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April 09 2019

Commentary by Eoin Treacy

April 09 2019

Commentary by Eoin Treacy

FAANG's $800 Billion Rally Has Mom and Pop Investors Cashing Out

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

After a three-month rally that’s added more than $800 billion to the value of FAANG stocks, individual investors have decided it’s time to cash out of the high-flying names.

Retail clients at brokerage TD Ameritrade increased their overall exposure to equity markets for a second consecutive month in March, yet they sold shares of Amazon Inc., Facebook Inc., Netflix Inc. and Apple Inc. All four members of the so-called FAANG cohort -- which also includes Google parent Alphabet Inc. -- have gained at least 35 percent since stocks bottomed on Christmas Eve, one-and-a-half times the S&P 500’s return.

“Taking profits isn’t the worst idea in the world,” said Joe “JJ” Kinahan, the chief market strategist at TD Ameritrade, noting clients had been buyers of Amazon for eight straight months while also showing immense interest in Netflix in recent periods. “What it makes me wonder is, they were the momentum stocks, so where do we get our new momentum?”

It’s possible the answer to that question is cannabis companies, according to Kinahan. While clients of Omaha, Nebraska-based TD Ameritrade shunned the FAANG names last month, many were buyers of Aurora Cannabis Inc. and CVS Health Corp., which recently announced that it will begin selling CBD-infused products at more than 800 of its stores. Millennial clients also scooped up shares of Canopy Growth Corp., according to a statement from TD Ameritrade.

Eoin Treacy's view -

The 20% decline in the 3-months from the early October peak was a visceral event for many investors, not just retail buyers. If we had said to anyone thinking about selling before Christmas that all they would have to was wait another three months and the market would be back at the high then at least some people would say that as soon as it gets back to that level I’m selling.  Others, who have sat through medium-term corrections before, will conclude this is nothing more than a pause within an evolving bull market. That argument between bulls and bears in the region of an all-time high contributes to at least a range forming.



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April 09 2019

Commentary by Eoin Treacy

Italy Raises Deficit Target, Risking Fresh Conflict With The EU

This article by Chiara Albanese, John Follain and Lorenzo Totaro for Bloomberg may be of interest to subscribers. Here is a section:

The wider deficit forecast could revive tensions with the Commission after months of wrestling at the end of 2018 which resulted in a promise from Italy to stick to a deficit of 2.04 percent of GDP. With growth lower than expected, the money to keep the promise isn’t forthcoming. Nor is the government keen on measures that would dampen growth, with Finance Minister Giovanni Triastating recently that restrictive fiscal moves would be “absurd.”

Italy stocks extended losses after the report, with the FTSE Mib index down 0.4 percent at 3.00 p.m. in Milan. The spread between Italian and German 10-year bonds widened by 4 basis points.

"The deficit is the most thorny issue for Italy and could spark tensions with the European Union," said Vincenzo Longo, an analyst of IG Markets in Milan. "We are expecting negative growth in the first part of the year and the numbers the government is going to debate seem too optimistic. The government isn’t likely to push the issue however until after the European vote in May."

Eoin Treacy's view -

The fiscal austerity program the EU is abiding by is designed to harmonise government debt to GDP ratios ahead of introducing pan European institutions like a deposit insurance corporation and a federal transfer mechanism. It offers no leeway for subpar economic growth which is what Italy is dealing with at the moment. That represents a significant challenge for the system because it greatly increases the potential for rebellion.



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April 09 2019

Commentary by Eoin Treacy

Israeli elections primer: Final polls and what they mean

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

The polls also suggest a great deal of uncertainty: Not only is the pro-Netanyahu advantage modest, but several small parties on both right and left have seen their vote totals hover around the electoral threshold for entrance into the Knesset. If they fail to clear 3.25 percent (nearly 4 seats), their votes would be discarded, potentially upending the equilibrium between the left- and right-wing blocs.

For Netanyahu, this election presents not only a battle for his political life, but possibly a battle for his personal freedom. The Israeli attorney general has decided to indict Netanyahu in three cases, including one charge of bribery, pending a hearing with the prime minister and his lawyers in July. Bibi’s lawyers face the challenge of undoing what months and years of investigations have presented to the attorney general (a Netanyahu appointee). Barring their unlikely success, Netanyahu will need a coalition willing to keep him in power through one of two unpopular avenues. First, he could maintain the support of such a coalition while on trial for serious crimes (he would only have to resign by law if convicted). Or, better yet for Netanyahu, he could form a coalition willing to pass legislation granting the prime minister immunity from prosecution. With all these uncertain factors at play, it is possible that we see another round of elections before too long—maybe even within the year.

Eoin Treacy's view -

36% of the global population is voting this year with Israel and Turkey the most recent examples. And neither is going particularly smoothly. The underlying forces that are fomenting political populism are evident in most countries because the status quo has failed to deliver on rising standards of living, resulting in a much tighter focus on corruption and inequality. In a democracy like Israel, low turnout has exit polls showing either a dead heat of a win for the opposition which risks installing a left-wing government. Meanwhile in Turkey, Erdogan is intent on redoing the mayoral election in Istanbul because he did not like the first result which is a clear threat to the country’s democratic basis.



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April 09 2019

Commentary by Eoin Treacy

Big-Data Infusion for CPI Starts With Apparel

This research note by Jeff Kearns for Bloomberg may be of interest to subscribers. Here is a section: 

The BLS change may add volatility in clothing prices, but the impact on the main index will be relatively small, subtracting maybe 0.1 percentage point from the annual CPI rate, according to Michelle Girard, chief U.S. economist for NatWest Markets Securities and the most accurate CPI forecaster in Bloomberg’s latest ranking.

“While, theoretically, this shift should not introduce a downward or upward bias in the data, we believe that prices captured using actual transactions data are more likely to be biased lower,” Girard wrote in a report. “Transactions data could capture lower price points from a flash sale that a data collector may not have observed.”

Goldman Sachs Group economist Spencer Hill estimates the change could reduce core inflation in March by around 0.05 ppt from the monthly change. Omair Sharif, senior U.S. economist at Societe Generale, also sees a possible drag from apparel. The BLS plans to collect more alternative data directly from companies, an avenue that could ultimately account for almost 32% the index, Konny and her colleagues outlined in a February paper. Examples include scraping fuel prices from the GasBuddy website.

Eoin Treacy's view -

The clear conclusion from the introduction new data sets is the Bureau of Labor Statistics has no interest in developing a measure that does anything other than help to depress the inflation gauge.



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April 08 2019

Commentary by Eoin Treacy

Video commentary for April 8th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Continued evidence of slowing global economic activity but the market continues to price in the potential for easing and a successful resolution to the trade war. cyclicals like oil, copper, gold, semiconductors and biotech continue to rally. Mexico rallies, Wall Street somewhat overbought and in the region of its October peak.



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April 08 2019

Commentary by Eoin Treacy

Africa's emerging economies to take the lead in consumer market growth

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

One in five of the world’s consumers will live in Africa by the end of the next decade, and more and more of these people will fall under the category of affluent or middle-class. Growing discretionary incomes will lead to higher demand for high-quality, niche, and foreign-produced goods. Urbanization, such as in Nigeria where eight cities already host populations over 1 million people, promises to increase competition for formal retail centers and the development of efficient production and distribution chains. Rebounding oil prices in Algeria, Angola, Nigeria, and Egypt may contribute to an increased market share for luxury goods. Though, ultra-high net worth individuals(whose net assets exceed $30 million) reside throughout the continent—in South Africa, Egypt, Nigeria, Kenya, Tanzania, Ethiopia, and Morocco. Growth in GDP per capita will lead to greater purchasing power among these classes of the population, and luxury goods retailers should look to the continent for entry points.

Eoin Treacy's view -

Fast moving consumer goods companies need to be where the people are. The countries with the most favourable demographics in the world today are all either in Africa or Asia with India, Indonesia, Nigeria and Ethiopia notable for their high populations. The global birth rate has already peaked which means companies have at best the next thirty years to capitalise on the demographic dividend before the global population starts to contract.



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April 08 2019

Commentary by Eoin Treacy

BJP promises a collateral-free credit & Rs 20k cr seed startup fund in its 2019 manifesto

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

BJP has promised a new scheme to provide collateral-free credit of up to Rs 50 lakh for entrepreneurs in its manifesto for 2019 elections. It said that 50% of the loan amount will be guaranteed towards female entrepreneurs, while 25% will be for male entrepreneurs. 

BJP has also promised to create a seed startup fund of Rs 20,000 crore to back early-stage companies. It's worth noting that Prime Minister Narendra Modi had earlier announced a credit guarantee fund with a corpus of Rs 2,000 crore to provide funding facilities to startups in the country, as part of the Startup India action plan in January 2016. 

The BJP-led government had also announced a Rs 10,000-crore fund of funds managed by the Small Industries Development Bank of India (SIDBI) in 2016. However, according to the Startup India status report, less than 20% of the corpus has been allocated to alternative investment funds as of November 2018, with the total commitment standing at Rs 1,611 crore. The report also noted that around 170 startups have received funding from these investments funds. 

In its manifesto, BJP has envisioned facilitating setting up of at least 50,000 new startups and 500 new incubators and accelerators by 2024. It has also promised to create 100 innovation zones in urban local bodies. 

Eoin Treacy's view -

In every Indian election for the next twenty years there will be tens of millions of people voting for the first time. The one thing young voters need more than anything is support to help secure an income to support their family formation aspirations. Easy access to credit and entrepreneurship in a growth economy are the clearest routes to securing a stable future and they contribute to growth in the wider economy through the multiplier effect of job creation. In addition to these measure India needs infrastructure, particularly ports, roads and better railways.



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April 08 2019

Commentary by Eoin Treacy

How to invest in real estate and pay nothing in capital gains

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

The Tax Cuts and Jobs Act has created a new tax break that dangles the potential of a 0% capital-gains tax on certain investments in economically distressed areas. But you’ll need to wait 10 years to claim it.

These new investments are funds tied to Qualified Opportunity Zones — approximately 8,000 areas around the country, both urban and rural, that local officials have designated as most in need. Qualified investments can be in real estate — commercial property is an early favourite — as well as small manufacturers and service businesses.

Tax breaks on investments in Qualified Opportunity Zone funds or businesses begin kicking in after five and then again after seven years; but the most generous terms — that 0% rate — are for investments held for at least 10 years.

And

If a taxpayer keeps the investment in the QOZ fund for at least 10 years, the appreciated capital gains on the QOZ fund investment becomes tax-free income when the investment is sold or exchanged. The long-deferred capital-gains taxes owed on the investment rolled into the QOZ will still have been paid once Dec. 31, 2026 rolls around, as illustrated in the previous example.

