrinkage of the 25-44 years age group to 26% of the total population by 2025, from 38% in 1995 (vs. 29% now); 4) the rise in people aged over 60 years to 30% of the total population, from the current 22%. Hong Kong already has the second-highest over-60 population in Asia, as a percentage of total population, behind Japan.

Aging population constrains financing, translating into lower affordability
In our view, housing affordability will be severely affected by an aging population. We believe affordability (debt servicing) is a function of property prices, mortgage rates, loan tenures and income. As the population ages, fewer households will be able stretch their mortgages to the maximum tenure of 30 years. On our new estimates, we expect only 11.5% of total households will be able to afford an average private housing unit by 2019. Moreover, by factoring in upcoming rate hikes, we expect overall affordability to worsen and ASP to decline by 48% over 2017-26 to restore the supply/demand equilibrium.

A new valuation methodology for property development – P/E approach 
With improving supply and a bleak outlook for the physical market, we expect land-banking to fade as a business strategy, and we anticipate a growing focus on asset turnover. As a result, we believe a discount-to-NAV valuation methodology will become less relevant in valuing the developers, and we advocate adopting a P/E approach for the development businesses. For the investment properties owned by the HK Property companies, we continue to estimate NAVs based on cap rates. We then apply a discount to the investment property NAV of 34% (the average discount over the past 25 years).

 

Eoin Treacy's view -

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

Hong Kong has long defied sceptics in its ability to innovate and adapt to changing market structures. However that has not freed it from the cyclicality of the property market which has always been prone to boom and bust. With a pegged currency and interest rates that are beginning to rise from a very low base, the threat to property prices, which are at elevated levels, is growing. 



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June 07 2017

Commentary by Eoin Treacy

Pulses, Indian Beef. Bullish Corn

Thanks to a subscriber for this report by Ned Schmidt which may be of interest. Here is a section:

Ten years ago India was not a topic of a lot of interest. This month we find ourselves again talking about India twice, on pulses and beef. And when we look at corn we have some optimism to offer up.

Pulses are basically dry beans, lentils, and peas. Few of us ever thought about them being grown in North America. U.S. and Canada have become major growers, exporting to India and other nations from the Middle East to India. Bottom graph is of U.S. acreage planted in pulses. While expansion has been irregular, roughly 1.5 million acres have been added in last fifteen years. Canada is a major source of pulses. Roughly 65% of world’s lentils are grown in that nation. Acreage dedicated to these crops is probably approaching 10 million acres. Apparently Canada is an ideal place to grow them, and then send them to India, et al

India is becoming a major customer for world’s food system. Second, world will grow what customers want. Farmers are looking to produce alternative crops in search for profits. The “corn vs. soybean” farmer, while essential, may increasingly become “outdated”.

Eoin Treacy's view -

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

India is one of the fastest growing economies in the world which is lifting millions of people out of abject poverty. The first thing people do when they go from $1 to $2 a day is eat more food and buy soap. That helps them to continue earning more money and puts many people and their children on the road to a more secure standard of living. It is reasonable to expect India’s demand for food will continue to increase as it progresses economically. 



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June 07 2017

Commentary by Eoin Treacy

Concerned about the Paris Agreement? There's still hope through girls' education

This article by Rebecca Winthrop and Christina Kwauk for the Brookings Institute may be of interest to subscribers. Here is a section:

The good news is that the most effective intervention is not even in the Paris Agreement. Empowering girls and women through a combination of education and family planning is the number one thing the world can do to address climate change, ahead of switching to solar energy, wind energy, or a plant-rich diet. Investing in both girls’ education around the globe and enabling women access to contraception and reproductive healthcare would result in 120 gigatons of carbon reduced by 2050, a staggering amount compared to the 90 gigatons that could be reduced by better management of harmful chemical refrigerants like chlorofluorocarbons (CFCs).

Demographers, global development specialists, and education advocates have long known about the connection between girls’ and women’s empowerment and smaller, more sustainable families. Research suggests that the difference in family size for a woman with 0 years of schooling compared to a woman with 12 years of schooling is about four to five children. And several studies have projected slower population growth if all girls around the world receive a secondary school education—as much as two billion fewer people on the planet for 2050 than if current fertility rates persist, and over five billion fewer people by 2100. Indeed, reaching a sustainable population growth rate could be realized even more quickly if the 225 million women around the world who want to avoid pregnancy but do not have access to contraception or control over their reproductive lives were given access to safe and voluntary family planning. The majority of these women live in the world’s 69 poorest countries, and it’s no coincidence that many of these countries are where girls have the hardest time going to school.

 

Eoin Treacy's view -

It boggles the mind that there is still debate on the issue of female education. Not only is there a strong body of research on the social and developmental benefits of giving girls equal access to education but there are also clear environmental and conservation benefits as well. At its most basic it just makes sense for any country to give itself a leg up by investing in the brain of every citizen to ensure the most productive people actually achieve their economic capacity. It really is that simple. 



