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January 12 2017

Commentary by David Fuller

Perils of the Icarus Trade as the World Runs Short of Dollars

Here is the opening of this topical article on the Trumpian outlook for stock markets in 2017, by Ambrose Evans-Pritchard for The Telegraph:

Bank of America calls it the Icarus Trade. Global stock markets will surge by another 10pc in a parabolic 'melt-up' this quarter, akin to the final stage of the dotcom boom.

This will be followed by a mirror 'melt-down' later in 2017 as the US Federal Reserves squeezes global liquidity, and rising bond yields puncture the Trump reflation trade.

Michael Hartnett, the bank's investment strategist, says there will be a perfect moment for the 'Big Short' within a few months, but first we must all wait for the speculative fever to pass. The warning signs of a market top are not yet flashing red.

The Bull/Bear ratio is a frothy 3.4, but far from extreme. The cash reserves of money managers have fallen to a 19-month low of 4.8pc. The danger zone is nearer 4pc. Powerful rallies tend to draw all but the most steely resisters into the vortex first.

Bank of America recommends "laggard risk assets", singling out British assets as the ultimate unloved play. We in the UK may think that the headline rise of the FTSE-250 over the last twenty months is not so bad, but for sophisticated investors who think in dollar terms it has been a 20pc haircut. Britain PLC is cheap.

Picking the last pennies off tracks before an incoming train is only for the nimble and brave.  Mr Hartnett says bond stress is creeping up on the markets. The peak-to-trough losses for holders of US Treasuries over the last five months are already greater than before the 1987 crash, the Orange County and Mexico blow-ups in 1994, and is not far short of the 'taper tantrum' in 2013.

The great unknown is where the pain threshold lies in a global system with debt ratios that are now roughly 40pc of GDP higher than just before the Lehman crisis. Bank of America fears a further rise in yields of 50 to 75 basis points may be enough to trigger a "financial event".

HSBC's latest global outlook is even darker. Indeed, it is astonishing. The bank expects yields on 10-year US Treasuries to push a little higher to 2.5pc before crashing back to historic lows of 1.35pc by the end of the year, taking global yields with them.

Markets will conclude by the summer that Trumpian stimulus does not add up to much, and that the reflation narrative is a hoax. "We believe that equities are walking a tightrope, and there is a fairly long way to fall," said the bank.

While I do not take a view on stock prices, HSBC's outlook is broadly in line with my own. The world cannot easily withstand the sort of Fed tightening now being etched into forecasts by the macro-economic fraternity.

The Institute of International Finance says debt has reached $217 trillion, a record ratio of 325pc of GDP. What is remarkable is that even in mature economies -  trying to 'deleverage' - the ratio jumped by 6pc of GDP to 390pc over the first nine months of last year.

There is almost nowhere left to hide. Corporate debt in emerging markets has risen from $6.5 trillion to $25.5 trillion since Lehman, with the 'credit gap' signalling danger in China, Hong Kong, Singapore, Thailand, Saudi Arabia, Chile, Turkey, and Indonesia. Total off-shore dollar debt has risen fivefold to $10 trillion since 2000.

David Fuller's view -

One expects a range of different forecasts at the beginning of January each year, and 2017 is no exception.  Love him or loath him, president-elect Trump is particularly newsworthy and a factor in these forecasts.  

On Monday I posted James W Paulson’s bullish report for Wells Capital Management in which he referred to the return of animal spirits no less than 24 times.  In Ambrose Evans-Pritchard’s column above he first quotes Michael Hartnett from Bank of America who predicts further momentum gains before “a perfect moment for the ‘Big Short’ within a few months”.  AEP then cites HSBC’s latest global outlook as even “darker” and in line with his own views.  The bank expects US 10-Year Treasury yields to retest their early-July lows near 1.35%, with equites walking a tightrope from which there is a long way to fall. 

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



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January 12 2017

Commentary by David Fuller

Dimon Praises Cabinet Picks, Says He Is Optimistic About Trump

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he’s optimistic about President-elect Donald Trump’s administration because of the group of people he’s assembled to fill his cabinet.

“If you want to win the game, put Tom Brady on the field,” Dimon, 60, said in an interview Thursday on CBS This Morning. Trump’s “hired a lot of professional people, people that are experienced, successful, smart and patriotic,” he said.

Dimon’s comments came amid this week’s marathon of Senate confirmation hearings. All of Trump’s picks are expected to win confirmation, barring unexpected revelations or major gaffes.

Dimon praised Steve Mnuchin, Trump’s pick for Treasury secretary, saying the former CEO of OneWest Bank Group LLC is “very qualified” and “wants to do the right thing.” Despite rumors last year that he was under consideration for the Treasury job, Dimon said Thursday he wasn’t offered the position, adding that he hasn’t finished his work at JPMorgan and at the Business Roundtable, an association of U.S. CEOs.

Rex Tillerson, Trump’s nominee for secretary of state, is “respected by everyone he deals with around the world,” Dimon said. Tillerson, the former CEO of Exxon Mobil Corp., has faced criticism for his dealings in Russia in the run-up to his confirmation. He was pressed on U.S.-Russia relations during his Senate confirmation hearing on Wednesday, responding that Moscow has acted against U.S. interests and urged an “open and frank dialogue” on areas of mutual concern.

“Rex Tillerson is a class act -- he’s smart, he’s patriotic,” Dimon said. “Almost every big company has dealings in Russia; that doesn’t mean he’s not a patriot.”

David Fuller's view -

I maintain that Trump has assembled the strongest business team for his Cabinet that I have seen from any president in my lifetime.  That can only be good for the US economy, which is positive for global GDP growth generally.  I am obviously not alone in this view, which is widely reflected by Wall Street since the surprising election result on November 8th.   Moreover, this is a team which can be very effective while Republicans also control both the Senate and the House of Representatives.

However, the problem is Trump’s other side, which is both discouraging and highly irritating for many people, even among those who support him.  He is not a fool, and there have obviously been attempts to undermine him.  The US presidential campaign was more contentious than any other which I have witnessed.  It is time to move on and the new president can set the tone for his administration. 

Trump aspires to two terms.  Fine, but to achieve that he will need to develop gravitas.  His inauguration speech will be the time to demonstrate that aspect of his character, along with the inclusivity seen in his brief statement immediately following his election victory.     



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January 12 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs during the rest of this week.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out over the next few months if the early November reaction lows are broken.  Note how well the UK’s FTSE 100 Index has performed, benefitting considerably from all the inform commodity shares. 

Keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin which fallen back sharply.  China’s government has clearly moved to stem this route for exporting capital and the Offshore Renminbi has also established a peak of at least near-term significance.    

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16th and delivering a short chart-based presentation.  



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January 12 2017

Commentary by Eoin Treacy

The Robot Rampage

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

Even an America-first advocate like Trump should be concerned by this because people joining the middle classes in Vietnam, Mexico or Egypt will be potential customers for U.S. goods exporters.

Why might it happen? Back when the U.S. middle class flourished after World War II, factory automation was expensive. Robots were limited to only a few sectors -- mainly the auto industry -- and those automatons weren’t that sophisticated. Wages rose thanks to improved productivity, but workers weren’t completely made redundant by the machines.

Poorer countries in Asia or Africa probably won't be that lucky. Today's robots are far more capable, are being deployed in a wider range of industries, and are cheaper too. That leaves less room for wages to rise before humans are priced out of the labor market. More low-cost automation also means manufacturing can be re-shored to developed economies.

German robot maker Kuka AG, acquired last year by China’s Midea Group Co., estimates a typical industrial robot costs about 5 euros ($5.28) an hour. Manufacturers spend 50 euros an hour to employ someone in Germany and about 10 euros an hour in China.

Eoin Treacy's view -

When I spoke to KP Reddy, the CEO of Softwear, a year ago the biggest takeaway was how he described the strong interest they were receiving from major clothing manufacturers in Asia. They want to be fully automated within the decade so they are investing now. 



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January 12 2017

Commentary by Eoin Treacy

Latest memo from Howard Marks: Expert Opinion

Thanks to a subscriber for a link to this letter which may be of interest. Here is a section:

I’ll end this section by sharing my latest epiphany on the macro.  I realized recently that in my early decades in the investment business, change came so slowly that people tended to think of the environment as a fixed context in which cycles played out regularly and dependably.  But starting about twenty years ago – keyed primarily by the acceleration in technological innovation – things began to change so rapidly that the fixed-backdrop view may no longer be applicable.

Now forces like technological developments, disruption, demographic change, political instability and media trends give rise to an ever-changing environment, as well as to cycles that no longer necessarily resemble those of the past.  That makes the job of those who dare to predict the macro more challenging than ever.

Eoin Treacy's view -

The Velocity of M2 has been declining since 1997. A housing bubble, sovereign debt crisis and bubble, commodity bull market and crash and massive monetary largesse have done nothing to stall the decline.

This argument from the St. Louis Fed in 2014 blames the refusal of consumers to spend as the primary culprit and suggests ultra-low interest rates are at least partially to blame. Here is a section:

And why then would people suddenly decide to hoard money instead of spend it? A possible answer lies in the combination of two issues:

A glooming economy after the financial crisis

The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds

In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).



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January 12 2017

Commentary by Eoin Treacy

Bitcoin Falls 6% After PBOC Shanghai Inspects Trading Platform

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

Bitcoin drops 6% after PBOC Shanghai says it conducted on-site inspection at Shanghai-based BTCChina.com to check for any violations of market manipulation, money laundering and safety of customer funds.

Bitcoin prices have plunged 20% from record high of $1,091.7 on Jan. 4

Current trading price at BTCChina.com, platform tailored to Chinese clients, dropped 9% from 24-hour high

Trading volume was 1.5m bitcoins on BTCChina as of today, 1.2m on Huobi.com today, 1.8m on OKCoin.cn

NOTE: Bitcoin trading could only accommodate a small fraction of funds leaving China, Bloomberg Intelligence says

NOTE: BTCChina, Huobi.com, OKCoin.cn are major bitcoin trading platforms providing services to Chinese clients

NOTE: Jan.9, China to Study Bitcoin Custodian Platform: Securities Journal.

Eoin Treacy's view -

Bitcoin is a small market compared to national currencies, However there is no getting around the fact that Chinese traders represent the majority of participants in that market. Therefore rather that Bitcoin representing the primary organ for money leaving the country it has been the victim of its own limited success by embarrassing monetary policy makers.



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January 11 2017

Commentary by Eoin Treacy

Video commentary for January 11th 2016

Eoin Treacy's view -

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

Here is a summary of the points covered:
    
TIPS yields at potential support, Dollar weaker, resources shares hitting new recovery highs, uranium and shipping rallying from deeply oversold conditions, South Korea outperforming, Genetic Sequencing collapsing in price.



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January 11 2017

Commentary by Eoin Treacy

World's top uranium producer Kazakhstan to cut output by 10%

This article by Cecilia Jamasmie for Mining.com may be of interest. Here is a section:

State-owned uranium company and global production leader, Kazatomprom, said production for 2017 will be reduced by 2,000 tonnes, which is about 3% of the total global output, according Cantor Fitzgerald Canada Research’s figures.

“These strategic [uranium] assets are far more valuable to our shareholders and stakeholders being left in the ground for the time being, rather than adding to the current oversupply situation,” Kazatomprom Chairman Askar Zhumagaliyev said in the statement.

He added the production would pick up pace once market conditions improve.

Cantor Fitzgerald’s analysts Rob Chang qualified the move as a “game changer,” adding he expected to see across the board strength in the uranium space very soon.

“Kazatomprom’s relentless increases in production over the years was one of the top causes for uranium price weakness,” Chang said in a note to investors.

 

Eoin Treacy's view -

Uranium prices have now unwound their oversold condition relative to the trend mean. It is as yet unclear whether this decision by Kazakhstan was the catalyst for the rally to date and will continue to act as a bullish factor. However what we can conclude is that prices are uneconomic for even the most efficient producers at these levels so marginal supply is under pressure. That is a recipe for higher prices over the medium-term.



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January 11 2017

Commentary by Eoin Treacy

Samsung Proves Its Business Remains Sound Despite Note 7 Fiasco

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

Samsung is emerging from its biggest corporate crisis, when reports of incendiary Note 7s forced the Korean company to kill its most profitable gadget. It still hasn’t revealed the results of a subsequent investigation into an episode that cost Samsung more than $6 billion and assured Apple Inc. of the lead in premium devices over the holidays. It’s now counting on its next marquee phone to repair its reputation.

“Despite the Note 7’s vacuum, Samsung acquitted itself well on the back of sound S7 sales,” said Lee Seung-woo, an analyst with IBK Securities Co. in Seoul. “After a softer landing in the first quarter, Samsung is on track for record June quarter profit with the new S8 coming to market.”

Operating income rose to 9.2 trillion won ($7.8 billion) in the quarter ended December, its biggest profit in three years, the Suwon, South Korea-based company said in preliminary results Friday. That compares with the 8.29 trillion-won average of analysts’ estimates compiled by Bloomberg in the past four weeks.

 

Eoin Treacy's view -

The heir to Samsung’s empire is being accused of taking part in a bribery scandal yet the share continues to outperform suggesting this news was already priced in. Perhaps more important is the fact Samsung was awarded more US patents last year than any other company. That suggests it at least has the potential to improve on its product line even after the Note 7 debacle. 



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January 11 2017

Commentary by Eoin Treacy

Down But Far From Out

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

Gold prices may have peaked in 2013 but so did the balance sheets and debt loads of the gold miners within our coverage, as the companies chased M&A and project development. Throughout 2015, and in particular 2016, the industry as a whole made FCF generation and balance sheet deleveraging high priorities. As seen below, the net debt balances of the gold miners under our coverage have declined 47% since the peak while Net Debt/EBITDA has improved by a full 1x turn, despite an average gold in 2016 that was 12% below the 2013 average.

The industry-wide focus on cost cutting and FCF generation has created companies that are less levered plays to rising gold prices, as was the case in the run up to peak gold prices in 2013. Industry FCF generation, as measured by our coverage universe, has improved greatly in the last few years. Despite much higher gold prices in 2012/13 (averaging $1,540/oz), FCF was negative as both capex and operating costs were significantly higher than current levels. As mentioned above, an industry-wide focus on FCF has clearly shown in the last few years. We forecast 2016E FCF in our coverage universe to exceed $4bn, the highest figure since the turn of the decade. 

Eoin Treacy's view -

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

Gold miners are much more leveraged to the gold price today than they have been in a very long time. They have slimmed down budgets, are eschewing spending on new projects and therefore any improvement in gold prices is reflected in free cash flow.  



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January 11 2017

Commentary by Eoin Treacy

Illumina Introduces the NovaSeq Series a New Architecture Designed to Usher in the $100 Genome

This is an important press release. Here is a section:

The introduction of NovaSeq marks one of the most important inflection points of innovation in Illumina’s history. In the same way that HiSeq X enabled the $1,000 genome with the HiSeq® architecture first announced in 2010, we believe that future systems derived from the NovaSeq architecture we are launching today one day will enable the $100 genome and propel discoveries that will enable a deeper understanding and better treatments for complex disease,” said Francis deSouza, President and CEO of Illumina. “The NovaSeq Systems enable the study of genetic links between health and disease at an unprecedented scale by making it possible to sequence more samples at greater depth and take on projects that would otherwise be cost-prohibitive. By accelerating the trajectory of genomics with these systems, Illumina is making it possible to envision a future in which all people can benefit from precision medicine.”

The NovaSeq Series includes the NovaSeq 5000 and 6000 Systems. These instruments offer ease of use features similar to those found in Illumina’s desktop sequencing portfolio, including automated onboard cluster generation, cartridge-based reagents, and streamlined workflows. With scalable throughput, users will have the flexibility to perform sequencing applications requiring different levels of output by simultaneously running one or two flow cells from up to four different flow cell types.