It is only the appreciated value of the QOZ investment that is tax-free, and there is no limit on the amount eligible for this tax break. If the investment in the earlier example was sold for $600,000 after 10 years, no taxes would be owed on $300,000. But deferred capital gains would have been paid on $170,000.

Eoin Treacy's view -

I had heard of this program before but this is the first time I have seen the map of where the qualified opportunity zones are. It represents an interesting way for investors with large potential capital gains liabilities to delay payment while putting the profit to work in a tax efficient manner which could potentially earn enough to absolve the investor of the original capital gains liability.



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April 08 2019

Commentary by Eoin Treacy

Economic Think Tank Says Korea Now in Recession

This article by Choi Hyun-mook and Shin Su-ji for ChosunMedia may be of interest to subscribers. Here is a section:  

The state-run Korea Development Institute on Sunday said Korea is slowly going into recession. The KDI said Sunday that the economy is "in a phase of gradual slowdown" as demand both overseas and at home shrinks.

Until last October, the institute had said Korea's economy was improving.

According to market researcher CEO Score, investment at 855 subsidiaries of Korea's top 60 businesses fell 3.1 percent last year to W98.5 trillion (US$1=W1,139).

Some 35 of them slashed spending last year. Samsung's cutbacks were particularly drastic with 46 subsidiaries reducing investment by 25.7 percent to W28.5 trillion.

Eoin Treacy's view -

South Korea is deeply embedded in the global economy and as a major electronics and vehicle exporter its health is an important barometer for the wider global economy.



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April 05 2019

Commentary by Eoin Treacy

April 05 2019

Commentary by Eoin Treacy

My Diagnosis of Why Capitalism Is Now Not Working Well for the Majority of People

This report by Ray Dalio for Bridgewater is well worth taking the time to read. It highlights in the clearest terms the conditions that have led to the rise of populism and what that means for economic governance going forward. Here is a section:  

Eoin Treacy's view -

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

Capitalism trends towards consolidation as the strong overtake the weak. The list of Autonomies I created seven years ago is smaller now because even the largest companies with the biggest global franchises often merge to become even bigger and to capture even more market share. That’s as true of Dow Chemical as it is of Disney or Saudi Aramco.



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April 05 2019

Commentary by Eoin Treacy

Samsung Profit Drops Most in Four Years as Chip Prices Slump

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

Samsung Electronics Co. reported its worst operating-profit drop in more than four years, buffeted by falling memory-chip prices and slowing smartphone sales.

Operating income fell 60 percent to about 6.2 trillion won ($5.5 billion) in the three months ended March, according to preliminary results released Friday from the Suwon, South Korea-based company. That was the biggest decline since a similar drop in the third quarter of 2014. Analysts surveyed by Bloomberg had expected a 56 percent slump to an average of 6.93 trillion won.

Samsung issued a rare warning last month that its results would be short of estimates, reflecting slower orders from data center owners such as Amazon.com Inc. and handset makers including Apple Inc. That’s pushed down prices for both DRAM and NAND memory and compounded the struggles for the South Korean company as it counts on new devices such as the Galaxy S10 smartphone to help it fight back against increased competition.

“We do expect server DRAM demand to pick up as well as the S10 sales and foldable-phone sales to be better than expected going into the second half.” Daniel Yoo, global strategist at Kiwoom Securities, told Bloomberg TV. “Therefore the earnings pickup should lead the share price going into the future.”

Eoin Treacy's view -

Samsung Electronics trended lower for more than year from its 2017 peak but has perked up over the last three months as the potential for earning growth later in the year is priced in. The company is a bellwether for the electronics industry since it is a major supplier of chips, memory and consumer goods. It’s impressive near 200% advance from early 2016 was a clear sign of improving perception of global growth so it is continued ability to hold the region of the trend mean is an important arbiter of whether the global reflation trade can continue to animate investors’ animal spirits.



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April 05 2019

Commentary by Eoin Treacy

The great Steelmageddon debate

This report by Timna Tanners for BoA Merrill Lynch, dated March 25th which may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

There have been a lot of headlines about the surge in iron-ore prices but the chart tells a more nuanced story. Spot prices at Qingdao port have been ranging below $80 since early 2007 and have bounced from the $60 area since the initial rebound in 2016. The price is now trading back above $80 and a sustained move below the trend mean would be required to question recovery potential.



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April 04 2019

Commentary by Eoin Treacy

April 04 2019

Commentary by Eoin Treacy

Musings from the Oil Patch April 3rd 2019

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on coal to gas power plant conversions:

With an investment of roughly 50% of the value of an operating coalfired power plant, the benefits of converting to natural gas for fuel can make economic sense, based on our estimates.  However, as every technical article we read discussing fuel conversions pointed out, each project is different and requires an extensive analysis before reaching a conclusion.  We will not bore you with the extended lists of issues to be considered.  Natural gas makes for a cleaner environment and operating facility, and also requires less ongoing maintenance.  Gas plants are also less labor intensive, which may become a greater consideration in the future with a tighter labor market and an aging labor force.  

Given the amount of natural gas resources in the world, it would be nice to say that this conversion option is a panacea for the expensive decarbonization efforts currently being proposed.  A global coal-to-gas conversion effort is not likely, even though we suspect many more switches could (may) be justified.  As the economics of the Joliet conversion highlights, the plant moved from a baseload to peaking status, which could be justified by current energy economics.  We doubt all regions have similar economics that facilitate such a move.  The world will continue to remain dependent on an “all of the above” energy slate for ensuring everyone has access to cost-effective electricity.  

Eoin Treacy's view -

Natural gas prices went negative in Texas over the last couple of days, as a result of a surge in supply from the Permian. A couple of years ago there were negative electricity prices in the same region as a result of all the wind power. These market anomalies help to highlight just how prolific production can be. Meanwhile US oil production is in excess of 12 million barrels a day.



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April 04 2019

Commentary by Eoin Treacy

Production of battery grade cobalt blows up First Cobalt's stock

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

“Producing a battery grade cobalt sulfate is one of our most significant accomplishments as the majority of refined cobalt for the electric vehicle market is produced in Asia. With no cobalt sulfate production in North America today, First Cobalt stands to become the first such producer for the American electric vehicle market," Trent Mell, President & CEO said in the press release.

“Electric vehicle demand in North America will keep growing," Henrik Fisker, First Cobalt director and CEO of electric vehicle manufacturer Fisker Inc., said. "Companies such as Fisker continue to introduce new, affordable EV models to the market. Automakers and battery manufacturers have a responsibility to ensure any materials we use in our batteries are sourced in an ethical way.  The restart of the First Cobalt Refinery is an important step towards producing battery materials in America with a clean record from mine to machine.”

Eoin Treacy's view -

Cobalt has bubbly characteristics by the time it peaked last year. One of the oldest adages in the commodity markets is “the cure for high prices is high prices” and the surge in cobalt prices encouraged new production and a drive towards greater consumption efficiency. The peaceful transition of power in Congo, the world’s largest producer, represented an additional bearish sign and contributed to the crash.



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April 04 2019

Commentary by Eoin Treacy

Fastest Electric Car Chargers Waiting for Batteries to Catch Up

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

“The charging capacities of electric vehicles have doubled in the space of a few years,’’ Wolfsburg, Germany-based Volkswagen said in an email. “We expect that fast-charging in public spaces will become the norm.’’

Tesla, which has more than 12,000 chargers globally, is boosting the speed of its own refueling units to cut time at the pump by as much as half. The upgrade promises to add as much as 75 miles of charge in five minutes -- still lagging the ultra-fast models.

The speed at which current EVs can recharge is limited by such factors as the size of their battery, the voltage the pack can accept and the charger’s current.

While it may be years before battery packs able to handle the power surge from ultra-fast chargers go mainstream, some new EVs -- including Hyundai Motor Co.’s Kona Electric and Jaguar Land Rover Automotive Plc’s I-Pace -- already can recharge faster than previous generations.

Volkswagen’s Porsche brand will introduce its electric Taycan sports car later this year. It’s the first vehicle capable of taking full advantage of the fastest chargers, with a larger battery and the ability to operate at a higher voltage.

“The cars are coming,” said Marty Andrews, CEO of Chargefox Pty, which installed ABB’s fastest units at some Australia charging stations. “The carmakers want ultra-rapid chargers because they want this to be future-proof. This is not a six-month plan, it’s a 10-year plan.”

Eoin Treacy's view -

Refueling infrastructure during the era of internal combustion engines was built out by the oil companies and they still own large parts of the filling station market. What was particularly interesting about Royal Dutch Shell’s announcement last month that it aims to become the world’s largest power producer by 2030, is that this dovetails with the proposed increase in demand from electric vehicles. 
That has little to do with the environmental impact of the move and more to do with protecting a significant portion of its business from terminal decline.



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April 04 2019

Commentary by Eoin Treacy

A Belief in Meritocracy Is Not Only False: It's Bad for You

This article by Clifton Mark for medium.com may be of interest to subscribers. Here is a section:

Perhaps more disturbing, simply holding meritocracy as a value seems to promote discriminatory behavior. The management scholar Emilio Castilla at the Massachusetts Institute of Technology and the sociologist Stephen Benard at Indiana University studied attempts to implement meritocratic practices, such as performance-based compensation in private companies. They foundthat, in companies that explicitly held meritocracy as a core value, managers assigned greater rewards to male employees over female employees with identical performance evaluations. This preference disappeared where meritocracy was not explicitly adopted as a value.

This is surprising because impartiality is the core of meritocracy’s moral appeal. The ‘even playing field’ is intended to avoid unfair inequalities based on gender, race and the like. Yet Castilla and Benard found that, ironically, attempts to implement meritocracy leads to just the kinds of inequalities that it aims to eliminate. They suggest that this ‘paradox of meritocracy’ occurs because explicitly adopting meritocracy as a value convinces subjects of their own moral bona fides. Satisfied that they are just, they become less inclined to examine their own behavior for signs of prejudice.

Meritocracy is a false and not very salutary belief. As with any ideology, part of its draw is that it justifies the status quo, explaining why people belong where they happen to be in the social order. It is a well-established psychological principle that people prefer to believe that the world is just.