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June 06 2017

Commentary by David Fuller

Email of the day 1

On Theresa May’s disappointing campaign:

Bullying, yes, and the British always tend to support underdogs. But the Tory campaign has allowed the debate to swing away from Brexit onto domestic, where Labour is generous and Tories realistic. Generosity is more attractive than reality. Her U Turn on Social Care -why introduce a radical domestic change mid-term when you are already incumbent and don't need to? - had many good points but she allowed Labour to characterize it as austerity. Overall, the Tory campaign has lacked bite and energy, allowing opponents to pitch it as arrogant and unnecessarily austere. A Trump factor - disenchantment with the political class - also works against the Tories and in favour of outsider Corbyn and the innumerate amateurism of his acolytes.

David Fuller's view -

Many thanks for your astute summary. 

We can be sure the Brussels bureaucrats will be enjoying Theresa May’s comeuppance.  It will be a painful but also valuable lesson, assuming she survives this election.

(See also: Matthew Lynn’s apt column for The Telegraph: 2017 is the Worst Possible Year for Britain to Experiment with Corbyn-omics, posted on Monday)  



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June 06 2017

Commentary by David Fuller

The Weekly View: Watching a Baton Pass - Eurozone Momentum

My thanks to Rod Smyth, Chief Investment Strategist at RiverFront for his excellent publication.  Here is the opening:

Our 2017 Outlook, published in January, was called Passing the Baton. We anticipated a series of changing economic and market drivers – baton passes – across the global economy.  We felt investors had focused so much on political risk in the Eurozone during 2016 that the potential persistence of the economic and earnings recovery was underappreciated. Last week, the monthly surveys from companies around the world combined with the monthly employment numbers in the US suggest two things to us:

  1. Growth momentum outside the US, especially in the Eurozone, is slightly stronger.
  2. Absent the anticipated stimulus (tax cuts, infrastructure spending etc.), employment growth is slowing somewhat, as is car buying. That said, the US surveys are positive, as is employment growth. We expect growth to continue and await greater clarity from Washington.

In analysing the employment numbers, we take great care to recognize that monthly information on the labor market is volatile and seek to smooth it out. The chart below shows the two major US surveys with each of them smoothed out into a 3 month, 6 month and 12 month average. Looking at the last 6 years, the 12 month average has been pretty consistent at around 200,000 new jobs per month for both surveys. The payroll survey is from companies and is more widely publish, but it is the household survey that the Labor Department uses to calculate the unemployment rate, currently at the historically low level of 4.3% (see our chart on page 2).   

David Fuller's view -

The Eurozone is currently experiencing at least a cyclical recovery from a very low trough.  This bodes well for the global economy.  However, European banks remain relatively weak and EU economies are overregulated. Most significantly, Germany remains adamantly opposed to fiscal union, without which no previous single currency among nations has survived.

Consequently, there are more questions than answers about the EU’s longer-term prospects.  Nevertheless, efficient Germany fares best within the Eurozone because it would have a less competitive currency if it returned to the Deutsche Mark.  

A PDF of The Weekly View is posted in the Subscriber's Area. 



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June 06 2017

Commentary by David Fuller

Excellent summary of the UK election campaign from a reader of The Telegraph

This was published on 3rd June:

SIR – A few weeks ago the Tories were in a commanding position, and now there is a fair possibility that we will be governed by a coalition of a union-led, economically illiterate, anti-Semitic Labour Party, a rabidly anti-British SNP and the ineffectual Lib Dems.

This happened because people believe we are led by a difficult woman who is not a team player, doesn’t listen to advice, is prone to U-turns and performs badly on television.

Peter Bullock

Chalfont St Giles, Buckinghamshire

David Fuller's view -

I think UK voters are a savvy lot, so I am expecting them to elect a government which has the best chance of delivering on Brexit, although this was always going to be a bumpy ride.  



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June 06 2017

Commentary by David Fuller

Email of the day 2

More on the UK election: 

Hiya David

The prospect of Corbyn terrifies me, truly. I agree, we will be taken back to a 70’s style nightmare. Perhaps not cerebral enough for your website but I think the man is the spitting image of Davros. If you are a Doctor Who fan you may remember him from the 70’s as well.

But for what it’s worth I think the Conservatives will win, comfortably. This site does give me some hope. It seems such a long time ago now but I was certain Cameron would win in 2015, and that there would be a Brexit vote last year. So hopefully, not 3rd time unlucky.

We shall see!

All the very best

David Fuller's view -

I really enjoyed this email which is also very informative, and you certainly have made some astute calls on our elections.

Davros is certainly scary, as is Corbyn’s track record, although my imagination does not reveal to me the spitting image resemblance.  Surprisingly, at least to me, he has run the most successful campaign. Under constant attack from May he has shown amazing self-control, presenting himself as a gentle, respectful and even kindly moderate figure, above criticism, rather than the hard-line Marxist his track record reveals.

Thanks for introducing me to Electoral Calculus by Martin Baxter. It is reassuring and also interesting, although they show a Conservative gain of only 30 seats – a far cry from the 100 or more seats which many pundits were forecasting when the campaign commenced.  Worryingly, Baxter respects the YouGov polling methodology, while disagreeing with its prediction that the Conservatives will lose their majority.  If that happens we are in trouble. 

(See also: General election: Polls and odds tracker in final week of campaigning, from The Telegraph)



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June 06 2017

Commentary by Eoin Treacy