The NovaSeq 5000 and 6000 Systems are priced at $850,000 and $985,000 respectively. Compared with other Illumina sequencing systems, both have lower per sample consumable costs for most sequencing applications. They provide laboratories that cannot afford the capital cost of a HiSeq X Five or HiSeq X Ten System with a roadmap to completing human whole-genome sequencing projects at a cost of $1,000 per genome.

 

Eoin Treacy's view -

It will be a few years before we have a $100 genome sequencer but the announcement that it is a possible iteration of the new architecture is a major development. 

Falling from $100 million in 2001 to $1000 last year and $100 within the next few years represents an exponential decline which will have ground breaking repercussions for the genetics industry. 

 



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January 10 2017

Commentary by David Fuller

U.S. Small-Business Optimism Index Surges by Most Since 1980

Here is the opening of this promising article from Bloomberg:

Optimism among America’s small businesses soared in December by the most since 1980 as expectations about the economy’s prospects improved dramatically in the aftermath of the presidential election.

The National Federation of Independent Business’s index jumped 7.4 points last month to 105.8, the highest since the end of 2004, from 98.4. While seven of the 10 components increased in December, 73 percent of the monthly advance was due to more upbeat views about the outlook for sales and the economy, the Washington-based group said.

The share of business owners who say now is a good time to expand is three times the average of the current expansion, according to the NFIB’s data. More companies also said they plan to increase investment and keep hiring, which reflects optimism surrounding President-elect Donald Trump’s plans of spurring the economy through deregulation, tax reform and infrastructure spending.

“Rising confidence adds to the economy’s upward momentum,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, said in a note. At the same time, the “NFIB membership appears to be disproportionately Republican, so it is possible that the data will start overstating strength, opposite the pattern during the Obama administration.”

The NFIB report was based on a survey of 619 small-business owners through Dec. 28. Small companies represent more than 99 percent of all U.S employers, according to the U.S. Small Business Administration. A small business is defined as an independent enterprise with no more than 500 employees.

Fifty percent of respondents, the biggest share since March 2002, said they expect better business conditions in the next six months. That was 38 percentage points higher than in November. The net share of firms projecting higher sales jumped by 20 points to 31 percent. Some 29 percent say they will boost capital outlays within six months.

“We haven’t seen numbers like this in a long time,” Juanita Duggan, president and chief executive of the NFIB, said in a statement. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy. Business owners are feeling better about taking risks and making investments.”

David Fuller's view -

This is exceptionally good news and can only help US GDP, which is also a boost for the global economy



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January 10 2017

Commentary by David Fuller

The Weekly View: Reducing US Stocks to Bring Balanced Portfolios Closer to Long-Term Targets

My thanks to Rod Smyth for the latest edition of his excellent timing letter, co-produced this week with Kevin Nicholson and published by RiverFront Investment Group.  Here is a brief sample:

In our 12/19/2016 Weekly View, we indicated that we were assessing our tactical position as we felt sentiment was approaching optimistic extremes.  Last week, we made a tactical decision to reduce US Stocks in our balanced portfolios.  Going into the end of 2016, our balanced portfolios had more equity exposure in order to take advantage of the post-election rally in the US.  Below is a summary of our current positioning as a result of the most recent portfolio changes:

1. As we begin 2017, it is our belief that the post-election rally may have gotten ahead of the new administration’s policy implementation.  We remain optimistic about the prospects for US stocks as a result of expected policy changes from the new administration and Congress.  However, our measures of investor sentiment suggest that our optimism is now widely shared.  In the first quarter, the details of policy will become more apparent, as will any differences among policymakers.  This process may be more challenging than anticipated.  

David Fuller's view -

We have a global stock market rally sparked by Trump’s election.  As we approach the first half of January, stock market performances in the first two weeks of January 2017 could not be more different than what we saw in early 2016.  Seasonal factors are favourable, although this made no difference last year. Nevertheless, on average they have worked more often than not, which is why this time of year is known for its favourable seasonal factors. 

Perhaps more importantly, animal spirits in favour of stock markets have returned for the first time in a long while.  Most of the hedge shorts have probably been covered but I doubt that most long-only investors are fully invested. 

This item continues in the Subscriber’s Area, where The Weekly View is also posted, along with an article.



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January 10 2017

Commentary by David Fuller

Email of the day

On changing attitudes:

Here's an article that was written by a friend that appeared in this month's Jan. Issue of Marc Faber's Gloom Boom and Doom.  George is a very successful California Real Estate investor and one of the savviest stock market investors I have ever come across. The article was written in December and is quite timely. I thought I would share it with you, with George's permission. 
 

David Fuller's view -

My thanks to you and George Karahalios, and I am very happy to post his article.  It is powerful, passionate, informative and credible.  I think most subscribers will agree with a great deal of it, as do I.   



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January 10 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs during the rest of this week.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out over the next few months if the early November reaction lows are broken.  Note how well the UK’s FTSE 100 Index has performed, benefitting considerable from all the inform commodity shares. 

Keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16th and delivering a short chart-based presentation.  



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January 10 2017

Commentary by Eoin Treacy

January 10 2017

Commentary by Eoin Treacy

Musings from the Oil Patch January 10th 2016

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

As for a new Ice Age, the Russian Academy of Science’s Pulkovo Observatory in St. Petersburg, considered one of the world’s most prestigious scientific institutions, recently issued a new study titled, “The New Little Ice Age Has Started.” According to the study, the average temperature around the globe will fall by about 1.5o C (2.7o F) when the planet enters the deep cooling phase of this new Little Ice Age, expected in the year 2060. The study goes on to predict that after 2060 the Earth will experience four-to-six 11-year solar cycles of cool temperatures before beginning the next quasi-bicentennial warming cycle around the turn of the 22nd century.

Habibullo Abdussamatov is the head of space research at Pulkovo and the author of the study. He has been predicting the arrival of another ice age since 2003, based on his study of the behavior of the sun’s different cycles and the solar activity that then results. His model is based on data from the Earth’s 18 earlier little ice ages over the past 7,500 years, six of them experienced during the last thousand years. Based on his model, he began predicting over a decade ago that the next little ice age would start between 2012 and 2015. Abdussamatov’s models have been affirmed by actual data, including the rise of the oceans and the measurable irradiance sent earthward by the sun. Given the accuracy of his predictions, which have been demonstrated in numerous studies since 2003, he now predicts that we entered the 19th Little Ice Age in 2014-2015. This forecast would appear to fly in the face of climate change scientists pointing to 2015 and 2016 as being the warmest years on record – and forecasts that we will experience more record warmth in coming years.

Mr. Abdussamatov’s views stand in opposition to the conclusions of climate models, as he has tied his forecast of a prolonged cooling spell to solar, not man-made, factors. The recent disappearance of sunspots from the face of the sun, which also occurred during the Little Ice Age in the late 1600s, has made Mr. Abdussamatov’s contention no longer an isolated view. In fact, organizations such as the National Astronomical Observatory of Japan and the Riken research foundation have reached similar conclusions. The battle over whether man-made or natural forces are the primary driving force behind global warming and climate change will likely become more contentious in the next few years. The key point is that the world’s population is at greater risk of serious harm from colder temperatures rather than warm temperatures, which seems to be ignored by government officials and the media. We guess, cold and ice doesn’t lend themselves to as spectacular disaster scenes as heat-related weather events.

Eoin Treacy's view -

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

I am more than willing to accept that humans have an impact on our environment. After all there are a lot of us and we engage in a great many industrial activities. However the sun is a major contributor to weather patterns and its cycles cannot simply be ignored. I predicted back in 2009 the most recent solar activity peak would represent a lower low and that has now come to pass. As we head into another solar minimum we can anticipate colder winters in the years ahead. However to go from there to a prediction of an impending mini-Ice Age is quite a leap. 



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January 10 2017

Commentary by Eoin Treacy

Coking coal price correction turns into rout

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

It's only the 5th, but the year to date fall in the price of coking coal has already reached 8%. The steelmaking raw material is also a round $100 below its multi-year high of $308.80 per tonne (Australia free-on-board premium hard coking coal tracked by the Steel Index) hit in November.

On Thursday the price dropped another 4.5% to $208.10 a tonne, the lowest since September 29 and one of the biggest declines (for the spot price) on record. In 2011 floods in key export region in Queensland saw the coking coal price briefly trade at an all-time high $335 a tonne.
With demand both more diverse and less predictable, the increasingly widespread transition towards market-based pricing couldn’t be more timely

Still, metallurgical coal is up 150% over the past year and averaged $143 a tonne in 2016 (about the same as it did in 2013). There was a more than $100 differential between the spot price average and the fourth quarter contract benchmark.

 

Eoin Treacy's view -

The oldest adage in the commodity markets is that “the cure of high prices is high prices”. There was a temporary dearth of coking coal so prices rose quickly for most of the latter half of 2016. However with new supply coming to market the necessity to pay ever higher prices has been reduced and coking coal has pulled back sharply. A potentially lengthy period of ranging is likely required before substantially higher prices can be sustained. 



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January 10 2017

Commentary by Eoin Treacy

Brazil Worries the 'China of South America' Is Eating Its Lunch

This article by Bruce Douglas and Matthew Malinowski for Bloomberg may be of interest to subscribers. Here is a section:

As Brazil struggles through its worst recession on record, dozens of businesses have set up operations across the border, creating thousands of jobs. Broadly welcomed by the Brazilian government at first, the migration of investment is now facing increasing scrutiny as unemployment rises to unprecedented levels.

"It used to be a joke," said Murillo Onesti of Sao Paulo law firm OLN Advogados, referring to Paraguay’s past reputation in Brazil as a source of cheap knock-offs. "China faced the same resistance at first. But people are seeing now that you can produce better quality goods at a lower price."

In effect since 2000, Paraguay’s "maquila law" aims to replicate the success of Mexico’s maquiladora -- or manufacturing plant -- operations. Goods can be imported tax-free for assembly, then sold locally or exported with only the value-added part taxed at a rate of just 1 percent.

Eoin Treacy's view -

It’s been a long time since we heard anything resembling a capitalist growth story from Latin America. However following a decade where commodity driven profits ushered in high spending rates and socialist ideologues, the continent has had to reassess and more business friendly policies are emerging.

 



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January 09 2017

Commentary by David Fuller

German Fury Grows Over Inflation Horror-Kurve as Fears of Destructive Boom-Bust Cycle Mount

Here is the opening of this important article http://www.telegraph.co.uk/business/2017/01/08/german-fury-mounts-inflation-horror-kurve/by Ambrose Evans-Pritchard for The Telegraph:

Inflation rage is coming to the boil in Germany. Leaders of the country's prestigious institutes warn that the economy is hitting capacity constraints and risks spiraling into a destructive boom-bust cycle.

In a series of interviews with The Telegraph they said that the ultra-loose monetary policy of the European Central Bank is now badly out of alignment with German needs. It has begun to threaten lasting damage, and is fast undermining political consent for monetary union.

"The ECB wants to inflate away the debt of the southern European countries. This is a clear conflict of interest with net creditors like Germany," said Clemens Fuest, president of the IFO Institute in Munich.

"There is a debate building up on the expropriation of German savers by the ECB. This is going to become very difficult if inflation approaches 2pc and they still do nothing. People will conclude that their true motive is redistribution," he said.

What is new is that Germany's inflation rate has suddenly jumped to 1.7pc after a long and deceptive period of quiescence. It is now much higher than in southern Europe.

The mechanical effect is to drive real interest rates to minus 2pc, lower than at any time in German history other than the two hyper-inflations after the First and Second World Wars.

Professor Clemens said the politics are poisonous because the ECB's majority bloc is openly sweeping aside German objections. This plays into the hands of the eurosceptic Alternative fur Deutschland (Afd), while the ruling Christian Democrats are toughening their line to stop a leakage of votes.

"The perception is that we are being dominated by foreigners. This is going to become a big issue in the campaign," he said.

The ECB plans to extend its programme of bond purchases until the end of the year after it expires in March, albeit trimming the pace from €80bn to €60bn a month.

Prof Clemens warned that this is far too slow. "They should start cutting by €10bn a month as soon as April, and end QE completely in October," he said.

The mix of rising inflation and negative rates is toxic for ordinary Germans, who keep much of their household wealth in bank accounts.

It is often claimed that Germany has a unique savings culture. The German term for debt (Schuld) is the same word as guilt. Putting money aside dutifully has a diamantine moral appeal with almost religious undertones.

Economists dismiss this is as a fallacy. Germany's savings habits are the result of tax laws, demographics, and the structure of the banking system. But whatever the cause, the political consequences matter.

The tabloid newspaper Bild Zeitung leapt on the latest price data, splashing with a "Horror-Kurve" showing inflation soaring to seemingly frightening heights.

David Fuller's view -

ECB President Mario Draghi will not tailor monetary policy in favour of Germany when most other EU economies are still struggling to fend off deflation.  Moreover, GDP growth is only just starting to recover in Southern European nations.  They have endured economic depressions during recent years. 

Meanwhile, Germany’s economy is now booming and its rate of inflation has risen from just below zero last April to 1.7% in mid-December.  It could be close to 2% when this month’s figures are released, or even higher.  German house price increases were a modest 1.5% in 2H 2009 but are appreciating at more than 12% per annum today. 

The Bundesbank will continue to complain but Germany remains the chief beneficiary of Euroland.  If it left the single currency, a new Deutschmark would be far stronger and a headwind for Germany’s export-led economy.

These problems were widely anticipated by analysts who knew their currency history.  No single currency for several different countries has survived without fiscal union.  

A PDF of AEP’s article is in the Subscriber’s Area.



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January 09 2017

Commentary by David Fuller

Some 2017 Impressions

My thanks to a subscriber for this 16-page illustrated report by James W Paulson, Ph.D, Chief Investment Strategist at Wells Capital Management Inc.  Here is the first page:

Welcome to the New Year! The current economic recovery turns nine this summer making it the third longest in U.S. history. However, this calendar-old recovery still appears young at heart. It has not yet sustained a real growth rate above 3%, has never been driven by excessive borrowing or lending nor produced a significant capital spending or housing cycle. Moreover, because it has only recently returned to some semblance of full employment, it has yet to seriously aggravate inflation. Yields about the globe remain near all-time records lows and the Federal Reserve is only now beginning to finally normalize monetary policy. Finally, despite an almost three-and-a-half fold increase in the U.S. stock market from its 2009 low, this bull market has never generated a broad-based public run into equities.

Perhaps for the first time in this recovery, we expect animal spirit behaviors; those originating from confidant businesses, consumers and investors, to increasingly characterize both the economy and the financial markets in 2017. Essentially, this furthers trends already evident during the last few months of 2016. After almost a two-year hiatus, economic growth recently accelerated and broadened about the globe. This rare synchronization in the economic recovery comes just as the U.S. has finally returned to full employment. Consequently, improved economic growth is also aggravating inflation and interest rate concerns.

Although broader economic growth, a restart of the earnings cycle and the election of a pro-business U.S. president have recently combined to boost confidence and awaken the animal spirit throughout the private sector, it also represents a quandary for the financial markets. The stock market begins the year surging to new highs as confidence in the durability of the economic recovery improves. However, the bond market is being battered by rising inflation expectations and recognition that the artificially low yield structure orchestrated about the globe during this recovery may finally be ending.

Here are some specific impressions for the economy and the financial markets in 2017.

Economic growth

The 2017 economic outlook is shaped by many important factors including a synchronization of economic policies about the globe, an economic recovery which is broadening both globally and within the U.S., a refresh and restart of the profits cycle, an end to the global manufacturing recession and collapse in commodity prices, the potential for awakening animal spirits and the increasing likelihood that a

recession is still multiple years away.