However, in addition to legitimation, meritocracy also offers flattery. Where success is determined by merit, each win can be viewed as a reflection of one’s own virtue and worth. Meritocracy is the most self-congratulatory of distribution principles. Its ideological alchemy transmutes property into praise, material inequality into personal superiority. It licenses the rich and powerful to view themselves as productive geniuses. While this effect is most spectacular among the elite, nearly any accomplishment can be viewed through meritocratic eyes. Graduating from high school, artistic success or simply having money can all be seen as evidence of talent and effort. By the same token, worldly failures become signs of personal defects, providing a reason why those at the bottom of the social hierarchy deserve to remain there.

Eoin Treacy's view -

I’m a believer in hard work, commitment and ingenuity but I agree it would be hubristic to discount luck or even serendipity in some of the events that have led to personal success. Nevertheless, to discount meritocracy because it does not provide an egalitarian outcome would be folly. Attempting an equal sharing of rewards is what communist systems do and we know how that works in terms of production, personal creativity and corruption.

Meritocracy might not be perfect but it is certainly better than believing that no matter what you do,you will do nothing to better your circumstances. That would be truly disastrous but it is the risk faced by the political establishment because of the populism which has gestated from the unequal returns created by quantitative easing.



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April 03 2019

Commentary by Eoin Treacy

Video commentary for April 3rd 2019

Eoin Treacy's view -

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

Some of the topics discussed include: commodities rally, supported by a resurgent Chinese market, platinum cheap relative to palladium, bitcoin breaking out, Wall Street pauses in the region of a previous peak, peripheral Europe turning to outperformance, Australian firm.  



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April 03 2019

Commentary by Eoin Treacy

It Takes Just 3 Stickers to Make a Tesla Drive Into Oncoming Traffic

This article by Ryan Whitwam for ExtremeTech may be of interest to subscribers. Here is a section:

Tesla’s Autopilot is a level two system that’s leaning into level three, but it might not have the necessary hardware to make it work. These vehicles use cameras, radar, and ultrasonic sensors to detect lanes and nearby vehicles. The Keen Security researchers reverse-engineered the software Tesla uses to see how easy it would be to fool those sensors. They didn’t need to make any changes to the car’s software — this is not a hack. They simply used three small reflective stickers on the roadway to trick Autopilot into thinking the lane had merged when it hadn’t.

According to the report, Tesla uses a feature called “detect_and_track” to identify lane markers. It uses several factors to avoid incorrect decisions like road shoulder location, lane history, and the distance to various objects. However, the reflective stickers appear to the car like lane markers, directing it to merge. These stickers are almost invisible to drivers, and it would be trivially easy to place them on roadways.

Tesla’s Autopilot system does include emergency braking. So, it’s possible the car could stop itself in the event it swerved into oncoming traffic. However, there’s no guarantee the other cars would stop. Tesla says it is evaluating the report but notes that drivers are supposed to keep their hands on the wheel while Autopilot is engaged.

Eoin Treacy's view -

Here is a link to the original research conducted by Keen Security. Teaching a computer to see, in the way we understand that statement as humans, is an enormously difficult task which is why they route to success has been through teaching computers to react to cues. By fiddling with the cues, the computer can be fooled. That suggests a major rewrite of code for autonomous systems but if the clear fix is to simply tell the computer to take more notice of its environment and the direction of the cars travelling on its periphery.



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April 03 2019

Commentary by Eoin Treacy

CBOE Trashing Bitcoin Futures Signals Crypto Market Bottom

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

Speaking on the “Fast Money” panel, Kelly explained that a unique mixture of factors including shifting fundamentals make it likely that bitcoin is poised to break out of its prolonged bear phase which has lasted more than a year now.

In his words: “I think we could look back on this and say that was the bottom…There’s a couple of things that have gone on since the low in December. We’ve seen the underlying fundamentals improve…I think retail is exhausted. You’re starting to see sellers being exhausted and institutions come in. Fidelity is a catalyst coming up in Q2. I think with all those things combined, we might look back and say ‘You know what, in the $3000’s is a great place to buy bitcoin.’”

Eoin Treacy's view -

The CBoE is removing its bitcoin contract from trading. The introduction of the futures contract introduced leveraged to what was previously an unleveraged market. The price rallied in anticipation of the introduction, but futures were used as a way of hedging exposure and most of the positions taken out were on the short side, which contributed to the crash in classic 1987 crash fashion.



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April 03 2019

Commentary by Eoin Treacy

Palladium Sags as Prices Gyrate on Auto Demand Concern

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

Palladium headed for the first decline in four sessions as U.S. President Donald Trump’s threat to shut down the border with Mexico added to concerns over the outlook for the auto industry, the biggest consumer of the metal.

Analysts said a border closing would rapidly ripple through a U.S. economy in which supply chains are closely integrated with Mexico, especially hitting the carmakers. Volatility in palladium, used in auto catalysts to curb pollution, has surged in the past week as investors assess slowing vehicle sales against the outlook for supply shortfalls that drove prices to record highs last month.

Eoin Treacy's view -

Something that does not get discussion any longer is the fact the platinum is primarily used in diesel catalytic converters but platinum and palladium are equally useful in petrol cars. The question of whether to use one over the other is down to the cost of retooling and the relative abundance of palladium over platinum. This was subject that got some coverage back in the early 2000s but I find it peculiar that is not a topic today.

Here is a section from a report by Johnson Matthey explaining the difference:

The role of platinum in catalytic converters is to oxidise carbon monoxide (CO) and hydrocarbons. Platinum is particularly effective at this under oxygen-excessive conditions, so is often the metal of choice for diesel applications. For petrol-powered vehicles (where there is a balance between reductants and oxidants in the exhaust gas), platinum and palladium can be equally effective, and so the choice is often made on the basis of relative cost. The three-way catalyst used for petrol vehicles must also be able to reduce NOx to nitrogen as well as oxidise CO and hydrocarbons – that is why rhodium is generally used in addition to platinum or palladium.



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April 02 2019

Commentary by Eoin Treacy

Video Commentary for April 2nd 2019

Eoin Treacy's view -

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

Some of the topics discussed include: bitcoin breaks out potentially in sympathy with 5G or the continued recovery in mining stocks, gold stead, silver unwinds intraday decline, oil firm, Wall Street steady, China holds its advance, bonds steady.



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April 02 2019

Commentary by Eoin Treacy

Growing the Pie

Thanks to a subscriber for Howard Marks’ most recent memo. Here is a section:

About 50 years ago, an older friend described for me what he felt made America great.

When the worker in Britain sees the boss drive out of the factory in his Rolls Royce, he says “I’d like to put a bomb under that car” But when the worker in the U.S. sees the boss drive out of the factory in his Cadillac, he says “Someday I’ll own a car like that “.

Today, too few Americans feel they might own that Cadillac. Taken to the logical extreme, that has the potential to bring the American miracle to an end. Thus, business should do all it can to arrest the trend toward stagnant and unequal incomes…not just to be fair or generous, but to assure perpetuation of the system that got us here.

Capitalism is the most dependable route to prosperity. And it has to be responsible capitalism. The solution can’t lie in turning away the Amazons of the world, imposing extra taxes on Cadillacs or otherwise shrinking the pie.

Eoin Treacy's view -

Here here!. However, it is highly unlikely companies are going to accept reduced profit growth and a shareholder backlash unless they have no other choice. That is just not how markets function.



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April 02 2019

Commentary by Eoin Treacy

US and India versus the World

Thanks to a subscriber for this article by Joe Zidle for Blackstone which may be of interest. Here is a section:

Eoin Treacy's view -

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

India has both the institutional framework and demographics to support a much larger market economy. What it needs is deregulation, anti-corruption measures and better infrastructure. The challenge, for whatever party wins the election, will be how to employ the millions of new workers entering the economy every year for the next couple of decades. The urgency of that issue is likely to spur rapid economic development.



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April 02 2019

Commentary by Eoin Treacy

The Biggest Saudi Oil Field Is Fading Faster Than Anyone Guessed

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

The new maximum production rate for Ghawar means that the Permian in the U.S., which pumped 4.1 million barrels a day last month according to government data, is already the largest oil production basin. The comparison isn’t exact -- the Saudi field is a conventional reservoir, while the Permian is an unconventional shale formation -- yet it shows the shifting balance of power in the market.

Ghawar is so important for Saudi Arabia because the field has "accounted for more than half of the total cumulative crude oil production in the kingdom," according to the bond prospectus. The country has been pumping since the discovery of the Dammam No. 7 well in 1938.

On top of Ghawar, which was found in 1948 by an American geologist, Saudi Arabia relies heavily on two other mega-fields: Khurais, which was discovered in 1957, and can pump 1.45 million barrels a day, and Safaniyah, found in 1951 and still today the world’s largest offshore oil field with capacity of 1.3 million. In total, Aramco operates 101 oilfields.

Eoin Treacy's view -

A lot of what Saudi Arabia is producing today is heavy oil and coupled with Venezuelan production that has boosted refining capacity for high sulphur blends. That transition is reflective of the changing production profile of the Saudi Arabia’s fields even as it continues to sustain the ability to produce up to 12 million barrels a day.



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April 02 2019

Commentary by Eoin Treacy

Taipei blasts 'provocative' Chinese fighter jet incursion across Taiwan Strait line

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

However, Glaser said that the Chinese “haven’t done so for at least a decade, likely longer.”

“I’ve been told that Chinese jets approach the midline, but then veer off,” she said.

The flight came just after Taiwan President Tsai Ing-wen capped off a tour of several Pacific nations with a visit last week to Hawaii, where she said she had formally submitted new requests to the United States for F-16B fighter jets.

The U.S. has no formal ties with Taiwan but is bound by law to help it defend itself and is the island’s main source of arms. The Pentagon says Washington has sold Taipei more than $15 billion in weaponry since 2010.

China is suspicious of Tsai and her pro-independence Democratic Progressive Party and any push for the island’s formal independence.

Chinese President Xi Jinping said in January that Beijing reserves the right to use force to bring Taiwan under its control, but would strive to achieve peaceful “reunification.”

Beijing has called Taiwan “the most important and sensitive issue in China-U.S. relations” and has bolstered its military presence near the island, sailing its sole operating aircraft carrier through the Taiwan Strait in January and March of last year and holding large-scale “encirclement” exercises and bomber training throughout 2018.

Eoin Treacy's view -

Anything that promotes the notion of Taiwan declaring statehood is being met with progressively more strident efforts by China to stamp it out. Xi Jinping has succeeded in having his doctrine written into the constitution and he is economic plan is to make China the preeminent global economy. However, the crown jewel for any Communist Party leader, something that would ensure he is remembered forever in the annals of history would be to reacquire Taiwan.



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April 01 2019

Commentary by Eoin Treacy

Video commentary for April 1st 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Europe rebounds with China. Wall Street firm, Sovereign bonds trim their rally, Pound firms on soft Brexit speculation, oil firm, resources shares turning to outperformance, Philadelphia semiconductors pressuring its highs. 



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April 01 2019

Commentary by Eoin Treacy

A contrarian view on Europe

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

Eoin Treacy's view -

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

Here is a quote from the foreword by Mario Draghi in the ECB’s annual report: “Substantial monetary policy stimulus remains essential to ensure the continued build-up of domestic price pressures over the medium term,” There is virtually no prospect of the ECB raising rates and in fact the balance of probabilities is pointed towards another round of quantitative easing. The main question is how long this is going to take to action.



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April 01 2019

Commentary by Eoin Treacy

Ignore the Brexit scare stories - they have no basis in sound economics

Thanks to a subscriber for this article by Ashoka Mody for The Independent. Here is a section:

As Krugman wrote in a brilliant 1995 essay, “People believe certain stories because everyone important tells them, and people tell those stories because everyone important believes them. Indeed, when a conventional wisdom is at its fullest strength, one’s agreement with that conventional wisdom becomes almost a litmus test of one’s suitability to be taken seriously.”

British leaders must pull themselves out from the spell of storytelling and focus on their urgent responsibilities. At home, they must heed the real message of the Brexit vote: citizens being left behind by globalisation are clamouring for more protection. Prime minister Theresa May seemed briefly to recognise the primacy of that task. But she was sucked quickly into the Brexit negotiations vortex.

On Brexit, British citizens and their leaders must decide what kind of nation they want to live in. The debate must pit the value of sovereignty against the risks to global peace. Such a debate is of the utmost importance for Europe, with its history of horrific wars, especially now when ugly forms of nationalism are gaining alarming numbers of adherents. Unfortunately, instead of dealing head-on with this monumentally important challenge, which must guide the Brexit decision, global leaders are peddling frightening economic scenarios.

The Remain or Leave decision is an opportunity for Britain’s citizens to express and reaffirm their true values. Failure to protect the most vulnerable at home and redirect the Brexit debate to a higher purpose will leave underlying tensions simmering.

Eoin Treacy's view -

The European answer to sticky questions is to just stop talking about them. Europe has adopted multiculturalism and there is a clear racist undercurrent in the “respect” for other cultures which precludes people from active participation in society but that is not talked about. In the same vein, the ambition of creating a European federal union is politically untenable and so there is no champion for the idea. However, every action taken by the EU in its response to the credit crisis points towards the long-standing aim of a federal union.



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April 01 2019

Commentary by Eoin Treacy

Flooding prompts criticism of way Missouri River dams run

This article from ky3.com may be of interest to subscribers. Here is a section:

"I was told point-blank, 'Flood control is not our top priority. It is not. Period.' They were very firm on that point," Hawley said. "I said, 'You've got to be kidding me.'"

Corps officials say they work to balance all the priorities Congress approved when operating the dams, but no single priority outweighs all the others. Their operating model tries to maximize the benefit to several priorities when possible.

Hawley said Congress should consider "serious reform," such as deciding if the Corps should be taken out of the Department of Defense and placed under direction of another agency, such as the Department of Transportation or the Department of the Interior.

The Corps manages the Missouri River's system of dams and locks and decides when and how much water is released from reservoirs into the river. The severe flooding this month in Nebraska, Kansas, Iowa and Missouri has renewed criticism of the Corps' management of the river.

Officials estimate that the flooding caused more than $1 billion of damage to farms in Nebraska and Iowa, destroying stored crops and killing livestock. And the damage total will grow as floodwaters recede and other states assess conditions.

Eoin Treacy's view -

Snow melt flowing directly into rivers because the ground was still mostly flooded, coupled with rain helped exacerbate the flooding. However, it is also worth considering that the predominance of the green movement is setting priorities for river management is an additional cause of the extent of flooding.



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March 29 2019

Commentary by Eoin Treacy

March 29 2019

Commentary by Eoin Treacy

Chinese Stocks Wrap Up Best Quarter Since 2014 With a Huge Rally

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

Friday’s surge in Chinese stocks rounds up a winning quarter for the country’s investors. China’s equities have outrun every other national market in the world in the three-month period. The CSI 300 Index’s 29 percent rally is its best since the end of 2014, when the nation’s equity bubble was forming. Apart from a Taiwanese chipmaker, a Brazilian steel producer and Latin America’s largest utility, all the top 30 performers on MSCI Inc.’s emerging-market benchmark are Chinese companies.

Managing a momentum-driven investor base, where turnover is in the hands of almost 150 million retail traders, has always been a challenge for the government. China’s experienced two massive bubbles in the past decade, with a tight-grip approach to tame the rally backfiring in 2015, drawing the ire of foreign investors. Analysts predict Beijing will be more successful this time in engineering a slow bull market.

“It’s a critical time for the market,” said Liao Zongkui, an analyst at Lianxun Securities Co. “Investors are keeping a close eye on earnings from heavyweight companies. A good results season will be a big confidence boost, and will ensure the stock-market rally can continue.”

Eoin Treacy's view -

Veteran subscribers will be accustomed to our long-time contention that monetary policy beats most other factors most of the time. That’s particularly true on Wall Street and is an even more important factor in the age of extraordinary monetary policy. In China, the state dictates the fate of the market so it is clear that bull markets are state sponsored.



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March 29 2019

Commentary by Eoin Treacy

Erdogan's Real Test Comes Monday When Election Calendar Clears

This article by Cagan Koc and Selcan Hacaoglu for Bloomberg may be of interest to subscribers. Here is a section:

“We’re going to implement structural reforms that will make our economy stronger against such attacks with great speed following the election,” Erdogan said.

The question is if investors will stick around long enough to see if he delivers this time. With Turkey succumbing to its first recession in a decade and unemployment at the highest in nine years, Erdogan will have an uphill battle ahead. It will be far harder to make headway on such key challenges as overhauling the labor market now than during a period when economic growth of 5 percent or more was the norm for Turkey, according to Naz Masraff, director for Europe at Eurasia Group.

Elections Loom
“It’s almost the least likely period to do structural reforms after the elections,” Masraff said. “If Turkey hasn’t managed to do them when growth was higher and the country was doing economically better back in 2011, 2012, it’s really difficult to do it in a downturn.”

Eoin Treacy's view -

Turkey has a great deal of US Dollar denominated debt and with the Lira under pressure that is only going to be a progressively more burdensome obstacle to recovery. While extraordinary measures are underway to support the currency ahead of this weekend’s municipal elections, the broader question is what measures are going to be put in place to repair the economic fabric after the election.



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March 29 2019

Commentary by Eoin Treacy

Zombie Crypto Stocks Resurface as Bitcoin Extends Recent Gains

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

Crypto-tied stocks, the former market darlings that quickly languished when the Bitcoin bubble burst, are showing signs of reawakening.

Small firms linked to blockchain and cryptocurrencies are following Bitcoin higher as it extended gains for a second month. The top digital token rose for the fourth consecutive session on Friday, reaching its highest level since late December. The price broke above its 100-day moving average for the first time since August 2018 this week, extending this quarter’s gain to 11 percent after tumbling 45 percent in the previous quarter.

Shares of Marathon Patent Group Inc. and Social Reality Inc. each rose about 6 percent in early trading, while Grayscale Bitcoin Trust BTC and Riot Blockchain Inc. gained about 4 percent.

Other tokens such as Ether and Litecoin also rose on Friday, helping push the Bloomberg Galaxy Crypto Index up as much as 2.1 percent. Despite recent gains, the gauge remains down more than 80 percent from its highs in early 2018.

Eoin Treacy's view -

Most assets get interesting again after an 80-90% decline and so it is with Bitcoin. The price has held a progression higher reaction lows since December and closed above the psychological $4000 level today for the first time since November. As long as the sequence of higher lows is intact, we can conclude a low of medium-term significance has been found.



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March 28 2019

Commentary by Eoin Treacy

Video Commentary for March 28th 2019

Eoin Treacy's view -

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

Some of the topics covered include: predicative power of the yield curve spread, bonds ease, stock steady, Eurozone weak, Brexit drama is an indictment of the political process, palladium peaks, precious metals weak, oil firms from intraday lows, India steady, China consolidating.



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March 28 2019

Commentary by Eoin Treacy

Brexit Stalemate Deepens as U.K. Fails to Agree on a Way Forward

This article by Robert Hutton, Alex Morales and Tim Ross for Bloomberg may be of interest to subscribers. Here is a section:

The U.K. has two weeks to go to the EU with a plan for its next steps or face the prospect of leaving without a deal, something Parliament also opposes. The likeliest outcome is that May will ask for a longer delay to Brexit, but she will have to convince European leaders that Britain is on a path to solving its apparently intractable problems.

Hours after May promised her Conservative members of Parliament on Wednesday that she’d step down if they back her Brexit deal, she still looked short of having the numbers needed to win. It’s already been overwhelmingly defeated twice.

Meanwhile, votes in the House of Commons intended to break the deadlock by finding a consensus also saw every proposal rejected. The pound fell.

May must decide on Thursday if she is going to bring her deal back for another vote and meet the EU’s Friday deadline for getting it passed. The government declared that it was still the only option in play. Yet it too appears to be doomed despite the capitulation of some Brexit hard liners.

Liz Truss, a member of Theresa May’s cabinet, told ITV television that Wednesday’s votes show there are no other “serious options” than the one already negotiated with the EU, and that has “focused minds.”

“There has been a significant shift now of people recognizing the reality of the options,” she said. “What we have seen today is Parliament does not have an option apart from the prime minister’s deal that is really a viable option for the future.”

Eoin Treacy's view -

This chart from Bloomberg highlighting the range of options puts me in mind of Walter Scott’s quote from Marmion “Oh what a tangled web we weave when first we practice to deceive”



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March 28 2019

Commentary by Eoin Treacy

Indian anti-satellite missile test meets with success

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

Anti-satellite weapons aren't new. Systems capable of destroying orbital spacecraft have been around since the 1960s and include everything from specialized anti-satellite satellites packed with explosives, to repurposed shipborne anti-missile missile systems that can take out space targets without any special modifications.

However, for various technological and diplomatic reasons, very few spacefaring nations have actually developed anti-satellite weapons. Today's test makes India the fourth to do so after the United States, Russia, and China.