Synchronized global economic policies

Not only has global economic growth been persistently subpar, it has never been synchronized. Economic policies typically conflicted during this expansion and economic boats around the globe have seldom risen together. While the U.S. has persistently employed stimulus, other developed and emerging economic policies have often been restrictive. While Japanese policy officials were hesitant earlier in this recovery, today, similar to the U.S., they are implementing full-out central bank balance sheet stimulus. Likewise, the eurozone, which earlier adopted fiscal tightening, is now also fully embracing monetary stimulus. Moreover, the oil crisis has forced energy-based economies like Canada and Australia, which earlier felt sheltered from many ongoing global struggles, to also boost accommodation.

Consequently, as illustrated in Charts 1 and 2, in the last couple years, policy officials everywhere have simultaneously attempted to improve the economic

recovery. Already, signs of a synchronized global economic bounce are materializing and we suspect this will become more obvious as the year progresses.

David Fuller's view -

There is a lot to like in this global report which I commend to subscribers.  After eight years of mostly negative comments, including a number of very bearish reports from so many analysts and strategists, this is the most bullish detailed report by far that I have seen since the 2008 crash. 

Market sentiment has steadily improved since Trump’s surprise presidential election.  This is despite many alarmist forecasts in anticipation of a Trump administration, albeit mostly from the left-leaning press.  Clearly the money men are delighted to see a President-elect who is interested in the US economy, and promises a number of stimulative policies.  This has led to a number of upside breakouts, often from multi-year trading ranges from trading ranges, and not just among US indices.     

In fact, James Paulsen mentioned “animal spirit”(s) 24 times in the report above.  Is that a record?  He also mentioned “synchronized” or “synchronization” of economic policies eight times. 

This item continues in the Subscriber’s Area where James Paulsen’s report is also posted.



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January 09 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs during the rest of this week.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out over the next few months if the early November reaction lows are broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16th and delivering a short chart-based presentation.  



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January 09 2017

Commentary by Eoin Treacy

January 09 2017

Commentary by Eoin Treacy

Ariad Enters into Definitive Agreement to Be Acquired by Takeda for $5.2 Billion

This press release from Ariad Pharmaceuticals may be of interest to subscribers. Here is a section:

Dr. Denner continued, “The transaction also underscores the tremendous value that shareholder activism can create for shareholders, patients and society. While ARIAD’s stock price was collapsing and many investors were abandoning the company, Sarissa Capital saw a company with important drugs and innovation and stepped in to become one of ARIAD’s largest shareholders. However, many things needed to be fixed before the value could be realized. With a new board and management team, ARIAD was able to focus on optimal capital allocation and operational excellence. As a result, the company created meaningful shareholder value and advance the options for those suffering from rare cancers.”

“The acquisition of ARIAD is a unique opportunity that will enable us to positively impact the lives of more patients worldwide, advance our strategic priorities and generate attractive returns for our shareholders,” said Christophe Weber, president and chief executive officer of Takeda. “This is a very exciting time for Takeda as we will broaden our hematology portfolio and transform our global solid tumor franchise through the addition of two innovative targeted therapies. Opportunities to acquire such high-quality, complementary targeted therapies do not come often, and we are very excited about the potential for this transaction to benefit patients, our shareholders and other stakeholders.”

 

Eoin Treacy's view -

Developing new drugs is prohibitively expensive. With no guarantee of success large pharmaceutical companies have in many respects outsourced the bulk of R&D to small biotech companies. The result is that these smaller companies spend a great deal of time and effort developing new drugs and become takeover candidates when they develop high probability solutions. Considering the fact that the cost of developing new drugs continues to increase the biotech ecosystem is likely to remain in this condition for the foreseeable future. 



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January 09 2017

Commentary by Eoin Treacy

Email of the day on India's demonetisation

Thank you for another very well done video commentary. I think it was excellent. When you or any one from the collective have time, could you please share their/your views on the effect of India's move to change their currency bills. Thanks in advance

Eoin Treacy's view -

Thank you for your kind words and I am delighted you are enjoying the video commentaries, which have so far been very well received and are a further example of how technology is advancing the ease with which we can communicate. 



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January 09 2017

Commentary by Eoin Treacy

Email of the day on the risk of a pullback on Wall Street:

I love you Vimeo updates and prefer to just the audio. While we have made new highs in the US equity indexes, it appears they are quite extended to the trend means which makes them prone to sharp pull backs in the short term. Would you not agree?

Eoin Treacy's view -

Thank you for your valuable feedback relating to the video commentaries, and for this question sure to be of interest to other subscribers. 

The deep but short lived pullback in 2014 represented the first major inconsistency in what had been a rhythmically trending environment for more than two-years. It represents a clear example of “a consistent trend losing consistency at the penultimate high” which we talk about at The Chart Seminar. The volatile range that unfolded from 2015 lowered investor expectations for future potential and conditioned them to expect sharp pullbacks not least due to the effects of high frequency traders. 

 



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January 09 2017

Commentary by Eoin Treacy

Consulting on the Cusp of Disruption

This article by Clayton M. Christensen, Dina Wang and Derek van Bever for the Harvard Business Review may be of interest to subscribers. Here is a section:

The consultants we spoke with who rejected the notion of disruption in their industry cited the difficulty of getting large partnerships to agree on revolutionary strategies. They pointed to the purported impermeability of their brands and reputations. They claimed that too many things could never be commoditized in consulting. Why try something new, they asked, when what they’ve been doing has worked so well for so long?

We are familiar with these objections—and not at all swayed by them. If our long study of disruption has led us to any universal conclusion, it is that every industry will eventually face it. The leaders of the legal services industry would once have held that the franchise of the top firms was virtually unassailable, enshrined in practice and tradition—and, in many countries, in law. And yet disruption of these firms is undeniably under way. In a recent survey by AdvanceLaw, 72% of general counsel said that they will be migrating a larger percentage of work away from white-shoe firms.

Furthermore, the pace of change being managed by the traditional clients of consulting firms will continue to accelerate, with devastating effects on providers that don’t keep up. If you are currently on the leadership team of a consultancy and you’re inclined to be sanguine about disruption, ask yourself: Is your firm changing (at least) as rapidly as your most demanding clients?

Finally, although we cannot forecast the exact progress of disruption in the consulting industry, we can say with utter confidence that whatever its pace, some incumbents will be caught by surprise. The temptation for market leaders to view the advent of new competitors with a mixture of disdain, denial, and rationalization is nearly irresistible. U.S. Steel posted record profit margins in the years prior to its unseating by the minimills; in many ways it was blind to its disruption. As we and others have observed, there may be nothing as vulnerable as entrenched success.

 

Eoin Treacy's view -

With the rapid pace of technological innovation no sector is immune to disruption. The consulting sector has existed in a bubble for a long time because they have been able to sustain the illusion of fully customisable solutions when in many cases what is being offered is a template driven product. There will of course always be a market for truly customised answers to difficult questions but what can be automated eventually will be as technological innovation marches onwards.



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January 06 2017

Commentary by David Fuller

Our Shell-Shocked Civil Service Is Simply Not UP to the Job On Brexit

We should be grateful to Sir Ivan Rogers for accidentally reminding us that we need wholesale reform of our broken Civil Service, since the cultural chasm between Whitehall and the public has grown dangerously large. 

For Sir Ivan, now thankfully our outgoing ambassador to the EU, and many other mandarins of his ilk, the barbarians truly are at the gates. They now mostly realise that Brexit is going to happen, but remain desperate to find ways to blunt its implementation.

In places, Sir Ivan’s resignation email reads like a parody, a textbook illustration of the dangers of creating a permanent ruling class. At times, one could even be forgiven for believing that he saw himself as a Platonic philosopher-king, entrusted to guard the guardians and to keep those pesky politicians and voters in line, ensuring that they don’t deviate from the expert orthodoxy of the times.

Sir Ivan is one of the most powerful, unaccountable men in Britain, and yet, hilariously, sees his and his colleagues’ job as “speaking truth to power”. He cannot even bring himself to write about Brexit without using inverted commas around the word – or as Americans would put it, sneer marks. He forgets that with independence comes a duty not deliberately to undermine the Government.  

His attack on “muddled thinking” – from Brexiteers in Government, presumably – is especially revealing: it is the meaningless insult favoured by the mandarin classes. The French try to dismiss arguments by deeming them “illogical”; the equivalent British put-down is haughtier, snootier and reeks of classism. 

Yet Sir Ivan himself confuses opinion and facts, claiming that “contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities”. Try telling that to those who repealed the Corn Laws, or to unilateral free trading economies such as Hong Kong. Commerce is something that emerges spontaneously from the free interaction of human beings; it does not require structures. Of course, Sir Ivan is right that in the current context multilateral liberalisation deals may be the best solution to maximise overall free trade, and that these can be fiendishly complex. 

But the problem is that we are asking too much of some of our civil servants, whose heart simply isn’t in Brexit. For the past 50 years or more, the British establishment’s foreign policy mission has been a united Europe. There were other major projects too, including dismantling the Empire, fighting the Cold War, helping to rebuild the free-trading international economy and signing up to a new global environmentalism. But since 1990 at least, the construction of Europe has been our most important foreign policy goal, an all-consuming project.

The Civil Service didn’t just help deliver government policy: it embraced the project. Many of its brightest minds, when exposed directly to Brussels, went native. This was not just the professionalism which sees officials nationalising firms under a Labour government before privatising them under a Tory one: it was a fundamental and permanent shift. Nation-states were out; liberal democracy was out; corporatism and rule by the technocrats were in. 

The Leave side collected very few votes in Whitehall last June: the Civil Service was institutionally Europhile. Officials could barely imagine how Britain could possibly function, let alone thrive, outside of the EU. 

Bizarrely, however, we are operating under the assumption that the people that have dedicated their entire working lives to promoting European integration can suddenly devote themselves to delivering the best possible Brexit. We are asking the old guard to become the revolutionaries, with immediate effect. Some can, of course, especially the younger, more ambitious officials who see how the world is changing, but not all. 

Other countries don’t work this way: Barack Obama’s people are not being asked to implement Donald Trump’s plans. Instead, the president-elect is hiring 4,000 or so people. It is common in other countries for new governments to recruit large numbers of political appointees; it is also healthier as it means the government isn’t controlled by self-serving and institutionalised lifers.

David Fuller's view -

This is a superb analysis by Allister Heath.  I can understand why PM Theresa May did not wish to upend civil service personnel working in the EU, but she and the capable Sir David Davis should have anticipated the problem.  After all, it is difficult to get someone to stop believing in something, when that person’s salary depends on them believing in it.

David Davis is Her Majesty’s Principle Secretary of State for Exiting the European Union.  That is a grand title for what is currently a very small department.  It should be beefed up with known Eurosceptic MPs such as John Redwood, who can work with pro-Brexit Civil Servants led by Sir Tim Barrow. 

I am not suggesting that they prepare for a long negotiating war on the EU’s terms, attempting to overturn their labyrinthine obstacles.  Those are intended to ensure that the EU remains a club which European countries can apply to join but once in, never leave of their own choice.  That is an absurdity.  The future of the UK will not be decided in Brussels. 

Britain needs to seize the initiative so that it can exit from the EU quickly and cleanly.  The key points are not complicated.  1) Theresa May has already said that the UK must have sole control of its immigration policies and all other forms of law making.  2) The next Brexit point should be to offer the EU free trade on a take it or leave it basis, otherwise WTO rules will apply to our trade with the EU.  3) There will be no restraints on the UK’s freedom to trade with any other nations of interest, which are outside the EU’s closed shop.     



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January 06 2017

Commentary by David Fuller

Element Six Diamond Sculptors Push the Envelope From Lasers to the Quantum Realm

The innovation centre dates from 2013, and was born out of a desire to group E6’s R&D teams in one place; it also rationalised its manufacturing facilities across the world. The lab occupies the front plot of Harwell Campus, a science park that is home to around 200 organisations. The European Space Agency is across the road, and it is a short walk to the UK’s Synchrotron, which fires electrons at near-light speeds around a ring.

E6 prides itself on a “start-up” ethos; like Google, it allows its staff to use 10pc of their time to work on pet projects. The 180-strong workforce at Harwell includes people from 54 countries and there are free language classes and sports teams. Hühn acknowledges that Brexit “doesn’t make life easier” when it comes to recruitment, but insists Harwell’s location near Oxford is attractive.

While cutting tools are the bread and butter of E6’s work, it is also forging ahead into more exotic areas. Synthetic diamonds are in the race to become the bedrock of quantum computing – a theoretical field that promises massive computational power that eschews the digital technology of “classical” machines.

Quantum computing involves the entanglement of particles in the sub-atomic realm. When one particle becomes ‘entangled’ with another, it synchronises with its partner, even when they have no physical connection. Manipulating one can change the state of the other. Albert Einstein called it “spooky action at a distance”.

Scientists at E6 and Harvard achieved a breakthrough last year when they proved that one particle could alter another 1.3km away without any possible transfer of data between them. “It fundamentally proved this entanglement process is a physical reality - there’s no other explanation for it,” says scientist Matthew Markham.

Yet the properties of diamonds get even weirder. It transpires that diamonds with a ‘nitrogen vacancy defect’ - a gap in the lattice that makes up the crystal - are highly sensitive to magnetic waves at room temperature. The hope is that these diamonds, embedded in handheld scanners, could eventually replace MRI scanners; experiments have already shown that a red diamond can pick up the firing of an axon in the brain of a marine worm. “In 10 years’ time you could envisage having a helmet with diamond sensors that would be the equivalent of MRI sensors,” says Markham.

Scientists also believe that these diamonds could one day use magnetic distortions caused by the sun to triangulate their position on the earth. This would eliminate the need for GPS, which relies on satellite signals to tell a driver where they are; it could also make driverless cars a reality. Currently a diamond with an NV defect has been calibrated to detect the magnetic signature from a car at 300m.

Many of these experiments are decades away from practical applications. But, as Hühn remarks, sometimes they have to “evangelise” about diamonds to create a market for their products. “We need to demonstrate what can be done and then make it transparent to the market,” he says.

David Fuller's view -

And it all starts with carbon – amazing.

Look what lies ahead: “… quantum computers may theoretically be able to solve certain problems in a few days that would take millions of years on a classical computer. (Source: Nasa)”

This era of accelerating technological innovation has only just begun.  Moreover, it will only be limited by: 1) the availability of time on earth, which hopefully lasts for at least a few million more years; 2) human destructive instincts, hopefully kept in check; 3) more optimistically, the extent of human imagination and creativity; 4) the creativity of artificial intelligence aided by quantum computers.

Unfortunately, E6 is not a publicly listed company.



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January 06 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16th and delivering a short chart-based presentation.  



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January 06 2017

Commentary by David Fuller

Icelandic Volcanic Heat May Be the Perfect Solution to UK Energy Crunch

Iceland is the answer to our prayers. The country has a surfeit of cheap electricity from volcanoes and melting glaciers that is either sold for a pittance, or goes to waste.

The Icelanders would dearly love to sell this power to us at global prices to pay down the banking debts of 2008. Britain would dearly love to buy it from them as our coal plants and ageing nuclear reactors are shut down, with little to replace them beyond the variable winds of the North Sea.

Advances in high voltage technology make it possible to transmit Iceland's low-carbon power to the industrial hubs of northern England by underwater cables with an energy leakage of just 5pc, and probably at lower costs per megawatt hour (MWh) than the nuclear power from Hinkley Point. And unlike nuclear, the electricity is 'dispatchable'.

“We can turn it on and off in fifteen minutes to half an hour. It is the only battery that is really available today for green energy,” said Hordur Arnarson, head of Iceland’s national utility Landsvirkjun.

It is hard to imagine a more elegant back-up for the UK's vast experiment in off-shore wind, the backbone of British electricity by the late 2020s.

Combined with interconnectors from Holland and France - and soon Norway - it could plug much of the intermittency gap through the dog days of a windless anticyclone. The power can flow both ways: surges in North Sea wind could be stored in Nordic reservoirs.