The Indian government says that the test was conducted by India's Defence Research and Development Organisation (DRDO) and was fully successful, demonstrating the country's ability to knock out a satellite with a high degree of precision using indigenous technology. The missile was a DRDO Ballistic Missile Defence interceptor developed as part of India's general missile defence program. It operated as expected, but carried no explosive warhead. Instead, it was what is known as a "kinetic kill," where the hypersonic velocity of the interceptor is enough to destroy the target.

Eoin Treacy's view -

The proximity of an Indian general election is a good explanation for the timing of this demonstration as well as the sorties over the Pakistani border. By pandering to the Hindu nationalist wing of the BJP, Modi needs to appear strong and is eager to demonstrate India’s technological prowess as a way of doing that.



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March 28 2019

Commentary by Eoin Treacy

Have Yield Curve Inversions Become More Likely?

Thanks to a subscriber for this note by Renee Haltom, Elaine Wissuchek, and Alexander L. Wolman for the Federal Reserve Bank of Richmond may be of interest to subscribers. Here is a section.

The flip side of the previous point is that if the term premium narrows, yield curve inversions will become more likely even if there is no increased risk of recession. And, indeed, there is reason to believe the term premium has fallen. Recently, the ACM model’s estimates of the term premium have moved persistently lower. The average values since 2006 and 2012 are 0.77 and 0.20, respectively. (See Figure 2).3

Two authors of this Economic Brief (Wissuchek and Wolman) recently evaluated how changes in the term premium affect the likely frequency of yield curve inversions.4 In principle, one could do this by conducting a statistical analysis of historical data to assess the relationship between the level of the term premium and the frequency of yield curve inversions. However, the number of inversions is too small to produce a reliable estimate using this method. Instead, Wissuchek and Wolman’s exercise involved simulating data for the short-term interest rate and then measuring how the frequency of yield curve inversions in the simulated data varies with the behavior of the term premium.

To build intuition for this simulation exercise, Figure 3 illustrates the qualitative relationship that would arise between the frequency of yield curve inversions and the level of the term premium if the term premium were fixed at different levels. For very high values of the term premium, the yield curve would never be inverted because the expected decrease in short-term rates would never be large enough to outweigh the term premium. Conversely, for very low (negative) values of the term premium, the yield curve would always be inverted because the expected increase in short-term rates would never be large enough to outweigh the term premium. And, if the term premium were fixed at zero, then over long periods the yield curve would be inverted roughly half the time. In reality, the term premium is not constant, so the simulation involves looking at how the frequency of yield curve inversion varies as the distribution of the term premium changes.

Eoin Treacy's view -

One of the most predictable outcomes of an inverted yield curve is the discussion about whether it will be a predicative tool on this occasion because so many mitigating factors have arisen since the last inversion to suggest this time is different.

What I find particularly interesting on this occasion is other Fed economists are coming out with alternative measures which support the view we are looking at an impending recession even while they contend the yield curve spread is an imperfect measure.



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March 28 2019

Commentary by Eoin Treacy

Lynas looks to WA, not Wesfarmers, for its Malay solution

This article by Hamish Hastie, Colin Kruger and Darren Gray for the Sydney Morning Herald may be of interest to subscribers. Here is a section:

"These discussions are preliminary in nature and no formal submission for any change has been presented to the EPA," a spokeswoman for the agency said.

The discussions could help solve the problems in Malaysia which threaten the company's future, and made it vulnerable to what analysts and investors described as a low-ball bid from Wesfarmers on Tuesday.

Lynas faces an uncertain future after the Malaysian  government imposed strict new conditions on its billion-dollar Malaysian operation which could force it to shut down in
September.

This includes the permanent removal of a residue with naturally occurring radiation, Water Leached Purification Residue (WLP), from Malaysia.

According to institutional investors, Lynas discussed plans last month to relocate some of its rare earths processing  back to Western Australia. All processing is currently handled
in Malaysia.

Lynas chief executive Amanda Lacaze denied there was any plan to extract and retain the controversial WLP residue in WA - the state where it is mined - but did confirm it planned to expand its processing operations outside of Malaysia.

Eoin Treacy's view -

A great deal of capital was invested in new rare earth metal projects after the price spike caused by China limiting exports in 2010. Lynas is the only one of those that made it to production and refining of heavy rare earth metals.



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March 27 2019

Commentary by Eoin Treacy

Video Commentary for March 27th 2019

March 27 2019

Commentary by Eoin Treacy

Aramco to Buy $69 Billion Sabic Stake in Record Mideast Deal

This article by Matthew Martin, Dinesh Nair, and Archana Narayanan for Bloomberg may be of interest to subscribers. Here it is in full:

Saudi Aramco, the world’s biggest oil producer, will buy a majority stake in local chemical giant Sabic from the kingdom’s sovereign wealth fund for $69.1 billion.

The Middle East’s biggest deal will transfer a big slug of cash into the Public Investment Fund, helping Crown Prince Mohammed bin Salman finance his economic agenda. It also weights Aramco away from its core oil production business, pumping 10 percent of the world’s crude, and more toward the production of fuels and chemicals.

“This transaction is a major step in accelerating Saudi Aramco’s transformative downstream growth strategy of integrated refining and petrochemicals," Amin Nasser, chief executive officer of Aramco, said in the statement.

The deal, first mooted last year, values the Public Investment Fund’s 70 percent stake at 123.4 riyals per share according to a statement. The remaining shares, traded on the Saudi stock market, aren’t part of the transaction.

Eoin Treacy's view -

This merger is a clear signal of Saudi Arabia’s long-term intentions. They know as well as any of us that the USA is going to become a competitor for established energy markets which means they have to produce more value-added products in order to compete with higher cost producers. That is particularly bad news for Canada and Brazil where supply bottlenecks, grades and deep water all represent challenges that are only likely to be overcome by higher prices.



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March 27 2019

Commentary by Eoin Treacy

Frontier Markets

Thanks to a subscriber for Meketa Group’s end of year report which contains some educative data I believe will be of interest to the Collective. Here is a section:

The opportunities that an investment in Frontier Markets offers can be summarized as a growth story at a good price. To get a sense of how the growth expectations within frontier markets compare with growth across the world, we examine the World Bank’s growth expectations for different countries and groups.

The chart above highlights that all but one of the Frontier Market countries have higher growth expectations than the U.S. and other advanced economies. We can also see that many are higher than the world average, which indicates that these economies tend to be a positive influence on the global average.

Frontier Market equity returns since inception have been less efficient when compared to U.S. equity market returns, but have still seen periods of very strong growth.

Closely tied to the growth opportunity in Frontier Markets are the demographics, which have been shown to be a driving factor in GDP growth across many studies. 2 Much of the growth story in these markets is driven by their relative youth.

Eoin Treacy's view -

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

Economic growth is important, particularly for emerging and frontier markets because of the base effect. It is simply easier to go from 50₵ a day to a $1 a day than it is to go from $10 - $20. With small markets liquidity is an issue and therefore one has to have some long-term perspective when participating and also to buy at the right time. One is reminded of the Baron de Rothschild quote “buy when there is blood in the street, even if it is your own”



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March 27 2019

Commentary by Eoin Treacy

Palladium hit by 'Barrage of Selling'

This note by Justina Vasquez for Bloomberg may be of interest to subscribers. Here it is in full:

The rally in the U.S. dollar triggered an investor exodus from precious metals on Wednesday. Spot palladium led declines as mounting concerns over global growth threaten the outlook for demand for the commodity used mostly in auto catalysts. The slump accelerated as the price of the least-liquid asset among its peers broke below the $1,500-an-ounce level, triggering “a barrage of selling,” Miguel Perez-Santalla, a sales and marketing manager at refiner Heraeus Metals New York LLC, said.

Eoin Treacy's view -

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March 26 2019

Commentary by Eoin Treacy

Video Commentary for March 26th 2019

March 26 2019

Commentary by Eoin Treacy

Gold: Ringing the bell

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

Eoin Treacy's view -

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

The clearest rationale for a positive view on gold is when we have evidence of negative real interest rates. That is becoming an increasingly likely scenario since global central banks are desperate to stoke inflation and are willing to allow their economies to run hot in order to achieve a self-sustaining cycle. That further supports the argument we are at the top of the interest rate cycle.



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March 26 2019

Commentary by Eoin Treacy

The debate over Modern Monetary Theory

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

Eoin Treacy's view -

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

The discussion about Modern Monetary Theory is inconvenient because it brings into the public eye what governments and central banks have been doing all along. It is very convenient to sport a façade of adherence to the ideal of balanced budgets, spending within your means, low inflation and preservation of purchasing power. However, if we look at the history of government these ideals are rarely realised. Meanwhile, deficit spending, lavish social programs and rising debt ratios are the rule rather than the exception.



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March 26 2019

Commentary by Eoin Treacy

Apple goes all-in on services, with new video, games and news subscription packages

This article by David Neald for NewAtlas may be of interest to subscribers. Here is a section:

Last and definitely not least, Apple unveiled a serious move into video content production, called Apple TV Plus. Dedicated to "the best stories ever told," the service will feature high-profile content from a variety of big names – Steven Spielberg, Jennifer Aniston, Reese Witherspoon and Jason Momoa were some of the stars who appeared on stage.

Again, we don't know how much it's going to cost, but it will involve a monthly fee and it will work across all Apple devices. It's coming to more than 100 countries later this year, and will use downloads rather than streaming. You can think of it as Apple trying to be HBO as well as Apple.

Apple is adding some improvements to the existing TV app as well as launching its own programs, including iTunes movie integration and easier navigation, and it's introducing a separate service called Apple TV Channels at the same time.

The idea is you only pay for the channels you need, and access them all through the one TV app on your Apple devices. HBO, Showtime, and Starz are three of the channels that are going to be available, and live sports and movies get pulled in too (assuming you've subscribed to the necessary channels).

Eoin Treacy's view -

Apple has come up with something to do with its cash and it is going to have to outbid Netflix in order to get the best shows. In the near term it is going to be selling those shows to a smaller audience of Apple product users than the vast number of Android, Microsoft and smart tv users that will be outside its ecosystem. 



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March 25 2019

Commentary by Eoin Treacy

Video commentary for March 25th 2019

Eoin Treacy's view -

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

Some of the topics covered include: yield curve analysis and discussion of what an inverted yield curve represents, Treasury yields continue to contract, gold steady, oil pauses, Wall Street quiet, banks weak, utilities breaking out, Europe and Japan likely to steady, QE4 a real possibility.  



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March 25 2019

Commentary by Eoin Treacy

Beware Misreading Inverting Yield Curve

This article by Mohamed A. El-Erian for Bloomberg may be of interest to subscribers. Here is a section:

“The extraordinary abrupt end to central bank hiking cycle + Fed paranoia of credit event is uber-bullish credit & uber-bearish volatility,” strategists including Michael Hartnett wrote.

While negative yields on paper suggest that investors lose money just by holding the obligations, bond buyers could also be looking at price gains if growth stalls and inflation stays low. But along the way, risk assets may be entering the danger zone.

“We’ve never seen monetary easing so long, so broad, so big,” said Brian Singer, head of dynamic allocation strategies at William Blair, a Chicago-based fund manager that oversees $70 billion overall. “What’s happened after every significant period of accommodation is a reckoning. This time the bubble is lower-rated credit and illiquid private assets.”

Eoin Treacy's view -

There is always an argument about the efficacy of an inverted yield curve as a lead indicator. It was exactly the same back in 2005 when the yield curve first became inverted. There were calls that this occasion is different because of the bull market in commodities, the rise of China and the strength of the housing market all of which proved to be fallacious.



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March 25 2019

Commentary by Eoin Treacy

Lyft Leading Wave of Startups Debuting With Giant Losses

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

“Many of their business models have not been tested fully,” Ilya Strebulaev, a Stanford University business professor who studies late-stage startups, said of the large private companies. “I would not be surprised if many of these companies would not be as successful as investors expect them to be.”

Of the five companies with the largest losses before an IPO, four of them—discount marketplace Groupon Inc., biotech Moderna Inc., social-media company Snap Inc. and communications company Vonage Corp. —have performed poorly on the public markets. A fifth, Viasystems Group Inc., went private years ago at a fraction of its IPO value.

For investors betting on the coming IPOs, the main appeal is rapid growth, which Lyft has made a centerpiece of its push to Wall Street. Its revenue doubled last year to $2.2 billion in what would be the third largest annual revenue of a U.S. startup pre-IPO, behind Facebook Inc. and Google, according to Capital IQ. Both Facebook and Google were profitable before their IPOs.

Lyft hasn’t publicly outlined when it hopes to turn a profit, but company executives and bankers point out that spending on high-cost items like marketing is falling as a percentage of revenue. It is also pushing to reduce insurance costs.

Eoin Treacy's view -

There is nothing that signals late cycle activity quite like a slew of IPOs from companies that have little prospect of turning a profit.



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March 25 2019

Commentary by Eoin Treacy

Investment Strategy: 'Trading Sardines?'

Thanks to a subscriber for this note from Jeffrey Saut who I had the pleasure of meeting at the American Association of Professional Technical Analysts's (AAPTA) conference on Friday. Here is a section:

"When investors hear yield curve inversion, they automatically think 'recession.' That’s because every recession since 1962 has been preceded by an inversion. But, not every inversion has been followed by a recession, so keep that in mind."

Myth number two is that we are into the late part of the business cycle. If that is true why are the late cycle stocks acting so poorly? I have argued that the economic downturn was so severe, and the recovery so muted, that what we have done is elongate the mid-cycle. This implies there is much more time until the mid-cycle ends and the late cycle begins.

Myth number three has it that earnings are going to fall off a cliff. I do not believe it. Certainly earnings momentum has slowed, but earnings continue to look pretty good to me. And, if the earnings estimates for the S&P 500 are anywhere near the mark, the SPX is trading at 16.3x this year’s earnings and 15.5x the 2020 estimate. I think with 2Q19 earnings myth number three will evaporate.

As for Friday’s stock market action, readers of these missives should have found last week’s action as no surprise. I have talked about the negative “polarity flip” that was due to arrive last week for a few weeks. How deep the pullback/pause will be is unknowable, but I have stated I do not think it will be much. It was not only the economic data, and PMIs, that sacked stocks, but as I have repeatedly stated it was also the Mueller Report. The result left the senior index lower by ~460 points and the S&P 500 (SPX/2800.71) resting at the lower end of my support zone of 2800 – 2830.

Eoin Treacy's view -

As a brief aside. I am now the membership chair for the organisation, which is a member of IFTA. If anyone would like to pursue membership, has at least seven years of professional experience using technical analysis, and enjoys a collegiate environment for sharing ideas and methodolgy please reach out. 

The focus of Jeffrey’s Saut’s talk at the conference was to reiterate his view we are in a secular bull market. I felt a lot more comfortable when I went to conferences and was the only person making that call. It is not a majority opinion today but there are definitely more people espousing it.



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March 22 2019

Commentary by Eoin Treacy

March 22 2019

Commentary by Eoin Treacy

Musings from the Oil Patch March 21st 2019

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

Eoin Treacy's view -

It stands to reason that by excluding a sector for reasons other than what might be considered strictly financial it increases the potential for that sector to outperform later. By flushing out holders selling for what they perceive as ethical reasons, it returns the price to a value stage where the potential for future outperformance is bolstered.



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March 22 2019

Commentary by Eoin Treacy

What Is the Future of Ecommerce? 10 Insights on the Evolution of an Industry

This article by Aaron Orendorff for Shopify may be of interest to subscribers. Here is a section:

For all its enduring hype — physical versus digital, offline versus on — the old war is over. In fact, it’s always been a lie. Choice, not location, is commerce’s greatest opportunity and its most-looming threat.

In defense of retail’s “apocalypse,” brick-and-mortar losses are mounting; the four-year bankruptcy count now sits at 57 once-landmark chains. Manufacturing market share and in-store sales for consumer packaged goodsare flat or declining. Born-online “microbrands” have devoured the lion’s share of growth. And ecommerce’s gains continue to trounce retail as a whole.

Here’s the uncomfortable twist: brick-and-mortar still dominates online sales by over $20 trillion. And the gap will widen. After a quarter century, ecommerce’s spread is slowing, 80% of 2018’s gains belonged to Amazon, and (in the U.S.) the top five online retailers own 64.7% of sales:

Eoin Treacy's view -

I found this report to be very interesting because it comes from a company whose business model is to supply small and start up sellers with an ecommerce platform and provides a partial counterweight to Amazon’s more than 50% share of the online retail market in the USA.



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March 22 2019

Commentary by Eoin Treacy

Morgan Creek Capital Management

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

Eoin Treacy's view -

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

I spent today at the American Association of Professional Technical Analysts conference which is a forum a I enjoy where market veterans share what works for them. Scott Fullman reported today that he was at a fundamental research conference from Emerald Research a few weeks ago where they opined that only about 10% of trading today is based on pure fundamentals.
 



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March 21 2019

Commentary by Eoin Treacy

Video commentary for March 21st 2019

Eoin Treacy's view -

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

Some of the topics discussed include Fed goes on pause, yield curve spread contracts, bond market pricing in a rate cut, Wall Street rallies on a reduced headwind from liquidity contraction, banks pull back, Dollar rebounds, emerging markets steady, gold eases.  



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March 21 2019

Commentary by Eoin Treacy

Traders' Rate-Cut Bets Shift Goalposts for Fed Playing Catchup

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

Money-market traders have proven skeptical in recent years -- and much of the time rightly so -- about just how much the central bank might be able to push rates back up toward more historically normal levels. Officials on Wednesday scaled back from two to zero the number of rate increases they foresee in 2019.

Futures markets, which were already leaning toward a cut this year, have pushed the probability of easing to about 50 percent. For next year, a cut is fully priced in. The turnaround in Fed expectations in recent months has been accompanied by a rebound in stocks, which tumbled in December amid concern about the economy and the prospect of rate hikes.
 

“The Fed got the signal from markets last year as they were crashing and were pretty much devouring the economy,” said Robert Tipp, chief investment strategist at PGIM Fixed Income, which oversees about $716 billion. “A cut this year is possible. This is a good environment for U.S. fixed income,” and the 10-year yield has room to fall, he said.

Eoin Treacy's view -

The big question after the Fed’s about face on raising rates is, are they moving early enough to avoid an economic contraction? The logic is reasonably straight forward. The Fed would not have announced such a major shift in policy unless they were worried about the economic and market outlook. By going on pause and waiting for additional information they are signaling a willingness to listen to what the market is telling them.



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March 21 2019

Commentary by Eoin Treacy

Powell Aims to Avoid Japan Deflation Trap With Dovish Tilt

This article by Rich Miller and Craig Torres for Bloomberg may be of interest to subscribers. Here is a section:

That’s the type of situation that Japan fell into two decades ago and with which Europe is flirting now. It’s a path that could ultimately lead to a deflationary downturn as households and businesses put off borrowing and spending today because they’re convinced prices will be lower tomorrow, no matter how far the central bank lowers interest rates.

“We are not getting any inflation and the risk is that we find out -- as did Europe and Japan -- that we are stuck and that the central bank isn’t able to raise inflation,” said Mark Spindel, chief investment officer at Potomac River Capital in Washington.

The Fed hasn’t hit 2 percent inflation on a sustained basis since formally adopting that objective in 2012. In December, the personal consumption expenditures price index that the Fed targets rose 1.7 percent from a year earlier.

The extra yield investors demand to hold 10-year Treasuries over two-year notes was 13 basis points, highlighting market conviction that inflation will stay subdued over the next decade.

Eoin Treacy's view -

The Fed has stated in the last week they are willing to let inflation run hot in order to create a self-sustaining trend which suggests we are likely to have an easy monetary environment for the foreseeable future.



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March 21 2019

Commentary by Eoin Treacy

America's Best Weapon in the Opioid Epidemic Just Got Cheaper

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

It’s potentially a really big deal,” said Brendan Saloner, an assistant professor at the Johns Hopkins Bloomberg School of Public Health, who has studied the opioid addiction crisis. Suboxone Film has “a really important role in the overall strategy of combating the overdose crisis,” he said, adding that placing patients on the drug cuts their risk of overdose in half.

For now, the U.S. opioid epidemic shows few signs of abating: annual opioid overdose deaths in the U.S. are expected to climb to 81,700 in 2025, a 147 percent increase from 2015, according to a study last month by the Massachusetts General Hospital Institute of Technology Assessment. The human and financial costs have led states, counties and cities to sue drugmakers and distributors, seeking billions of dollars.

Opioid Crisis
Suboxone Film allows the opioid-based drug buprenorphine to be absorbed through the mouth to help control cravings and stave off withdrawal. When combined with counseling and support services, that type of medically assisted therapy is considered one of the most effective ways to treat opioid addiction. It’s also expensive, especially for uninsured patients.
 

Eoin Treacy's view -

The trend of opioid use remains a worrying development in the USA, where heroin, prescription drugs and fentanyl all represent avenues through which addiction is expanding. The availability of these drugs is an obvious problem which has been exacerbated by over prescribing medications, the war against the Taliban which has boosted heroin production and cheap fentanyl exports via regular mail from China.