Roughly 70pc of Iceland's electricity comes from hydropower through glacial run-off. This is mostly sold to aluminium smelters for a derisory price. Water washes over the top of the dams for parts of the year because the island has no way of selling the excess energy.

Hydro could probably provide the UK with one gigawatt of stable baseload, but then there is the tantalising potential of geothermal power from the island's 350 volcanoes as well.

The advances in drilling are breath-taking. An Icelandic project backed by the US National Science Foundation is currently boring the deepest hole ever attempted into the fluids of the inner earth at Reykjanes on the Mid-Atlantic Ridge. As of late December it had reached a depth of 4.626 kilometres, approaching temperatures of 500C.

The team aims to stop just short of the magma, at 200 times atmospheric pressure, where hot rock mixed with sea water releases ‘supercritical steam’ with enormous energy. This is the Holy Grail of geothermal power, if it can be extracted safely in a thermal mining cycle.

David Fuller's view -

Drilling to just short of the magma – what could possibly go wrong?  Hollywood has a new topic (Ice-hot?) for next summer’s splat film. 

Seriously, it is another triumph for technological innovation that the capture and transmission of this energy is even considered feasible.  It may be so but costs in the region of the appallingly expensive and outdated Hinkley Point nuclear project are hardly encouraging.  If lower costs are worth considering, and they certainly should be, fracking for natural gas is a much better idea for the UK and many other countries over the next two decades.

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



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January 06 2017

Commentary by Eoin Treacy

January 06 2017

Commentary by Eoin Treacy

U.S. Payrolls Rise 156,000 as Wages Increase Most Since 2009

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

The employment report added to data ranging from housing to manufacturing and auto sales in suggesting that President-elect Donald Trump is inheriting a strong economy from the Obama administration. The labor market momentum is likely to be sustained amid rising business and consumer confidence.

Trump, who takes over from President Barack Obama on Jan. 20, has pledged to increase spending on the country's aging infrastructure, cut taxes and relax regulations. These measures are expected to boost growth this year.

But the proposed expansionary fiscal policy stance could increase the budget deficit. That, together with faster economic growth and a labor market that is expected to hit full employment this year could raise concerns about the Fed falling behind the curve on interest rate increases.

 

Eoin Treacy's view -

The US Hourly Earnings chart was updated today and it broke out. If people are demanding more money for the same work, it is hard to argue inflation is not picking up. Even though rents have increase, insurance premiums are higher and education has been outpacing wage growth for years these figures do not move the needle in how the Fed measures inflation the way wages do. 



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January 06 2017

Commentary by Eoin Treacy

Yuan Pares Record Rally as Goldman Says Now's the Time to Sell

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

The offshore yuan is sinking because there is some recovery in the dollar, perhaps the unwinding of short-yuan positions has mostly been done, and it’s closing the gap with the onshore currency,” said Roy Teo, senior currency strategist at ABN Amro Bank NV in Singapore. The yuan is likely to weaken this year as capital outflows continue and the U.S.
Federal Reserve increases interest rates, Teo said.

China’s central bank raised its daily reference rate by 0.92 percent to 6.8668 per dollar on Friday, following a 1 percent drop in a gauge of the greenback’s strength overnight.

The offshore yuan was trading 0.8 percent weaker at 6.8457 per dollar as of 5:23 p.m. in Hong Kong, paring its weekly gain to 1.9 percent, the most in data going back to 2010. The onshore rate slumped 0.6 percent. Friday’s fixing was weaker than Mizuho Bank Ltd.’s prediction of 6.8447 and Australia & New Zealand Banking Group Ltd.’s estimate of 6.8456.

The three-month yuan interbank rate in Hong Kong, known as Hibor, surged to a record high, while the overnight rate jumped 23 percentage points to 61 percent, the highest since last January’s cash crunch. Rising interbank rates can make some short positions prohibitively expensive.

 

Eoin Treacy's view -

The Chinese administration has attempted to squeeze short sellers in much the same way it did a year ago when it believed perceptions of the Yuan as a one way bet were too prevalent. That does not mean the Chinese don’t want, or perhaps more importantly need, a weaker currency. They do but they want it to weaken in a measured manner.  



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January 06 2017

Commentary by Eoin Treacy

World's Worst Commodity Radioactive for Investor Portfolios

This article by Joe Deaux, Natalie Obiko Pearson and Klaus Wille for Bloomberg may be of interest to subscribers. Here is a section:

“It’s the world’s best asset in the world’s worst market,” said Leigh Curyer, chief executive officer of NexGen Energy Ltd., a Vancouver-based uranium producer. “I don’t think there’s a mine profitable at current spot prices. This short-term spot price isn’t reflective of the cost of producing a pound globally.”

The outlook isn’t entirely bleak. Losses are forcing uranium mines to cut production or close, which may eventually create a supply crunch, while accelerated building of nuclear plants in China and India could help revive demand. But it may take a while for those developments to take hold, according to a report last month from Morgan Stanley, which said it can’t identify any medium- or long-term driver for prices.

Uranium extended its fade last year even as most other raw materials recovered. The Bloomberg Commodity Index of 22 items posted its first annual gain since 2010, advancing 11 percent.

 

Eoin Treacy's view -

When Tata Motors bought Land Rover it held onto the name for obvious reasons. It knew it didn’t stand a chance of selling a luxury vehicle under the moniker Tata Motors. If nuclear energy could do the same it would be in a much better position. Reactors being built today bear little resemblance to those which have garnered such a bad reputation over the last number of decades. However that is not the point. Public opinion is not yet in favour of uranium fuelled energy and there is little evidence that is about to change not least because it simply does not have a high profile credible spokesperson to champion it. 



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January 05 2017

Commentary by David Fuller

Intel Boss on the Doubling of Computer Power Every Two Years

Intel founder Gordon Moore declared half a century ago that computer power would roughly double every two years as the silicon chips powering them developed.

The maxim, which became known as Moore’s law, directed technology companies for five decades before reaching a crunch point last year. Physicists and technology giants alike said transistors had reached a point where it was no longer economically viable to make them smaller, bringing about the end of the law.

But Intel’s chief executive Brian Krzanich has put an end to such fears with news the company will release a 10 nanometre chip in 2017. The tiny chip will be cheaper than its predecessor, Intel said, keeping Moore’s law alive.

"I've heard the death of Moore's law more times than anything else in my 34-year career and I'm here today to really show you and tell you that Moore's law is alive and well and flourishing," Krzanich said.

The news came as Intel opened the doors on its virtual reality project, which includes applications for the technology, content production and a headset. For Krzanich, VR is one of the most exciting uses of the faster processor coming this year.

“Imagine in your living room being able to walk around the next hotel you’re going to visit, or visiting the event you’re going to,” said Krzanich in a demonstration of the VR uses Intel is working on at the Consumer Electronics Show in Las Vegas.

Some of the applications Intel is developing include live sports games in VR and monitoring remote areas, such as solar panel farms, through a live 360 video stream from a drone and a VR headset.

The chipmaker has teamed up with La Liga to fit three stadiums with 360-degree cameras that will stream to 38 channels this year.

“From the comfort of your home you could be transported to your favourite seat,” said Krzanich. “This is the future of how you’ll view sports. You’ll have the opportunity to go to games you’ve never been to before.”

David Fuller's view -

I do not assume that silicon chips will always be used for the more complex challenges, because the technology for transistors is still in its infancy, relative to future developments.  We live in an exciting era of accelerating technological innovation, which will not end of its own accord.

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



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January 05 2017

Commentary by David Fuller

Email of the day

On the economic consensus being horribly wrong:

Dear David

I really enjoyed reading this very positive article about the UK economy which was written by a distinguished and well-informed commentator.

All the points he makes sound good sense to me. The most surprising thing is the newspaper in which it was published, the rabidly anti-Brexit Independent. Maybe some newspapers are at last tiring of their own negativity!

Best wishes

David Fuller's view -

Thanks for this and more people in the UK now hold similar views, than at the time of the referendum. 

The biggest risk, in my opinion, would be a frustratingly long exit from the EU, which would increase uncertainty, not least within both the UK and international business communities.  I hope the Supreme Court will bear this in mind and decide on what is best for the UK under the current circumstances.  However, if it rules that legislation is required before notice of Brexit is served – a debatable legal point - I think the additional delay would be both divisive and more costly for the UK economy. 



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January 05 2017

Commentary by David Fuller

President Mark Zuckerberg? It May Not Be as Crazy as It Sounds

When 13 tech bosses – among them some of the world’s richest entrepreneurs – were summoned for a meeting with Donald Trump, one face was conspicuous in its absence.

Facebook’s role in the US election had been much scrutinised: it was accused of being a petri dish for fake news that allowed anti-Clinton stories to spread like wildfire; and the social network was employed to great effect by the Trump campaign, which built up profiles of voters to target and bombarded them with ads.

And yet, Mark Zuckerberg was nowhere to be seen at Trump Tower. Instead, he sent his trusted deputy and chief operating officer, Sheryl Sandberg, making Facebook the only company at the meeting without its CEO in attendance.

Zuckerberg has not explained his absence, but two likely – and related – reasons may well become clear. Firstly, the man who started Facebook 13 years ago now has priorities outside of its daily running: as with many tech founders, he would prefer the nitty gritty of advertising relationships and regulatory tangles to be dealt with by someone else, as Zuckerberg focuses on his missions – the $45bn fund he has set up with his wife Priscilla Chan, or the internet.org project to bring connectivity to the world’s poor.

But more fundamentally, Zuckerberg may see a photo-op with the president-elect as harming his own political ambitions, especially if he plans to act on them sooner rather than later.

If your main impression of Facebook’s founder came through seeing The Social Network in 2010, you might find the film's portrayal of Zuckerberg as an awkward Machiavellian schemer a little difficult to square with the idea of a role in public office.

But in recent years he has been spring cleaning his image. Connecting directly to the world via his own Facebook page, Mark Zuckerberg is now the family man, the internationalist and the statesman (his profile is full of images documenting meetings with Narendra Modi, officials in Beijing, and Pope Francis).

While like much of his Silicon Valley brethren, he is a natural liberal, lobbying on immigration and science research, but Zuckerberg has been careful to appeal to a wider base. In response to allegations that Facebook suppressed conservative news, he fired the team responsible and replaced them with supposedly bias-free algorithms. He has declined to take the immediate action that many liberals demanded on Facebook’s fake news problem.

He has come out as religious after years of claiming atheism, a move that a cynic could point to as practically mandatory for high office. And most recently, he announced his ambition to visit every state in the US in order to understand the effect of globalisation. “We need to find a way to change the game so it works for everyone,” he said on Tuesday.

David Fuller's view -

It may seem a bit early to be discussing this possibility shortly before President-elect Trump is sworn in on 20th January… but perhaps not.  After all, Trump has certainly opened the door for unconventional candidates who have never held political office. 

Might the possibility of a bad Trump presidency close that door?  Theoretically, yes although I think it would be premature to assume that Trump will be judged as having more failures than success over the next four years.  In any event, Trump and Zuckerberg have very different profiles.   

I think it would be a great idea if Zuckerberg ran for President in 2020, or 2024.  Governance is everything and countries with the most capable leaders generally outperform.  If nominated by his Party, I suspect Zuckerberg would win.

A PDF of the The Telegraph’s article is posted in the Subscriber’s Area.



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January 05 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs throughout January.  If indices such as the Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Looking further ahead, I would give the upside the benefit of the doubt provided the early November reaction low is not challenged.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  Sharp reactions in Bitcoin and the offshore Chinese Renminbi suggest that China is trying to slow its currency outflow.     

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.

 



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January 05 2017

Commentary by Eoin Treacy

January 05 2017

Commentary by Eoin Treacy

America's Roster of Public Companies Is Shrinking Before Our Eyes

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

The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.

In the technology industry, the private fundraising market now dwarfs its public counterpart. There were just 26 U.S.-listed technology IPOs last year, raising $4.3 billion, according to Dealogic. Meanwhile, private U.S. tech companies tapped the late-stage funding market 809 times last year, raising $19 billion, Dow Jones VentureSource’s data show.

Private funding markets have taken on attributes of public equity, such as an ability to hand employees shares they can trade. Airbnb Inc.’s recent $850 million funding round, which valued the home-rental company at $30 billion, enabled employees to sell $200 million of stock. Investors, particularly in late-stage funding rounds, now often have a better view of a private company’s financials than they used to, including through quarterly conference calls.

“There’s no great advantage of being public,” says Jerry Davis, a professor at the University of Michigan’s Ross School of Business and author of “The Vanishing American Corporation.” “The dangers of being a public company are really evident.”

 

Eoin Treacy's view -

There have been two important themes that have shaped the view going public is not the most worthwhile exercise for new companies. The overbearing nature of regulatory requirements has increased substantially over the last decade, not least in response to the financial crisis, and this represents a significant cost for public companies which private companies avoid. It is quite simply a hassle for small companies to go through the motions of preparing earnings reports on a quarterly basis and formulating them in such a way as to be amenable to analysts. 



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January 05 2017

Commentary by Eoin Treacy

Bitcoin Suffers Biggest Fall in Two Years Following China Currency Gains

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

Bitcoin's value suffered its biggest single-day decline in two years Thursday, just hours after China's offshore yuan posted its biggest two day gain and days after the cryptocurrency touched $1,000.

The price of bitcoins against the U.S. dollar fell 13% in London trading, changing hands at around $950 each by 13:45 GMT. Bitcoins traded as low as $880 during a volatile session which saw it reach as high as $1137, according financial bookmakers IG.

The moves follow the biggest two-day gain on record for China's offshore yuan, which trades more freely than the domestically controlled currency of the world's second-largest economy. Speculation of government buying led the gains as investors bet authorities are determined to stem capital outflows and avoid a sustained decline in the currency ahead of the inauguration of President elect Donald Trump, who has vowed to label China as a currency manipulator.

The connection is relevant in the nearly all of the daily trading in bitcoin is linked to the yuan, which has fallen more than 7% against the dollar over the past year, as speculators attempt to skirt currency controls and ensure value.

The offshore yuan gain 1% to 6.7989 against the greenback in Asia trading, putting downward pressure on the dollar index and boosting the yen in foreign exchange trading. The move whipsawed the dollar index, a measure of its strength against a basket of six global currencies, from a near 14-year high on Tuesday to three-week low of 101.74 by the start of European trading before it recovered to 102.10 by 13:45 GMT

Eoin Treacy's view -

I have been pointing out in recent audios that China represents the majority of Bitcoin trading and what goes on in that country is likely to have a profound impact on the value of the cryptocurrency. In many respects we might look on Bitcoin as the anti-Renminbi because it tends to do best when Chinese investors are worried about the stability of their domestic currency. 



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January 05 2017

Commentary by Eoin Treacy

Treasuries Soar Most Since Post-Brexit as Market Volatility Hits

This article by Brian Chappatta and Edward Bolingbroke for Bloomberg may be of interest to subscribers. Here is a section:

Treasuries extended gains across the curve, driving down benchmark yields by the most since the days after the June Brexit vote, as traders across financial markets backed away from crowded bets.

The benchmark 10-year U.S. yield plunged about eight basis points to 2.36 percent at 12:15 p.m. in New York, touching the lowest level since Dec. 8, according to Bloomberg Bond Trader data. It’s on pace for the biggest decline since June 27. The 10-year break-even rate, a market measure of inflation expectations, fell from close to the highest level since 2014.

Across financial markets, trends snapped Thursday as investors weighed the risk of a lackluster payrolls report Friday and the prospect that trades based on Donald Trump’s impending presidency had gone too far. Data from the ADP Research Institute on Thursday indicated companies added fewer jobs in December than forecast. The figures come a day before the Labor Department releases its monthly payrolls report. 

“A bunch of the widely predicted trades for this year are all being broken at the same time, with oil going lower, investment-grade corporates widening out, TIPS break-evens tightening, and then rates rallying as a result,” said Mike Lorizio, a Boston-based senior trader at Manulife Asset Management, which oversees about $343 billion. “Some key levels being broken just inspired further buying.”  