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March 20 2019

Commentary by Eoin Treacy

Video commentary for March 20th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Fed confirms dovish tilt. Dollar pulls back which boosts the outlook for Europe, commodity producers, commodities, energy and gold. US Treasury yields compress, taking the conclusion that the next move in interest rates will be downwards. 



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March 20 2019

Commentary by Eoin Treacy

Fed Sees No 2019 Hike, Plans September End to Asset Drawdown

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

“This was definitely a dovish outcome and even a bit of a surprise,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York. “The Fed took out the entire rate hike scenario for this year.”

Reaction in markets confirmed the dovish interpretation. Stocks pared losses, the dollar turned lower and Treasuries rallied. Traders lifted the odds of the Fed cutting rates. In a separate statement Wednesday, the Fed said it would start slowing the shrinking of its balance sheet in May -- dropping the cap on monthly redemptions of Treasury securities from the current $30 billion to $15 billion -- and halt the drawdown altogether at the end of September. After that, the Fed will likely hold the size of the portfolio “roughly constant for a time,” which will allow reserve balances to gradually decline.

Beginning in October, the Fed will roll its maturing holdings of mortgage-backed securities into Treasuries, using a cap of $20 billion per month. The initial investment in new Treasury maturities will “roughly match the maturity composition of Treasury securities outstanding,” the Fed said. The central bank is still deliberating the longer-run composition of its portfolio and said “limited sales of agency MBS might be warranted in the longer run.”

Eoin Treacy's view -

The Fed has cemented its about turn around with today's statements. That confirms a somewhat bearish tilt in their reasoning since the only way a pause can be justified is if growth figures are downgraded.



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March 20 2019

Commentary by Eoin Treacy

Corporate America = Vapourware?

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

Eoin Treacy's view -

A link to this insightful note and a section from it are posted in the Subscriber's Area.

One of the most significant side effects of ultra-low interest rates has been the creation of a clear incentive to take on as much leverage as possible. Whether that is justified as reducing the weighted average cost of capital, providing the funding for buybacks and dividend increases or for improving the veneer of EPS growth, the result is the same. Leverage has increased substantially.



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March 20 2019

Commentary by Eoin Treacy

Italy set to formally endorse China's Belt and Road Initiative

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

Chinese investments have become increasingly contentious in the EU. Diplomats in Brussels and influential western European capitals have long worried the 16+1 grouping of China and central and eastern European states, including 11 EU members, is a Trojan horse to divide the bloc. Beijing has denied this suggestion.  EU member states such as Germany and France have pushed for tougher screening criteria for Chinese investments. They want the bloc to develop a more unified strategy amid rising tensions over the security implications of using Chinese technology from companies such as Huawei, the telecoms group. Other countries including Greece and Portugal, where Chinese groups have invested billions of euros since the financial crisis, have adopted a more lenient approach.

Eoin Treacy's view -

I can’t help but think of the adage “a drowning man will clutch at a straw”. Italy’s populist administration has need of both funds for investing in public works and also a desire to snub the federalist ambitions of Northern European creditors. Meanwhile, China has a clear ambition to draw European countries within its sphere of influence in an effort to cement export markets and to weaken the chances of a concerted effort to blunt its expansionism.



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March 19 2019

Commentary by Eoin Treacy

Video commentary for March 19th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Semiconductors Index surmounts 1400 again, Wall Street pauses, commodity producer currencies firming except Rand, Mid Caps turn back to outperformance in Europe and UK but not USA, India firm, China pauses, Bonds steady, gold steady.



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March 19 2019

Commentary by Eoin Treacy

Another Swing at the Plate

This updated report from KKR on the 2019 forecast published in January may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

The rally that began on boxing Day continues to impress with the S&P500 now trading back above the psychological 2800-point level. This move has now broken the sequence of lower rally highs and increases scope for the Index to consolidate above the trend mean.



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March 19 2019

Commentary by Eoin Treacy

Under "Basel III" Rules, Gold Becomes Money!

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

If banks own and possess gold bullion, they can use that asset as equity and thus this will enable them to print more money. It may be no coincidence that as March 29th has been approaching banks around the world have been buying huge amounts of physical gold and taking delivery. For the first time in 50 years, central banks bought over 640 tons of gold bars last year, almost twice as much as in 2017 and the highest level raised since 1971, when President Nixon closed the gold window and forced the world onto a floating rate 

And

The only way governments can manage the levels of debt that threaten the financial survival of the Western world is to inflate (debase) their currencies. The ability to count gold as a reserve from which banks can create monetary inflation is not only to allow gold to become a reserve on the balance sheet of banks but to have a much, much higher, gold price to build up equity in line with the massive debt in the system.

Eoin Treacy's view -

The Federal Reserve values the gold certificates it holds from the Treasury at $42 an ounce which is the statutory gold price set in 1973. It is unlikely that any change to the way the Bank of International Settlements treats gold will alter that valuation.  



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March 19 2019

Commentary by Eoin Treacy

Alberta Pork Reports A Fourth Confirmed PED Case

This article from High River Online may be of interest to subscribers.

A fourth case of the porcine epidemic diarrhea (PED) virus has been confirmed in Alberta.

Alberta Pork announced the outbreak on Friday, March 15, saying this is the fifth reported case in the province, however one of the reported cases turned out to be a false positive.

The virus has previously been found in Ontario, Manitoba, Quebec and PEI, but was reported for the first time in Alberta back in January.

Earlier this year, Alberta Pork Executive Director, Darcy Fitzgerald, said the disease made its way into the United States from Asia, and was first confirmed in Canada in 2014.

The farm group says hog operations within 60 kilometres of the fourth confirmed case will be notified.

PED affects pigs with no risk to human health. This incident has also not caused any food safety concerns.

For more information on what you can do to protect your farm, visit Alberta Pork's website to view their PED toolbox.

Eoin Treacy's view -

Swine flu has decimated the Chinese herd and new cases are being found all the time. It was reported in Belgium earlier this year and is now in North America. There is no cure so the only recourse is to cull the herd and maintain quarantine but that is very difficult.



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March 19 2019

Commentary by Eoin Treacy

Mental compass: New evidence suggests humans can sense Earth's magnetic field

This article by Michael Irving for NewAtlas may be of interest to subscribers. Here is a section:

Alpha-ERD is a strong neural signature of sensory detection and the resulting attention shift," says Shin Shimojo, co-lead author of the study. "The fact that we see it in response to simple magnetic rotations like we experience when turning or shaking our head is powerful evidence for human magnetoreception. The large individual differences we found are also intriguing with regard to human evolution and the influences of modern life. As for the next step, we ought to try bringing this into conscious awareness."

The team took plenty of steps to ensure that participants weren't sensing other things. The test chambers were shielded from outside electromagnetic signals, and the copper wires that generated the magnetic field were wrapped so they wouldn't produce an audible hum.

Eoin Treacy's view -

Dousing or witching for water and electrical wires has been something people have been doing for generations. The practice offers empirical, though not especially reliable, evidence that humanity has the ability to sense electromagnetic signals. However, it has until now been largely beyond the ability of science to test with any kind of reliability. The clear result of this confirmation is there is scope for a broader range of understanding into what drives human activity or how we are influenced by our environment.



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March 18 2019

Commentary by Eoin Treacy

Video commentary for March 19th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Teasuries at a short-term resistance ahead of the Fed, China clears the way for outszied credit growth, ASEAN, India and Emerging Markets rally, Europe recovering, Wall Street steady, gold and oil steady,  



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March 18 2019

Commentary by Eoin Treacy

China Wants Its Stock, Bond Markets to Step Up Funding Role

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

“We need to create a strong capital market,” Guo Shuqing, the country’s chief financial regulator, said at the National People’s Congress, China’s top legislative session which wrapped up last week. “We could do more work especially in the capital market -- stock market, bond market -- for direct financing.”

China is trying to transform how it funds its economy after decades of relying on state-run banks that benefit from the implicit backing of the nation’s treasury -- but tend to direct most loans to other government-owned companies. The difficulty that small and private firms have in securing funding was one reason for an explosion of shadow-banking, and the rapid increase in debt and risk that came with it.

Spurred to act by a record $34 trillion debt pile, authorities in recent years have cracked down on risky loans, squeezing businesses that relied on such funding. While leaders including Guo have called on the banks to do more to finance private companies, lenders are grappling with their own concerns about loan quality and default rates. Even so, outstanding banks loans in China have increased by about 27 percent since 2016, while capital-market funding rose by around 15 percent.

“We shouldn’t put all the pressure on banks,” Xu Kuijun, an NPC delegate and vice president at Bank of China Ltd. In Shanghai said in an interview at the sidelines of the gathering. “We have to rely more on direct financing, and capital markets should do more.”

Eoin Treacy's view -

There is nothing says “We are done with tightening” quite like the statement “capital markets should do more”. The dominant policy narrative in China for the last three years has been the need to curtail speculation and most particularly in the shadow banking sector.



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March 18 2019

Commentary by Eoin Treacy

March 18 2019

Commentary by Eoin Treacy

What the Federal Reserve Got Totally Wrong about Inflation and Interest Rate Policy: Getting Real About Rents

Thanks to a subscriber for this report from Cornell research Academy of Development, Law and Economics by Daniel Alpert. Here is a section:

The foregoing factors present perceptional problems especially when met with sizable gains in employment that would normally result in rapid household income growth. It is tempting to see rent and OER increases as only the result of higher levels of demand. But despite recent glimmers of meaningful wage growth (mostly in lower wage, lower hours employment sectors) and the longer term reduction in U-3 unemployment to historically low levels, median U.S. household income in 2018, adjusted for inflation, remained less than 4% higher than it was at the turn of this century, 18 years ago (see Figure 13).

So there is something else going on here. As Figure 5 illustrates, the contribution of rent and OER to core CPI inflation hit a historic high of 81% in the summer of 2017. While such contribution moderated some in 2018, it remains the lion’s share of core inflation and is again increasing in proportion.

This begs another question, what would be the level of core inflation without price growth in rent and OER? There was evidence at the end of Q4 2018 that rents declined nationwide on an annual basis for the first time in more than six years, according to the Zillow Group real estate database9.  Now this data, if the trend continues, will take some time to percolate through to the BLS and BEA data - even longer for it to migrate from rents to OER estimates – but if it persists it will clearly result in materially lower inflation data in 2019. Far lower than the FOMC was banking on to support its monetary policy actions of 2018.