 

Eoin Treacy's view -

The odds are in favour of the view that the 35-year bull market in bonds is over, however it would be a mistake to think that such a lengthy expansion will end overnight. Inflationary expectations might well be justified in the medium-term but they have run ahead of the market and Treasury yields in the region of 2.5% are competitive with many equities and therefore desirable by bond investors conditioned over generations to buy the dip. 



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January 05 2017

Commentary by Eoin Treacy

Email of the day on separate video and audio files

The VIMEO software for the new subscriber’s audio demands lots of download capacity. I am fixing this issue with my phone company. Is it possible to include a separate Audio file with the combined Video & Audio? If I am away from the house I like the choice to just to listen to the audio. If this is too difficult don't worry I like the new Video and Audio format. Eoin see you in Singapore in April.

Eoin Treacy's view -

Thank you for this question which gives me the opportunity to clarify what services we are in fact providing and I look forward to renewing our acquaintance in Singapore in April. 

I record the video and audio file concurrently and post them separately. You will find links to the video on the homepage for the relevant day but I also post the regular audio file separately in the Subscriber’s Audio section. You can access it either through the embedded audio player at the top of the page of via the Subscriber’s Audio section of the site where all our audios are archived. 



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January 04 2017

Commentary by David Fuller

Harvard Academic Sees Debt Rout Worse Than 1994 Bond Massacre

Here is the opening of this interesting article from Bloomberg

If you thought you had already read the gloomiest possible prognosis for bonds, wait until you read this one.

Paul Schmelzing, a PhD candidate at Harvard University and a visiting scholar at the Bank of England, said if the latest bond market bubble bursts, it will be worse than in 1994 when global government bonds suffered the biggest annual loss on record.

“Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded,” wrote Schmelzing in an article posted on Bank Underground, which is a blog run by Bank of England staff. “History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 ‘bond massacre’”.

Schmelzing, whose research focuses on the history of international financial systems, divided modern-day bond bear markets into three major types: inflation reversal of 1967-1971, the sharp reversal of 1994, and the value at risk shock in Japan in 2003.

The Bank of America Merrill Lynch Global Government Index of bonds fell 3.1 percent in its worst-ever annual loss in 1994 as then-Fed Chairman Alan Greenspan surprised investors by almost doubling the benchmark rate. Treasury 10-year yields surged from 5.6 percent in January to 8 percent in November.

The current bond market is facing the “perfect storm” of potential steepening of the bond yield curve, monetary policy tightening, and a multi-year period of sustained losses due to a “structural” return of inflation resembling that of 1967, he said. Last quarter was the worst for government bonds since 1987, according to data compiled by Bloomberg.

Global inflation expectations, as measured by the yield difference between nominal and index-linked bonds, have risen to the highest since May 2015 after falling to a record low in February last year.

“By historical standards, this implies sustained double-digit losses on bond holdings, subpar growth in developed markets, and balance sheet risks for banking systems with a large home bias,” Schmelzing said.

David Fuller's view -

I maintain that US 10-year Treasuries will not break their July low of 1.318% during my lifetime.  In fact, it may not be broken in this century.  Why?  Because this is one of the biggest bubbles of all time.  It developed over 35 years and took US yields to their lowest levels since The Great Depression (1929-39). 

However, this is certainly not a consensus view.  Until very recently, there was a clear consensus that we were living in ‘a new normal’ of disinflation and deflation.  We were told that GDP growth in developed countries would remain historically low for many more years.  In fact, some bond market experts say that US 10-year Treasury yields will break their July 2016 lows within the next three years.  It is often hard to accept that one’s favourite trend is ending.

Consequently, for perspective we should look at some long-term charts.

This item continues in the Subscriber’s Area, where six charts and an additional article are also posted..



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January 04 2017

Commentary by David Fuller

Sir Tim Barrow Appointed as UK Ambassador to the EU

Theresa May has appointed Sir Tim Barrow, a career diplomat, as the new British ambassador to the EU in Brussels, replacing Sir Ivan Rogers, who quit on Tuesday.

Her decision means she has ignored calls from within the Tory party to appoint a wholehearted Brexiter – possibly from outside of the civil service – to the job.

Rogers, the head of UKRep – in effect the UK embassy in Brussels – resigned in frustration on Tuesday urging his fellow civil servants to provide impartial advice, and stand up to muddled thinking. He also made clear he thought that the UK government not only lacked an agreed exit strategy, but also a coherent exit negotiating team.

Barrow was the UK ambassador to Moscow until 2015 and in March 2016 succeeded Sir Simon Gass as political director at the Foreign Office. He has extensive European experience and acted as first secretary at UKRep. His appointment is also a victory for the Foreign Office, which lost the UKRep post to former Treasury officials in 2012.

May is due to trigger article 50, to formally start EU talks, in March, requiring her to urgently recruit someone committed to delivering Brexit, but also knowledgeable about how the labyrinthine EU works.

Barrow said: “I am honoured to be appointed as the UK’s permanent representative to the EU at this crucial time. I look forward to joining the strong leadership team at the Department for Exiting the EU and working with them and the talented staff at UKRep to ensure we get the right outcome for the United Kingdom as we leave the EU.”

A Downing Street spokesperson called Barrow “a seasoned and tough negotiator, with extensive experience of securing UK objectives in Brussels”. They added: “He will bring his trademark energy and creativity to this job, working alongside other senior officials and ministers to make a success of Brexit.”

David Fuller's view -

Theresa May certainly needs a British ambassador who is committed to delivering a successful Brexit.  Sir Tim Barrow apparently has the presence and credentials for this important task, including being “knowledgeable about how the labyrinthine EU works”.  However, the UK should not be playing the labyrinthine game, designed to deter countries from leaving the EU.  Until EU negotiators fully understand that a quick, hard Brexit is not only a possibility, but would also be preferred by many UK citizens and businesses, negotiations will be a waste of time.   



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January 04 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.



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January 04 2017

Commentary by Eoin Treacy

January 04 2017

Commentary by Eoin Treacy

The Ugly Unethical Underside of Silicon Valley

This article by Erin Griffith for Fortune may be of interest to subscribers. Here is a section:

No industry is immune to fraud, and the hotter the business, the more hucksters flock to it. But Silicon Valley has always seen itself as the virtuous outlier, a place where altruistic nerds tolerate capitalism in order to make the world a better place. Suddenly the Valley looks as crooked and greedy as the rest of the business world. And the growing roster of scandal-tainted startups share a theme. Faking it, from marketing exaggerations to outright fraud, feels more prevalent than ever—so much so that it’s time to ask whether startup culture itself is becoming a problem.

Fraud is not new in tech, of course. Longtime investors remember when MiniScribe shipped actual bricks inside its hard-disk boxes in an inventory accounting scam in the 1980s. The ’90s and early aughts brought WorldCom, Enron, and the dot-bombs. But today more money is sloshing around ($73 billion in venture capital invested in U.S. startups in 2016, compared with $45 billion at the peak of the dotcom boom, according to PitchBook), there’s less transparency as companies stay private longer (174 private companies are each worth $1 billion or more), and there’s an endless supply of legal gray areas to exploit as technology invades every sector, from fintech and med-tech to auto-tech and ed-tech.

The drama has some investors predicting more disasters. “What if Theranos is the canary in the coal mine?” says Roger McNamee, a 40-year VC veteran and managing director at Elevation Partners. “Everyone is looking at Theranos as an outlier. We may discover it’s not an outlier at all.” That would be bad news, because without trust, the tech industry’s intertwined ecosystem of money, products, and people can’t function. Investors may find the full version of the old proverb is more accurate: “One bad apple spoils the whole barrel.”

 

Eoin Treacy's view -

Fraud isn’t generally identified immediately because it takes time for such contrivances to be discovered. The impetus for investigation doesn’t generally arise until someone goes looking for the money that was invested, when the expected return does not materialise. It took the credit crisis to reveal problems with Madoff’s Ponzi scheme, yet it had functioned unperturbed by regulators for years before that event. The above article does an excellent job of identifying the frauds which have occurred in Silicon Valley as well as the culture that promotes exaggeration.



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January 04 2017

Commentary by Eoin Treacy

China Said to Consider Options to Back Yuan, Curb Outflows

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

China’s currency stockpile has probably shrunk further after hitting a five-year low of $3.05 trillion in November, according to the median estimate in a Bloomberg survey before data due as early as this week.

Capital outflows from China accelerated in recent months as the yuan suffered its worst year of losses against the U.S. dollar since 1994, declining 6.5 percent. About $760 billion left the country in the first 11 months of 2016, according to a Bloomberg Intelligence gauge. The yuan will decline 2.7 percent the rest of this year, according to the median estimate in a Bloomberg survey.

“The policies, if implemented, can help increase foreign-exchange supply in the onshore market, and hence help defend the yuan in the short term,” said Carol Pang, vice president for fixed income, currency and commodities at Zhongtai International Holdings Ltd. in Hong Kong. “However, it won’t change market expectation of further depreciation.”

 

Eoin Treacy's view -

The Renminbi is somewhat oversold at present following a quicker pace of depreciation in the last quarter than seen in the three-year downtrend to date. Therefore there is scope for a reversionary rally or at least some steadying. 



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January 04 2017

Commentary by Eoin Treacy

Lithium producers can't expand fast enough to meet demand: An interview with Orocobre CEO Richard Seville

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

So the project was one of those moments when you look back on it where we did the hard analytical work, drew a conclusion, acted on our judgement, and it worked and went according to expectations.

I don’t mean picking a certain price I just mean a general trend. I’m quite proud of that actually and sometimes the detail work is really valuable. We’ve redone it recently to understand the hard rock sector and the conversion plant capacity in China. Although that’s harder than what we did in Chile I think we got a pretty good understanding.

That again supports the view that supply growth is being over estimated and over simplified and that it will take longer—just like we did—and there will be delays because of complications in China and offtake and everything will slip because it always does.

So when you look at the supply/demand curve, our view is that it (lithium market) goes very tight for a number of years. And the first relief, if it is relief, will really be that period around 2020.

 

Eoin Treacy's view -

The only way to get around the fact many sources of renewable energy are intermittent is through storage. Right now lithium is the benchmark electrolyte for batteries’ and a great deal of research is going into developing better anodes and cathodes to boost energy density, safety, recharging speed and cost. That suggests the lithium product cycle still has a long way to run which is benefit for miners of the element not least as new potential demand growth drivers evolve. 



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January 04 2017

Commentary by Eoin Treacy

Email of the day on long-term iron-ore prices

Just wonder why the Iron ore chart in the library starts only in 2008. Is there another source for 50 years of iron prices?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Iron-ore is not traded on a futures exchange. Historically prices have been fixed by contracts between the major miners and consumers with little involvement from the markets. The price for iron-ore quoted in the Chart Library is for Chinese imports at Ningbo and is used as a benchmark because China is such a dominant force in the market. We only have data since 2008 because that is when China started reporting it.  



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January 03 2017

Commentary by David Fuller

Trump Criticizes House GOP Move to Weaken Ethics Office

President-elect Donald Trump blasted a move by House Republicans to effectively weaken the independent Office of Congressional Ethics that investigates lawmakers’ alleged misconduct.

“With all that Congress has to work on, do they really have to make the weakening of the Independent Ethics Watchdog, as unfair as it may be, their number one act and priority,” Trump wrote on Twitter Tuesday morning. “Focus on tax reform, healthcare and so many other things of far greater importance!’ He closed his tweet with “#DTS,” a reference to his campaign promise to “drain the swamp” of corruption in Washington.

Trump was reacting to a move House Republicans made behind closed doors Monday night, when the caucus voted to approve an amendment to a broader House rules package that would make the office “subject to oversight” by the House Ethics Committee and significantly restrict its powers. The House will vote Tuesday on the rules package as members open the 115th Congress.

The approval of the amendment, proposed by Judiciary Chairman Bob Goodlatte of Virginia, comes amid broader calls from Trump for steps to fight corruption in Washington, including term limits on lawmakers and restrictions on lobbyists.

“Republicans claim they want to ‘drain the swamp,’ but the night before the new Congress gets sworn in, the House GOP has eliminated the only independent ethics oversight of their actions," Minority Leader Nancy Pelosi of California said in a statement. "Evidently, ethics are the first casualty of the new Republican Congress."

House Speaker Paul Ryan defended the change in a statement Tuesday that insisted the ethics office will still “operate independently.”

“The evenly divided House Ethics Committee will now have oversight of the complaints office,” said Ryan of Wisconsin. He said the House panel would exercise that oversight only to "ensure the office is properly following its rules and laws," and said he’s instructed the House committee not to "interfere with the office’s investigations or prevent it from doing its job."

David Fuller's view -

Commenting on Trump’s tweets has already become an international blood sport and the President-elect has yet to be sworn in.  Is this good for democracy?  Yes, if it increases interest and involvement in the political process.  No, if it permanently lowers the standards of political decorum, not that they were very high before Trump’s tweets. 

Meanwhile, I’ll credit Trump for his timing and propriety with the two tweets above.  Yes – DTS.  

  (Stop Press: New Republican Congress reverses ethics move after outcry, from the BBC)



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January 03 2017

Commentary by David Fuller

British Ambassador to the EU Sir Ivan Rogers Unexpectedly Quits Just Weeks After Row Over Leaked Brexit Memo

Sir Ivan Rogers has quit just months before Theresa May triggers formal Brexit negotiations with the EU in which he would have been expected to play a major role. 

He was expected to be in post until October 2017 but will instead leave within the coming weeks and a replacement will be announced in due course.

A UK Government spokesperson said: "Sir Ivan Rogers has resigned a few months early as UK Permanent Representative to the European Union. 

"Sir Ivan has taken this decision now to enable a successor to be appointed before the UK invokes Article 50 by the end of March. We are grateful for his work and commitment over the last three years".

The Financial Times reported that Sir Ivan did not explain the reasons behind his decision when he informed staff of his decision to leave early, but that he played down his resignation by stating it was only slightly ahead of his planned departure date.

The news has prompted concerns that the UK will get a worse Brexit deal than it would have if he remained part of the team.

Charles Grant, director of the Centre for European Reform think-tank, said: "Ivan Rogers's resignation makes a good deal on Brexit less likely. One of the very few people at the top of British government who understands [the] EU".

David Fuller's view -

Sir Ivan may understand the EU’s intentionally convoluted procedures but he was one of Cameron’s appointees to this insiders’ club and they had different plans.  He should have resigned with Cameron and I think Prime Minister May’s team ought to appoint their own pro-Brexit representatives for negotiating with the EU. 

These need not be mainly civil servants.  I would prefer to see some smart, tough and pro-Brexit businessmen and lawyers among the UK’s negotiating team.   Additionally, the UK should push for an early exit from the EU, as I have said repeatedly.  There is little to be gained from lengthy negotiations.  These would only be divisive and frustrating in terms of UK business planning.  A lengthy exit would also delay the establishment of new trade links with other countries.  EU governments will be under pressure from their own corporations, to negotiate mutually sensible trade terms with the UK, once we have left this closed shop. 

A PDF of The Telegraph’s article is posted in the Subscriber’s Area, along with a link to another relevant article.



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January 03 2017

Commentary by David Fuller

Compulsory Motor Insurance for Lawnmowers, Gold Buggies and Mini Quad Bikes?

A few years ago, I bought one of those irresistible Christmas presents that you pretend are for the kids, but which you really want to try out yourself. 

It was a quad bike. To be accurate, it was a mini quad bike. It was superb. In length and breadth it was no bigger than an armchair, but it was full of grunt.

We would all pile on it in a pyramid of humanity and careen around the garden: up the bank, into the ditch, slap bang into the tree. It had fat round tyres with deep grass-chewing treads. It roared with a proper trail bike roar, and sent out pleasing clouds of aromatic white smoke.

We gave it some welly, I can tell you; and after a while our tyres began to feel the strain. One day the technical demands became too much. I gave it away to the next door neighbour, who is more mechanically minded than I am, and whose kids are younger and certainly less heavy.

So it is in his interests that I now report an appalling development in the life of off-road quad bike owners. If my neighbour wants to continue to enjoy that quad bike; if he wants to thrill his children; if he wants to exercise the right of every free-born Brit to pootle blissfully on his own quad bike on his own private land – then he is going to have to pay. As things stand, he is going to have to find insurance. Yes: to find a broker to cover the risk posed by his quad bike – to any human being or property coming into contact with that rumbustious rugrat of a machine. 

I hope I do not have to try too hard to convince you that this is insane. Of course this quad bike is dangerous, in the sense that the contents of your cutlery drawer are dangerous. It is perfectly true that if you drove that quad bike at full tilt over a 6ft ha-ha, you would probably do yourself an injury. If you happened to be hurtling round a blind corner, and your neighbour happened to be coming the other way, planning to remonstrate with you, perhaps, about the noise, your neighbour might suffer in the collision. But this country has rubbed along for decades – more than a century, in fact – without seeing any statutory requirement to insure off-road vehicles such as quad bikes. 

Where does it come from, this new rule, or this threat of regulation? There is not a single MP – not even a Liberal Democrat – who has campaigned for the compulsory insurance of off-road children’s quad bikes. There is no pressure group; there have been no querulous voices on the Today programme. There is no need, no call, no demand, no appetite, no reason, no justification, not even the shred of the beginnings of a case – in the United Kingdom – for this kind of pointless and expensive burden on millions of people.

David Fuller's view -

It is hardly surprising that the number of new regulations increases in line with the number of unelected regulators in office.   

A PDF of Boris Johnson’s article is posted in the Subscriber’s Area.



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January 03 2017

Commentary by David Fuller

Try Not to Tell the Markets What to Do

David Fuller's view -

We are too often tempted to pontificate.  This lack of ego control may indicate a need to attract attention, not least to influence others when we have positions which will be affected.  These egregious mistakes are made by all investors from time to time, and radical short to medium-term forecasts can indicate desperation.

Comparatively inexperienced investors may be less prone to this loss of judgement than experienced leveraged traders.  However, they may impede their own learning curve if overly influenced by those who appear to have better insights or at least more experience.

How can we reduce these problems?       

This item continues in the Subscriber’s Area.



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January 03 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown, who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along to contribute and enjoy the fun.



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January 03 2017

Commentary by Eoin Treacy

January 03 2017

Commentary by Eoin Treacy

Email of the day on Friday's big picture long-term video and audio

Thank you for Friday’s weekly summary, especially the long excursus on technology

It is good from time to time to digress on the long term trends that are likely to influence markets in the future

The short term price action is important but your reflections on the technology developments are very much appreciated

Good work in the New Year!
And

Thank you so much for another nice long term audio last Friday. But you did not comment on precious metals, and gold mining companies. Could you kindly comment on these as well as the oil companies i.e. shell/Exxon etc. at your convenience. Tks again. And best wishes for the New Year to you and David.

 

Eoin Treacy's view -

Thank you both for your well wishes and I look forward to covering both the outlook for technology and precious metals in depth this year. Last Friday I intentionally decided to expound upon the case for technological innovation representing a powerfully bullish factor for both the global economy and the stock market over the coming decades. 



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January 03 2017

Commentary by Eoin Treacy

January 03 2017

Commentary by Eoin Treacy

Earnings, Not Donald Trump, Are Stocks' Best Friend in 2017

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

“It’s earnings growth that drives stocks over the long term,” said Tom Cassidy, chief investment officer at Univest Wealth Management Division. While “we won’t know if any of these policies will actually be implemented until later next year,” a continued rebound in earnings should nevertheless prop up stocks for additional gains, Mr. Cassidy said.

?Earnings for companies in the S&P 500 grew 3.1% in the third quarter from a year earlier, according to FactSet, entering positive territory for the first time since the first quarter of 2015, when they grew 0.5%. Analysts polled by FactSet expect the rebound to continue, and are estimating a 3.2% growth rate in the fourth quarter of 2016.

An end to the longest earnings slump since the financial crisis also comes against a backdrop of improving economic data. U.S. gross domestic product, a broad measure of the goods and services produced across the economy, posted its strongest quarterly pace of growth in two years in the third quarter, according to data released by the Commerce Department in December.

 

Eoin Treacy's view -

There is no doubt that the earnings recession which prevailed for the last 15 months acted as a headwind to sentiment and more importantly corporate profits. There were fears that the loss of momentum in margin expansion was a precursor to recession and this was enough to keep many investors on the side lines. 



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January 03 2017

Commentary by Eoin Treacy

China to become net importer of some rare earths

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

According to the Adamas outlook for rare earth demand from 2016 through 2025 over the past five years upwards of 30,000 tonnes of annual rare earth oxide demand were lost due end-users’ growing concerns over supply security. On top of that more than 20,000 tonnes were lost as a result of the ongoing phase out of several mature technologies, such as fluorescent lamps, NiMH batteries, and hard disk drives used in PCs.

According to the authors following the lengthy and painful adjustment, the REE market will return to strong global demand growth for a number of rare earth elements including neodymium, praseodymium, dysprosium, and lanthanum. The resulting rise in price will help "sustain the profitability and growth of today’s dominant producers, and incentivize continued investment in exploration and resource development globally":

REE demand will boom from 2020 onwards as growth rates of top end-use categories including electric vehicles, wind turbines and other hi-tech applications accelerate.

 

Eoin Treacy's view -

Rare earth miners went through a crushing bear market and it is arguable whether it has ended. The growth of new sources of demand is a potential medium-term bullish catalyst. However it is unlikely China will surrender its dominance of the global supply chain not least because it wishes to attract and support advanced manufacturing companies. 



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December 30 2016

Commentary by Eoin Treacy

December 30 2016

Commentary by Eoin Treacy

Australia ASX 300 Overextensions

Eoin Treacy's view -

Over the last two days I have created spreadsheets for the constituents of the S&P500 and the FTSE-350; ranking them by overextensions relative to the trend mean. Today I am conducting the same exercise for Australia’s ASX 300. 

This is a particularly illiquid time of year and it takes less capital for traders to move markets. This is easiest where accelerated moves are in evidence, stops will have been placed and algorithmic systems have little difficulty identifying them. 
 



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December 30 2016

Commentary by Eoin Treacy

Euro Jumps 1.6 Percent in Minutes as Algo Orders Surprise Market

This article by Michael G. Wilson and Kevin Buckland for Bloomberg may be of interest to subscribers. Here is a section:

The euro surged as much as 1.6 percent against the dollar in the Asian morning Friday as a rush of computer-generated orders caught traders off guard.

The sudden move started under $1.05 and algorithmic orders snowballed above that level, causing what little liquidity there was on the year’s last trading day to vanish, according to foreign-exchange traders. In minutes, Europe’s single currency jumped to a high of $1.0653, forcing some dealers to take losses to cover positions.

And

“It could be stops taken out in thin liquidity,” said Simon Pianfetti, a senior manager at the market solutions department at SMBC Trust Bank Ltd. in Tokyo. “But it’s still a big move.”
An hour later, the currencies had pared gains and traders were swapping stories on who had come out ahead in dealing rooms. The euro was up 0.5 percent as of 6:14 a.m. in New York, while the franc was 0.4 percent higher. The yen had flipped to a 0.3 percent loss from a 0.4 percent advance.

The sharp move in the world’s most-traded currency pair punctuated a year that’s seen several unexpected moments of extreme volatility, most notably the pound flash crash in October. Again in early Asia time, the British currency dropped more than 6 percent against the dollar in two chaotic minutes, exacerbated by a rush of computer-driven sell orders amid thin liquidity. There is concern that such price swings will become increasingly common, with Boston-based consultant Aite Group estimating algorithmic transactions have more than tripled in the past three years.

 

Eoin Treacy's view -

Algorithmic trading systems have proliferated in an environment where computing power has reached the speed required to support the ambitions of traders. Ultralow rates and massive availability of liquidity have lent fuel to these kinds of programs. The result has been a marked uptick in market specific volatility where programs can profit from what I consider “stops arbitrage”. In much the same way that prior program traders found disparities in pricing between different exchanges, current programs can fish for stops around psychological levels.  



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December 30 2016

Commentary by Eoin Treacy

Solar Panels Now So Cheap Manufacturers Probably Selling at Loss

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

“Certainly it would be a challenge for anyone to make money at that price,” Osborne said in an e-mail. “The blended cost for most last quarter was about 36 cents to 38 cents.”

The current price is also lower than cost estimates from Trina. The biggest supplier of 2015 expected to reduce costs to about 40 cents a watt by the end of the year, from 45 cents in the second quarter, Chief Financial Officer Merry Xu said in an August conference call. The Changzhou, China-based company’s shareholders on Dec. 16 agreed to a $1.1 billion deal to take the company private. A spokesman declined to comment Friday.

Some companies’ cost structures remain competitive, even with prices this low. Canadian Solar Inc., the second-biggest supplier, reported costs of 37 cents in the third quarter, down from 39 cents in the second quarter. The company has said its costs are among the lowest in the industry, and it expects to reach 29 cents a watt by the fourth quarter of 2017. Many of its competitors expect costs in the low 30s by then, Osborne said.

 

Eoin Treacy's view -

Producing solar cells in an environment where prices are falling and likely to continue to fall as new technologies are integrated into the manufacturing process is a highly competitive business. Companies unable to compete will go bankrupt and even the most successful face the threat of obsolescence. Consumers are the primary beneficiaries. 



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December 30 2016

Commentary by Eoin Treacy

Pharma's Pricing Troubles Will Get Worse in 2017

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

A structural decline in U.S. pricing power is ominous for every pharmaceutical company -- particularly if it extends to brand-new drugs, or to areas, such as cancer, that traditionally have strong pricing power. Highly effective new cholesterol-lowering drugs from Amgen and Sanofi/Regeneron have had notably sluggish launches since being approved in 2015, as a result of cost-driven roadblocks to patient access. Meanwhile, the market for expensive, immune-boosting cancer drugs -- dominated by Merck & Co. Inc. and Bristol-Myers Squibb Co. when 2016 began -- gained a new entrant this year in Roche Holding AG. Pfizer Inc. and AstraZeneca PLC may join next year. Having five similar drugs on the market would make pricing pressure all but inevitable. These trends quietly gathered strength in 2016, and 2017 will give us more of a sense of just how far they will go. This, regardless of what Donald Trump decides to do, could well be the defining biopharma story of the year.

Eoin Treacy's view -

The pharmaceutical industry has led a charmed existence for a long time because it has been able to increase prices for legacy drugs because of little to no competition. It is the antithesis of what we see in the consumer electronics sector where price pressure is enormous and demand for constant improvements and ever lower costs is the norm. 



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December 29 2016

Commentary by Eoin Treacy

December 29 2016

Commentary by Eoin Treacy

FTSE-350 Overextensions relative to the 200-day MA

December 29 2016

Commentary by Eoin Treacy

Indian Sugar Shortage Deepens as Cane Crop Set to Disappoint

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

India’s sugar shortfall is worsening as disappointing cane crops boost the need for imports this season.

Reduced cane supplies in the states of Maharashtra and Karnataka mean output will probably fall to the equivalent of 21.3 million metric tons of white sugar, according to Tropical Research Services, which advises several hedge funds on agriculture markets. That’s 4 percent smaller than forecast last month and 15 percent below a year earlier.

The El Nino weather pattern that ended this year hurt cane crops in India, the biggest sugar-consuming country and second- largest producer. At the same time, the harvest in No. 2 exporter Thailand is running behind last season’s pace, helping tighten global supplies already forecast to fall short of demand.

“Early reports from both the key Maharashtra state in India and also from Thailand suggest their cane crops could disappoint," James Liddiard, a partner at Agrilion Commodity Advisers LLC, said in a report Wednesday.

 

Eoin Treacy's view -

Brazil’s sugar crop is coming in ahead of expectations suggesting that the disappointing figures in Thailand and India will be at least partially compensated for. However contracts are in backwardation out to late 2018 so the supply deficit is not a short-term phenomenon and it will take time for new planting to rebalance the market. 



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December 29 2016

Commentary by Eoin Treacy

Musings from the Oil Patch December 28th 2016

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

With the election of Donald Trump as the nation’s 45th president, there are signs environmental restrictions on fossil fuels will be loosened and more room will be made for fossil fuels. That will be a significant shift in the recent trends for environmental and energy regulation. Whether it significantly alters the current trajectory for the dirtiest of our fossil fuels – coal – remains to be seen. Clearly, short of an outright ban on renewable energy plants, the current backlog of new, cleaner power plants will not change, so our near-term energy mix will continue to shift toward more renewable fuels. The issue for the energy industry is whether the economic trends in place boosting renewable fuels are altered and slow down the pace of additions of new renewable fuel plants. That will partially depend on whether current renewable fuel mandates and subsidies are renewed once they reach their expiration dates, or even if they are outright cancelled early.

At the present time, businessmen, energy executives and consumers are struggling to understand the true economics of electricity. Analysts have strived to produce cost estimates for electricity produced by different fuels in such a way that they can be analyzed on the same basis. Standardized cost estimates provide a means to assess the impact on different fuel sources of various environmental policies. The process is called levelized cost of electricity. This tool enables direct comparison of electricity costs from power plants fueled by either fossil fuels or renewables. One drawback from this tool is that it assumes every kilowatt of power generated has the same value to consumers regardless of when during the day it is produced. It ignores the reality that during summer days in the southern regions of the United States, electricity to power air conditioners in the afternoon when temperature reach their highest levels is of greater value to consumers than during the middle of the night when temperatures drop.

 

Eoin Treacy's view -

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

Electricity pricing is a moving target for both energy companies and environmentalists alike. The challenge is to deliver energy when it is most required rather than when it is easiest to produce and the only way of solving that issue for renewables is with storage or back-up conventional capacity. 



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December 28 2016

Commentary by Eoin Treacy

December 28 2016

Commentary by Eoin Treacy

Overextensions relative to the trend mean

Eoin Treacy's view -

We do not regard the 200-day MA moving average as a sacrosanct level where support or resistance need to be found in order to confirm the consistency of a trend. Rather we look on it as the trend mean around which prices move. In an upward trending environment we can expect the price to find support in the region of the trend mean as long as a demand dominated environment persists.  Since the crowd plays such an important role in the day to day gyrations of any market prices can and do overshoot. 



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December 28 2016

Commentary by Eoin Treacy

December 28 2016

Commentary by Eoin Treacy

Africa's mixed political transitions in the 3 Gs: Gabon, the Gambia, and Ghana

This article by Vera Songwe for the Brookings Institute may be of interest to subscribers. Here is a section:

Ghana is the pride of Africa when it comes to democratic transitions. Once again, its most recent election has proven this point.  Despite the tense and intensely fought campaign both parties continue to pledge respect for the process. Indeed, there is much to celebrate around Africa’s leadership transitions, but much remains to perfect the process the continent over. This year many elections were held freely and fairly on the continent, and both incumbents and new leaders were elected to office—including Benin, Cabo Verde, São Tomé and Príncipe, and Zambia for example. And in an unprecedented move the President of Mauritania and Angola all declared they will not seek re-elections at the end of the term. A very positive and encouraging trend if the pronouncements come to pass.

However, in a number of countries the old has not given way to the new, and the evolution of democracy is still in motion with too-often deadly consequences for the citizens in Burundi, Gabon, and the Gambia to name a few. These examples demonstrate that the concept of leadership transition has not yet been fully adopted. A number of lessons can be drawn from these latter experiences. The populations are increasingly more vocal about transparency of elections. Both sides incumbent and opposition have increasingly equal chances of getting their voices heard and results tend to be closer in these countries. There is still a need for vigilance, and the tendency to slip remains. Peaceful leadership transitions are not yet the norm.

 

Eoin Treacy's view -

The investment case for Africa is predicated on standards of governance improving. Unsurprisingly there is considerable variability in performance across the continent, nevertheless the general trend is toward gradual improvement and that is a very positive development. The recovery in commodity prices is an additional positive development from an investment perspective. 



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December 23 2016

Commentary by David Fuller

The Chaos Theory of Donald Trump: Sowing Confusion Through Tweets

Here is the opening of this article from The Washington Post:

Donald Trump’s sudden embrace this week of a nuclear arms race — and his staff’s scramble to minimize the fallout — underscored an emerging modus operandi for the president-elect: governance by chaos.

Since winning the election, Trump has seemed to revel in tossing firecrackers in all directions, often using Twitter to offer brief but provocative pronouncements on foreign and domestic policies alike — and leaving it to others to flesh out his true intentions.

In the past week alone, Trump has publicly pitted two military contractors against one another, sowed confusion about the scope of his proposed ban on foreign Muslims and needled China following its seizure of a U.S. underwater drone.

But nothing has created more consternation for many foreign policy experts than Trump’s assertion on Twitter Thursday that the country should “greatly strengthen and expand” its nuclear capability.

On Friday, after his staff had tried to temper his comments, Trump doubled down — telling a television talk show host that in an arms race against any competitor, the United States would “outmatch them at every pass.”

Trump has pledged to shake up both Washington and the world order, and boosters argue that a degree of unpredictability can be useful, particularly when it comes to foreign policy. But the mixed messages and erratic nature of his pronouncements have alarmed even some Republicans, who say it’s important to know how seriously to take the leader of the free world.

“We’re just operating in this world where you cannot believe the things he says,” said Eliot Cohen, a foreign policy expert and former George W. Bush administration official at the State Department. “It will have large consequences for our allies and our adversaries, and it’s going to greatly magnify the danger of miscalculation by all kinds of people.”

Trump’s team has struggled with the new resonance that becoming president-elect has given Trump’s Twitter habit. They have repeatedly said that his statements on social media do not necessarily reflect his official policy and have at times sought to play down the import of his actions.

But Trump supporters say the rest of Washington is going to have to get used to his more freewheeling style.

David Fuller's view -

President-elect Trump has had a flying start a month before he will be sworn in as President.  He deserves credit for assembling a heavyweight team of highly successful business leaders to help him re-energise the US economy.  Wall Street celebrated his election with new all-time highs. 

That’s the good news.  The bad news may start with an excessive number of tweets, which do not add to his credibility.  In fact, they can make him look unstable. 

If Trump wants to be a great president, he could start by emulating Theodore Roosevelt, commencing with: “Speak softly and carry a big stick”.  Here are some more excellent quotes from President Roosevelt.



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December 23 2016

Commentary by David Fuller

Email of the day 1

On Homo Deus: A Brief History of Tomorrow:

Dear David, I wish you and Eoin and all the team the very best for 2017. I am reading Yuval Noah Harari's book "Homo Deus". It offers us his thoughts on the future of humanity and covers many of the themes that your team develop in your commentaries. It follows his excellent book called "Sapiens on the history of humanity. May I share this intelligent analysis with the rest of the FullerTreacy community. Regards, Alan

David Fuller's view -

Thank you so much and I return your sentiments for 2017. 

You may indeed share this intelligent analysis with the rest of the Fuller Treacy community, and I thank you for doing so. 

Mrs Fuller and I first heard Yuval Noah Harari speak when he was interviewed at the wonderful Hay-on-Wye Festival two years ago, and was talking about Sapiens: A Brief History of Humankind - well worth reading.  I have already ordered a copy of Homo Deus., which is just about to be released in London.   



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December 23 2016

Commentary by David Fuller

Email of the day 2

On notes from the Milken Institute meeting on The Evolution of Asset Management:

Dear David

I have attached more notes from last weeks' meeting organised in London by the Milken Institute. I found this session particularly interesting. The topic was 'The Evolution of Asset Management.' We all sense that change is coming so it was interesting to attend this panel comprising 3 constituencies: current asset managers, openly disillusioned customers, and new technology companies aiming to disrupt the status quo. It was all very polite but some strong messages came across which I have summarised in the pdf.

Asset managers are trying new markets, such as direct lending in place of banks, and investments in private equity including hi-tech startups (I wonder how many really understand what they're doing). And they are experimenting with big data and automated trading though there was disagreement about how successful this actual is. No evidence was given.

Other key messages that I took away were:

1. Customers are not particularly happy with performance or fees, saying there's much waste in unnecessary infrastructure.

2. The public availability of so much information that was previously available only to professionals is a game changer, as it reduces the 'added value' of asset managers.

3. The result is a growing trend for DIY investing. It started with HNWs setting up their own wealth funds and it is spreading to other private investors as they/we become more empowered by technology.

Also, corporations are starting to retake control of their defined benefit pension schemes by managing them in-house. To quote one panelist: "Corporations whose db plans failed to deliver will ask 'why would I delegate investment to those who are clearly the dumbest investors in the world.' Public and private pension funds need returns of 7-8% but they have been receiving much less than that from the AMs to whom they out-sourced. The pension asset managers always get their fees yet it's the corporate that has the liabilities on its book when there is under-performance. One panelist stated that several corporations in the US have already taken in-house control of their db plans and he expects this to become more widespread.

Of course, my impression of the discussion inevitably reflects my view of the topic.

Others may interpret it differently, so here is a link to a recording of the panel in case readers wish to check it out themselves.

Best wishes

David

David Fuller's view -

Thanks, David, for sharing your thoughts on The Evolution of Asset Management, as discussed at the Milken Institute conference.  If you mention this during your presentation at the Markets Now seminar on 16th January, I am sure it will generate further discussion. 

David’s additional notes on this topic are posted in the Subscriber’s Area. 



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December 23 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, currently short-term overbought.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  

Also, keep an eye on China’s Shanghai Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

 It will be interesting to discuss all of this at Markets Now on January 16th, and to hear your views as well.  Come along and enjoy the fun.



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December 23 2016

Commentary by David Fuller

December 23 2016

Commentary by Eoin Treacy

December 23 2016

Commentary by Eoin Treacy

U.S. shale is now cash flow neutral

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

Oil prices are probably already high enough to spark a rebound in shale production.

The IEA says that in the third quarter of 2016, the U.S. shale industry became cash flow neutral for the first time ever. That isn’t a typo. For years, the drilling boom was done with a lot of debt, and the revenues earned from steadily higher levels of output were not enough to cover the cost of drilling, even when oil prices traded above $100 per barrel in the go-go drilling days between 2011 and 2014. Even when U.S. oil production hit a peak at 9.7 million barrels per day in the second quarter of 2015, the industry did not break even. Indeed, shale companies were coming off of one of their worst quarters in terms of cash flow in recent history.

That all changed around the middle of 2015 when the most indebted and high-cost producers went out of business and consolidation began to take hold. E&P companies began cutting costs, laying off workers, squeezing their suppliers and deferring projects that no longer made sense.

By 2016, oil companies large and small had shed a lot of that extra fat, running leaner than at any point in the last few years. By the third quarter, oil prices had climbed back to above $40 and traded at around $50 per barrel for some time, replenishing some lost revenue. That was enough to make the industry cash flow neutral for the first time in its history.

 

Eoin Treacy's view -

The price of anything is heavily influenced by the marginal cost of production. If US onshore domestic unconventional oil plays are cash flow neutral at $50 it is reasonable to expect they will invest any free cash flow in expanding production at prices above that level. 



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December 23 2016

Commentary by Eoin Treacy

Gleanings

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

Another theme we think is surfacing is inflation driven by Trump's potential fiscal stimulus program. Hence, a return to "real assets," or stuff stocks, should have an increased weighting in portfolios. Verily, the price of real assets, relative to financial assets, is at historic lows. Consequently, investors' mindsets should be focused towards higher inflation, higher interest rates, and reduced disinflation. As an example, China's PPI hooked up in September for the first time since 2012. We believe the same thing is happening here in the U.S. 

Accordingly, REITs, timber, agriculture, collectibles (wine, art, diamonds, precious metal coins, farmland, etc.), and MLPs should have an increased weighting in portfolios, in our view. To this MLP point, we recently met with one of the savviest MLP-centric portfolio managers on Wall Street, who believes the midstream and downstream MLPs are ripe for a number of good years going forward. He suggests the bad news is in the rearview mirror: the capital markets are wide open for the MLPs; we are consuming an extra 1 million barrels of crude oil per day, and the MLPs traded at around a 30% discount relative to par.

 

Eoin Treacy's view -

The MLP sector is highly leveraged as a rule so it collapsed when oil prices fell. By the same token it is also benefiting from the rise in oil prices and with the high yields evident, particularly in the pipelines sector, it now offers upside leverage. 

The Alerian MLP Total Return Index hit a new recovery high this week and a clear downward dynamic would be required to question medium-term potential for additional upside. 



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December 23 2016

Commentary by Eoin Treacy

The bizarre business of intentional product failure: planned obsolescence

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

Today built-in obsolescence is used in many different products. There is, however, the potential backlash of consumers who learn that the manufacturer intentionally make the product obsolete faster. Such consumers might turn to an alternative producer (if any exists) that offers a more durable alternative. In other words, this nasty strategy is not available for small companies who would only lose customers.

Given today’s tremendous increase of international corporate power and severely reduced competition, planned obsolescence has become an attractive possibility for products than ever in human history.

Built-in obsolescence was already used in the 1920s and 1930s when global mass production became possible and rigorously optimized. 

 

Eoin Treacy's view -

I have to have my car smog tested soon and coincidentally the check engine light came on just ahead of when the test was due. In talks with the chaps at the dealership and with other customers while I was waiting the scale of obsolescence by design is quite astounding. 

For example, one of the technicians recounted how he bought a manufacturer’s original part for his Audi Q7 on eBay. He thought he had gotten a wonderful deal only to find that Audi’s computers will not code any part that is more than three years old; even if it is unused, one of their own and appropriate for the car in the question. 

 



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December 23 2016

Commentary by Eoin Treacy

Email of the day on back pain, lifestyle and emotional reserves:

I had lots of back problems as I was a dancer until I had my operation. 1 fusion and 1 plastic disc that give a little movement. One interesting thing was that they put in synthetic bone of some description for the fusion, and within 6 months, it would all be replaced by growth bone and the synthetic would have disappeared! Yes, key hole if it's just a disc snip!

And 

I’ve had the same myself – also see if you can get Bowen Therapy over there. I tried this 3 years ago and I haven’t had a problem since (touch wood). I wish Lily a very speedy recovery. 

And 

Add swimming to your wife's list of options for a longterm solution. It is medically recognized as a very effective remedial method and it helped me combat lower back pain (brought on by muscle spasm, not a herniated disc) some years ago. A caveat: avoid breast stroke as it arches the back. Do the crawl or back stroke, instead. Incidentally, even walking lengths of the pool is beneficial.

 

Eoin Treacy's view -

Thank you all for these informative emails. Lifestyle, diet and exercise all contribute to wellbeing and help restore the emotion reserve we require to participate in markets. I have made a conscious decision over the last couple of weeks to avoid trading because of the multiple tasks I am focusing on at home but as the situation calms down I look forward to exploiting developing opportunities not least as there a considerable number of oversold and overbought conditions evident in a large number of markets. I intend to spend most of next week identifying these charts and sharing them with subscribers. 



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December 22 2016

Commentary by David Fuller

Jamie Dimon on Trump, Taxes, and a U.S. Renaissance

As recently as September, you thought it would be difficult for people on Wall Street to get into the new administration. Now, Donald Trump has tapped several Wall Street figures. What do you think they’re going to bring that’s different?

Obviously, I was dead wrong about that. But you had a complete upheaval. The Republicans are in charge, and they have not been anti-business the way you’ve seen the Democrats largely be anti-business for years. I think if you are going to be president, you should have the best people sitting around a table. I think it’s a mistake for the American public to constantly be told that if you work for an oil company or you work for a bank, that automatically makes you bad. I think a lot of these people are very qualified people who are patriots. They’re going to want to help the country. They’re not going to try to help their former company. These are people with deep knowledge that will hopefully do a great job.

I think it’s a reset moment for how businesses are going to be treated: 145 million people work in America; 125 million of them work for private enterprise; 20 million work for government—firemen, sanitation, police, teachers. We hold them in very high regard. But you know, if you didn’t have the 125 you couldn’t pay for the other 20. Business is a huge positive element in society. But for years it’s been beaten down as if we’re terrible people. So I think it’s a good reset.

Detroit is a perfect example where civil society, not-for-profits, government, business all work together to improve the lives of American citizens. If you can duplicate what they’ve done in Detroit around the country, you’re going to have a huge renaissance.

What is your diagnosis about what’s going on in this country, this economic angst, the anti-immigrant sentiment?

It’s not anti-immigration per se. America’s changing too much for that. The core of the frustration and anger were two things. First, middle-class incomes have really not grown for 15 years. Second, the difference between unskilled and skilled has been growing over time. The unskilled really have a hard time having what you would call a living wage.

There are solutions. Skills training, like they do here in Michigan. I would also greatly expand the earned income tax credit. We only do it for mothers with babies. We don’t do it for single men. So if you’re making $8, $9 an hour, the government will pay you $3 or $4 [as part of your tax refund]. Figure it as negative income tax. If I can give you a job at a living wage, it helps small businesses. It’s not necessarily good for big business, but it’s a wonderful thing to do for society.

I think fixing corporate taxes, immigration, trade, all done properly will have fast results in America. Unfortunately, a lot of people who talk about fixing those problems, their answer is beating up on business is going to make it better. It’s not.

David Fuller's view -

Whatever one thinks of Donald Trump, he has certainly reignited the enthusiasm of Wall Street, not least among many of its most experienced and successful leaders.  There are many more interesting points in this interview, which I commend to you.   



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December 22 2016

Commentary by David Fuller

Donald Trump is Holding a Government Casting Call. He is Seeking The Look

Donald Trump believes that those who aspire to the most visible spots in his administration should not just be able to do the job, but also look the part.

Given Trump’s own background as a master brander and showman who ran beauty pageants as a sideline, it was probably inevitable that he would be looking beyond their résumés for a certain aesthetic in his supporting players.

“Presentation is very important because you’re representing America not only on the national stage but also the international stage, depending on the position,” said Trump transition spokesman Jason Miller.

To lead the Pentagon, Trump chose a rugged combat general, whom he compares to a historic one. At the United Nations, his ambassador will be a poised and elegant Indian American with a compelling immigrant backstory. As secretary of state, Trump tapped a neophyte to international diplomacy, but one whose silvery hair and boardroom bearing project authority.

The parade of potential job-seekers passing a bank of media cameras to board the elevators at Trump Tower has the feel of a casting call. It is no coincidence that a disproportionate share of the names most mentioned for jobs at the upper echelon of the Trump administration are familiar faces to obsessive viewers of cable news — of whom the president-elect is one.

“He likes people who present themselves very well, and he’s very impressed when somebody has a background of being good on television because he thinks it’s a very important medium for public policy,” said Chris Ruddy, chief executive of Newsmax Media and a longtime friend of Trump. “Don’t forget, he’s a showbiz guy. He was at the pinnacle of showbiz, and he thinks about showbiz. He sees this as a business that relates to the public.”

“The look might not necessarily be somebody who should be on the cover of GQ magazine or Vanity Fair,” Ruddy said. “It’s more about the look and the demeanor and the swagger.”

As Trump formally announced his vice presidential pick in July, he said that Mike Pence’s economic record as Indiana governor was “the primary reason I wanted Mike, other than he looks very good, other than he’s got an incredible family, incredible wife and family.”

And in picking retired Marine Gen. James Mattis as his nominee for defense, Trump lauded him as “the closest thing to General George Patton that we have.”

Mattis has a passing physical resemblance to the legendary World War II commander, as well as to the late actor George C. Scott, who won an Academy Award for his portrayal of Patton in the 1970 biopic. Trump also seems particularly enamored with a nickname that Mattis is said to privately dislike.

“You know he’s known as ‘Mad Dog’ Mattis, right? ‘Mad Dog’ for a reason,” Trump said in a recent interview with the New York Times.

The president-elect, however, does not mention Mattis’ other sobriquet, which is “Warrior Monk.” Or his call sign: “Chaos.”

On the other hand, in Trump’s book, not having the right kind of appearance is tantamount to a disqualifier. During the presidential campaign, he stirred a controversy when he pronounced that Democratic nominee Hillary Clinton lacked “a presidential look, and you need a presidential look.”

David Fuller's view -

He’s right, and the look applies to every animal species on the planet.  Among humans, the right look opens important doors but they may not stay open for long if not backed by intelligence and integrity.   



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December 22 2016

Commentary by David Fuller

Email of the day 1

On “Beware of height nervousness”:

 

After the first big surge in the early 1980's, I remember seeing "Beware of height nervousness". Probably not an appropriate comparison but something to bear in mind.

David Fuller's view -

You remember your market history very clearly, so thanks for sharing this recollection.  I am assuming that you are referring to the very important low in August 1982, which finally launched Wall Street's huge secular bull market which lasted until the end of the century. There was an earlier low in April 1980, followed by a persistent move to new all-time highs in November of that year.  You can see this more clearly in the centre of this segment which I took from the monthly semi-log chart above. 

That short, sharp rally was almost entirely retraced in what I often referred to as a post-breakout consolidation, leading to the first step above the base. What you modestly point out may indeed prove to be a very appropriate comparison



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December 22 2016

Commentary by David Fuller

Email of the day 2

On the UK negotiating trade terms with EU countries pre or post a clean Brexit:

I have never been impressed by the argument that, because the UK imports more from the EU than it exports to it, the EU has more to lose. In value terms this is true but it is only part of the picture. The percentage of EU exports that come to the UK is much smaller than the percentage of total UK exports that go to the EU. Thus any increase in trade restrictions between the EU and the UK may cost the EU more in absolute value terms but the percentage damage to the UK economy will be much greater than the percentage damage to the EU. Only quoting half the facts is the sort of dishonesty that we were bombarded with by both sides during the referendum campaign.

David Fuller's view -

You make a correct point on absolute value terms, but I think it would be more relevant if the EU had first achieved fiscal union, turning it into ‘a United States of Europe’, with a central government to redistribute funds as economically required.  However, the EU’s founders and subsequent national and also bureaucratic leaders knew that it could not achieve fiscal union because no country’s population supported this further loss of sovereignty.  So the EU proceeded with stealth, completely ignoring repeated wise advice from so many who knew their economic history: no currency union has ever survived for long without fiscal union.  This presumably remains out of reach for the 27 countries which have not yet decided to leave the EU.  With the exception of Germany, most are clearly unhappy with the Euro, which has been the chief reason for their economic underperformance.   

Following a clean Brexit, I do not think German automobile manufacturers will be either impressed or influenced by the EU’s absolute value relative to trade percentages with the UK, if they can only export to us on WTO terms.  They would certainly pressure Angela Merkel, if she is still around.    



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December 22 2016

Commentary by David Fuller

Email of the day 3

Also on the UK negotiating trade terms with EU countries pre or post a clean Brexit:

December 22 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, currently short-term overbought.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  It will be interesting to discuss all of this at Markets Now on the 16th.



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December 22 2016

Commentary by Eoin Treacy

December 22 2016

Commentary by Eoin Treacy

Jingle bulls, jingle bulls, jingle all the way!

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

The reality is that company managers are not Scrooges. Indeed aggregate real capex as a proportion of output is at or near record levels in America (figure five). It’s obvious! – Father Christmas would chuckle to his reindeer. What else has caused the rampant over capacity we observe down those factory chimneys as we zoom about? And clearly too much – not too little – capex also explains why businesses are having such a hard time raising prices and growing their top lines. More than 40 per cent of American companies will have seen no revenue growth this year – globally almost half won’t (figure six). 

So the wise men were correct to point their fingers at businessmen – but for the wrong reason! Reckless over spending rather than deliberate under spending has led to the lack of growth and general unease. Investors were also oblivious to the decline in revenue growth caused by a profligate expansion of assets. Or maybe they were just not bothered. After all, toy factories were returning sacks of money to shareholders and equity prices were somewhere north of Lapland. This was sustainable, Father Christmas knew, because the erosion in asset-turn (revenues divided by assets) was being off-set by rising margins (figure seven) – thus supporting returns on equity.

This overlooked dynamic explains everything from anaemic growth and booming equities to the rise of passive funds and lull in corporate deal making. What is more, it is a global phenomenon – especially so in emerging markets where excess capacity is chronic. To most people this looks worrying, given the tailwinds of lower wages, lower rates, and worldwide tax fiddling, which have pushed margins higher, are becoming headwinds. Only Father Christmas understands what an opportunity this is. Margin pressure will force companies to change behaviour for the better – with dazzling repercussions. 

And the winds have already turned in America. For example, average hourly earnings growth has doubled since two years ago (figure eight) and keeps rising. Even Father Christmas’s laziest elf appreciates that his labour is scarce these days and has demanded more porridge. Meanwhile borrowing costs have turned upwards having declined for most of the millennium (illustration nine). Finally, there is less scope for taxes to fall than everyone thinks – American companies already pay a much lower effective tax rate than they did a decade ago (figure ten). 

Margin pressure is the snowball in the face company bosses need to start investing more cleverly. Out with the irrational extra production line, fourteenth systems patch or mindless overseas expansion in order to boast being global. And in with capex that boosts productivity and returns. So ineffectually have most firms been spending money that investment will rise despite being elevated in real terms. The biggest gains will be made by the lowest quality companies. Forget about robots and artificial intelligence; this is about basic new IT infrastructure, client relationship software or logistics systems. So many companies do not do the simple things well because the tailwind of low wages, taxes and interest rates has meant they haven’t needed to. Only the top ten per cent of American companies have managed to significantly boost their returns on capital, excluding goodwill, over the past 15 years (figure 11). Other developed countries have similar skews too.

Eoin Treacy's view -

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

There are a number of important points raised in this short report that are worth considering. Corporate margins are close to record highs and the loss of momentum in margin expansion has been a source of concern for many investors over the last couple of years. 



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December 22 2016

Commentary by Eoin Treacy

Businesses Are Friskier After Trump Victory, BofA's Moynihan Says

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

Bank of America Corp. doesn’t expect Donald Trump’s election to jolt the U.S. economy next year, but its corporate customers are enthusiastic and already seeking funds to expand, according to Chief Executive Officer Brian Moynihan.

Mid-sized companies “are friskier, they’re more active,” Moynihan, 57, said in an interview with Bloomberg Television’s David Westin for broadcast Thursday. Recently, some have been drawing down credit lines to invest in operations, he said. “They feel better about the prospects of the regulatory environment and their businesses. They feel better about the possibility of final demand.”

Moynihan, who runs the second-largest U.S. lender, said it may take a while for Trump’s initiatives as president to play out in the economy, which already was benefiting from rising consumer spending. The bank has forecast about 2 percent growth next year, he said -- up from the 1.6 percent that economists estimate for 2016.

 

Eoin Treacy's view -

Friskier clients must be a welcome development for banks because it will be easier to sell them new products. It’s been a long time since it a banking CEO has been able to say that. Additionally the banking sector could be one of the greatest beneficiaries of deregulation, lower taxes and fiscal stimulus. 



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December 22 2016

Commentary by Eoin Treacy

Apple's Search for Better iPhone Screens Leads to Japan's Rice Fields

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

That push has also put a spotlight on suppliers of previously obscure technologies, testing their capacity to satisfy demand that drives sales of more than 200 million iPhones each year. A couple of years ago, Apple sought to use strong sapphire glass for iPhones, only to abandon the effort when a manufacturer couldn't deliver enough of acceptable quality and went bankrupt. The scratch-resistant material is now featured on the Apple Watch.

Now OLED is the big goal. The technology has been included on top-end smartphones for years, including almost all of Samsung Electronics Co.'s high-end phones. While LCDs rely on a backlight panel, OLED pixels can glow on their own, resulting in thinner displays, better battery life and improved contrast. OLED screens can also be made on flexible plastic, allowing for a wider variety of shapes and applications.

"OLEDs aren't just for flat areas, but can be used on edges, so smartphone makers will challenge themselves by building displays with new shapes," Tsugami said. "These qualities in OLED will give it an advantage."

 

Eoin Treacy's view -

Delivering advances in technology to the masses has a long lead time considering how long it takes to build new factories and indeed the machines to fill them. The story of how long it takes to build a single OLED production line is a testament both to impressive innovation and precision engineering as well as the ability of companies to survive until their products hit the big time. 



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December 22 2016

Commentary by Eoin Treacy

Email of the day more on back pain

I was sorry to hear about your wife's disc problem. My wife had a bad episode some years back and eventually had to resort to surgery, the sciatic pain having become unbearable. Luckily we discovered that the surgery could be minimally invasive - keyhole, in fact, to simply remove the detritus from the burst disc (L5) which was pressing on the sciatic nerve. A few hours later and she was out of bed and pain free. 

I have suffered from a more generalised lower back pain most of my adult life, but many years ago I discovered a morning stretch which I do every day and which I believe really helps. It was explained in a book by an Australian physiotherapist called Sarah Key. It's been brilliant for me. I later discovered an article in an NHS primary care journal which explains in detail how it works, and which I have attached (sorry for poor quality). It's dead easy to do. You can order Sarah's "back block"(for the stretch)  from her web site, though I bought good back block mats from yogamatters.com. Perhaps this may be useful to add to your other subscriber's excellent recommendations.

And 

Just read the back stuff. I’ve had multiple back surgeries including a fusion. The basic stuff is out patient and like going to the dentist. You are fine the next day and pain is gone at the moment your eyes open. The world of back surgery deniers are living in the 1984. I tried everything else. Had surgery way later than I should have. 

Insurance companies had a rule and most likely still do that you must try 3 non-invasive courses before they would pay for back surgery. This started for me in the later 1990s. Then with any type of work you were taking a chance. Now it’s quick and simple. A fusion is much more difficult but even then you are walking the same day and home the next. 

And 

I can testify that core exercises to strengthen the lower back muscles and also the stomach muscles are easy to do and really work. Nearly 40 years ago, two different surgeons told me I had to have an operation, including disc infusion or removal.  With the core exercises I avoided all that and have had no back problems subsequently.  

The other exercise, which soon becomes automatic, is never bend over, let alone to lift something, without tightening your stomach muscles.  

 

Eoin Treacy's view -

Thanks to every subscriber who has shared their experience of back pain. It’s a dizzying learning curve but Mrs. Treacy has been greatly helped by all the well wishes shared by the Collective. 

I’m happy to report she is making steady progress following a cortisone injection last week. She had an MRI this week which confirmed a tear in her S5/L1 disc. While time will tell whether this problem is long lasting, stretching and exercise are beneficial in their own right and cost nothing. 

Thankfully surgical procedures are improving all the time should one be required. One encouraging statistic is that the majority of herniated discs resolve on their own within six weeks. If she is lucky enough to be in that category a stretching and muscle strengthening regime would make eminent sense and I believe should form part of any long-term solution.

 



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December 21 2016

Commentary by David Fuller

Merkel Said to Close Off Banks-for-Cars Brexit Deal Before Talks

Chancellor Angela Merkel is seeking to stiffen German resolve on Brexit, singling out the car industry as vulnerable to any British attempt to strike market-access deals ahead of the U.K.’s exit from the European Union.

In a closed-door meeting with German lawmakers, Merkel said some industries might press for such accords with the U.K. government and that political leaders should oppose them, according to two people who attended. In particular, allowing U.K. banks to do business in the EU in return for Britain granting market access to European carmakers is a non-starter, Merkel was quoted as saying by the people, who asked not to be identified because the meeting was private.

The comments are the most specific signal yet of German concern that Prime Minister Theresa May’s government might try to sidestep the other 27 EU governments and seek sector-by-sector advantages before Brexit talks have even begun. As Merkel seeks to enforce the EU’s insistence on a package deal, some ministries in Berlin earlier instructed officials to avoid back-door contacts with U.K. counterparts for the same reason.

“Merkel is rightly warning against special deals for individual industries,” Heribert Hirte, a lawmaker in the chancellor’s Christian Democratic Union, said in an interview. “We can’t enable cherry picking.”

A German government spokesman declined to comment on what Merkel told lawmakers in the meeting last week, saying her position on Brexit -- that the U.K. must accept the EU’s free movement of people, capital, goods and services to have full market access -- is unchanged.

The U.K. government has underscored the auto industry’s importance by giving assurances that persuaded Nissan Motor Co. to keep investing in Britain while May tries to balance taking the country out of the EU with safeguarding investment and jobs. For Germany’s auto industry, the stakes may be even bigger.

David Fuller's view -

This may be no more than yet another somewhat mischievous volley from the EU, so I would not take it too seriously.  We have often seen that Angela Merkel will change the EU’s “inviolate” rules when it suits her to do so.  Since EU policies are always a work in progress, I regard that as practical rather than merely cynical.  

Since the EU is mired in problems, a safe rallying point is its collective dislike of the UK.  After all, the British public had the audacity to defy David Cameron and vote for Brexit, without even needing any help from Vladimir Putin. 

The British public was voting for self-governance because the EU’s agenda had changed.  This shocked EU officials who took it personally.  Some have repeatedly said that the UK should be “punished”, so that other nations in the EU would not follow our lead.  In other words, the EU had become a club which European nations could join, but never leave of their own choice.  This does not strike me as a compelling enticement. 

EU officials are also angry because with the UK leaving, they will lose their second largest contributor to this expensive club.  That means bureaucratic perks in Brussels will have to be downsized.  Against this background, I maintain that it would be unwise for the UK Government to contemplate mutually sensible negotiations over a lengthy period.

This item continues in the Subscriber’s Area. 



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December 21 2016

Commentary by David Fuller

The Weekly View: US Stocks Are A Bit Stretched, But New Highs Confirm Bull Market

My thanks to Rod Smith for the latest issue of this excellent timing service, published by RiverFront Investment Group.  Here is a brief sample:

In conclusion: Measures of investor sentiment and anecdotal conversations with investors make us aware that a mood shift has occurred and that some investors are clearly worried that US stock indices have risen.  Our studies of trends and sentiment suggest that the current combination of the two may present an opportunity to return portfolios closer to long-term target norms, but do not indicate to us that risk should be brought below those norms.  

David Fuller's view -

This is a sensible comment from RiverFront. 

As an overall view, this bull market since 2009 had been characterised by its lack of euphoria, despite big gains for indices against a monetary policy background which has been very stimulative.  Yes, some individual shares have done well but there has been little overall euphoria.  In fact, a number of once favoured hedge-funds have damaged themselves by shorting the US and UK stock markets.  This has often been described as ‘the most hated bull market in history’.

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



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December 21 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for the first Markets Now of 2017, on Monday evening 16th January, at London’s Caledonian Club.  

David Fuller's view -

 

Iain Little and I will be joined by the distinguished speaker, Dr David Brown, discussing one of his favourite topics: ‘Our new Industrial Revolution’. 

We will have a few political revolutions to discuss as well.  I look forward to seeing our interesting subscribers at another lively and enjoyable evening.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, currently short-term overbought.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as the S&P 500 remain steady, let along firm, we could see another upside momentum move.  It will be interesting to discuss all of this at Markets Now on the 16th.



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December 21 2016

Commentary by Eoin Treacy