Eoin Treacy's view -

I found this to be a very interesting and educative report not least for its breakdown of the composition of CPI figures. The Fed dot plot which will be released on Wednesday, along with its rate decision, is being eagerly anticipated by investors for some perspective of just how dovish the Committee has become.  



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March 15 2019

Commentary by Eoin Treacy

March 15 2019

Commentary by Eoin Treacy

Wireless Set to Transform Communications/Cloud

Thanks to a subscriber for this report from Oppenheimer, dated June 2018, which is one of the best primers on the evolution of 5G I have seen. Here is a section:

Eoin Treacy's view -

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

5G is what I regard as an enabling technology. It is an investment theme in its own right because it will displace the legacy infrastructure we use today. but it also acts as the framework upon which additional services can be built. Telecom companies are selling the first 5G plans at present and Samsung and others are in the process of rolling out the first dedicated 5G handsets. Additionally, the roll out of products like smart speakers, digital assistants, web-connected doorbell cameras, etc, give us a clue to how the initial phase of the Internet of Things is going to progress.



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March 15 2019

Commentary by Eoin Treacy

Licence for value hunting

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

Eoin Treacy's view -

A link to this note and another from Morgan Stanley are posted in the Subscriber's Area.

A European portfolio manager recently remarked to me that India is better covered among analysts he talks to than Europe. That is a clear testament to how much the constant barrage of negative news from Europe on the political, social and economic fronts have damaged sentiment.



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March 15 2019

Commentary by Eoin Treacy

China makes major U.S. pork purchase despite steep import tariffs, as hog virus takes toll

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

Buyers in the world’s biggest hog producer and pork consumer struck deals for the meat despite import tariffs of 62 percent imposed by China on U.S. pork as a consequence of the trade war between the two countries.

The duties had slashed China’s imports of U.S. pork from companies such as WH Group Ltd’s Smithfield Foods since last summer.

The sale of 23,846 tonnes of U.S pork in the week ended March 7 comes after a months-long outbreak of African swine fever in China that has spread to 111 confirmed cases in 28 provinces and regions across the country since August 2018.

Eoin Treacy's view -

Pork is one of the most popular proteins in China. Rising living standards have only boosted demand for what many people consider to be a staple and with so many pigs dead from disease there is a shortage.



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March 15 2019

Commentary by Eoin Treacy

Why Central Banks Like Canada's Are Finding It Hard to Get Home

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

Poloz counters by pointing out that the leverage already out there makes tightening risky too. Plus, he sees potential long-term benefits from frontloading demand.

Exports and investment remain below pre-crisis levels as a share of the economy, leaving Canada reliant on consumption and housing. Wage gains are smaller than in the past. The number of new firms being created, an important metric for Poloz, is lackluster. What if Canada’s economy is on the cusp of an investment boom that may not be detectable yet, and companies are holding back because they lack confidence? Productivity typically picks up late in the business cycle, and policy makers shouldn’t get in the way of that by removing stimulus too quickly.

Yet, if the purpose of low rates has been to nurse the economy back to normal, then the ability to raise them should be the ultimate gauge of health.

With the jobless rate at four-decade lows, and underlying inflation back near the 2 percent target, there were signs that the economy was nearing its capacity -- which is why Poloz began to hike.

Eoin Treacy's view -

The dilemma facing the Bank of Canada is similar to that facing the Reserve Bank of Australia and the Bank of England for that matter. They are all facing into housing markets that are expensive by any measure and household sectors that are very sensitive to interest rates.



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March 14 2019

Commentary by Eoin Treacy

Video commentary for March 14th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Pound continues to hold its breakout, Bond yields contracting globally, Indian Rupee breaks above the trend mean, Australian Dollar tests its lows, Industrial resources ease with China, but commodity exporter stock markets outperforming. Wall Street quiet.



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March 14 2019

Commentary by Eoin Treacy

Old allies turn tough: How the EU will react to Theresa May's request for a Brexit extension

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

One senior EU source predicted that the leaders would be uncompromising and some, if not all, would lean on the prime minister to extend Article 50 as long as possible.

“Every time Mrs May has spoken to the leaders, their final decision has been tougher than was predicted by their officials,” the source said, pointing out the prime minister’s dismal record at the European Council.

“None of the leaders want to be blamed for a no deal Brexit," said one EU diplomat, “but they know that if they will be by their businesses if there is one.”

It is up to Donald Tusk, the president of the European Council, to broker a consensus between the EU-27.  On Thursday morning, he made it clear he would ask the heads and state of government to look favourably on a request for a long extension, understood to be between nine months and a year, which opens the door to a general election or second referendum.

Meanwhile influential MEPs such as Guy Verhofstadt and Manfred Weber are adamant that a British extension cannot hijack the European Parliament elections.

Broadly, countries with socialist governments hanker for a longer extension in the expectation of more left-wing British MEPs being elected in upcoming European Parliament elections, while centre-right governments fear a Eurosceptic surge if Britain is forced to run the vote in May.

Officials in Brussels, veterans of many marathon late night summits, are fond of saying, “you can never predict what will happen when the leaders get together”.

But here is a look at the EU’s movers and shakers on Brexit stand on extension today.

Eoin Treacy's view -

The decision to hold a third vote on May’s deal on the eve of the summit with European leaders is a cynical, though perhaps not unexpected move, by the UK government to have another stab at getting the deal passed. That is aimed at imposing a “my deal or no Brexit ultimatum” on the hold outs in the Eurosceptic movement. It also puts pressure on the European side since they will not know whether the deal is to be accepted or not until the night before they propose their conditions for an extension.



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March 14 2019

Commentary by Eoin Treacy

DHFL, Wadhawans And Ownership Webs

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

This story started with the loans made by DHFL to four developers. When the developers bought a stake in Darshan Developers, the money moved to Kyta. Kyta used most of the proceeds, Rs 1,324 crore, on a joint venture, details on which are not available in the company’s filings.

The remaining Rs 100 crore was used to repay unsecured loans it had received from unknown sources.

In February, BloombergQuint asked DHFL about the use of its loan funds by these developers and the connection with Wadhawan entities. The company said it was awaiting the outcome of an internal investigation into the Cobrapost allegations.

"You are aware that over the last two weeks, we have issued various media statements as also clarifications. The clarifications issued by us clearly sets out the motivation of the complainant, and also states that statements, allegations and accusations contained in the complaint are utterly false and baseless.

Eoin Treacy's view -

As happens with all major collapses, the details of the wrongdoing and the untangling of the web of deceit that led to the collapse happens well after the decline. Dewan Housing Finance collapsed abruptly from its September peak, falling from INR700 to its recent low of INR100 as the full extent of the misallocation of capital started to become clear. That was helped along by the RBI stepping in to instil discipline in the banking sector which resulted in a number of privately held banks pulling back sharply.



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March 14 2019

Commentary by Eoin Treacy

A quantum experiment suggests there's no such thing as objective reality

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

They use these six entangled photons to create two alternate realities—one representing Wigner and one representing Wigner’s friend. Wigner’s friend measures the polarization of a photon and stores the result. Wigner then performs an interference measurement to determine if the measurement and the photon are in a superposition.

The experiment produces an unambiguous result. It turns out that both realities can coexist even though they produce irreconcilable outcomes, just as Wigner predicted.  

That raises some fascinating questions that are forcing physicists to reconsider the nature of reality.

The idea that observers can ultimately reconcile their measurements of some kind of fundamental reality is based on several assumptions. The first is that universal facts actually exist and that observers can agree on them.

But there are other assumptions too. One is that observers have the freedom to make whatever observations they want. And another is that the choices one observer makes do not influence the choices other observers make—an assumption that physicists call locality.

If there is an objective reality that everyone can agree on, then these assumptions all hold.

But Proietti and co’s result suggests that objective reality does not exist. In other words, the experiment suggests that one or more of the assumptions—the idea that there is a reality we can agree on, the idea that we have freedom of choice, or the idea of locality—must be wrong.

Eoin Treacy's view -

I apologise if this going to sound a little wonkish but there are important considerations raised that have a direct impact on the nature of markets and crowd psychology.

Every electrical engineer is taught that you change a system by measuring it. The change is obviously very small but there are phase modulations that occur when you interfere with the system to measure it. That is a clear fact.

At The Chart Seminar, I often talk a little about Heisenberg’s Uncertainty Principle which is that the more you know about the position of the particle the less you know about its velocity.

Then we have the above piece citing the assumption that the choices people make do not have an influence on the choices other make. In the markets we absolutely know that the choices other people make have a definite impact on the decisions of everyone who has yet to make a decision. We also know that the more a winning strategy is seen to work the greater the reliance investors place on it.



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March 13 2019

Commentary by Eoin Treacy

Video commentary for March 13th 2019

March 13 2019

Commentary by Eoin Treacy

China's economy is 12% smaller than official data say, study finds

This article by Gabriel Wildau for the Financial Times may be of interest to subscribers. Here is a section:

For years, the sum of China’s provincial GDP has exceeded the national figure, a clear sign of statistical inflation at the local level. The National Bureau of Statistics (NBS) has previously acknowledged that “some local statistics are falsified”, and in 2017 the central government accused three provinces in China’s north-east rust belt of fabricating data. 

The Brookings paper highlights how the NBS in Beijing struggles to make adjustments to the inflated data it receives from local officials. The analysis finds that the central government’s adjustments to local data are mostly accurate before 2007-08 but “after this date no longer appear to be accurate”. 

The NBS said last year that it would assert greater control over provincial data collection beginning in 2019 to eliminate discrepancies between local and national data. 

“NBS has done a lot of work to weed out the fake numbers added by local government, but it just doesn’t have enough power and capacity, nor the right incentives,” Michael Zheng Song, economics professor at the Chinese University of Hong Kong and a co-author of the paper, told the FT. “It would be unfair to blame NBS for fabricating GDP numbers.”

Eoin Treacy's view -

The reliability of Chinese data has been an enigma investors’ have been pondering for decades. It’s not really a question we can answer with any degree of confidence so the best course of action is to monitor the actions that can be backed up with some degree of confidence.



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March 13 2019

Commentary by Eoin Treacy

Brookfield to Buy Marks's Oaktree to Make Alternatives Giant

This article by Gillian Tan and Scott Deveau for Bloomberg may be of interest to subscribers. Here is a section:

As the private equity industry gathers near record sums of assets, institutional investors aim to make big allocations to fewer firms with a wide range of products. Today’s deal creates such a one-stop-shop: it bolsters the credit business of Brookfield, which has traditionally focused on real estate, and provides Oaktree, a specialist in distressed debt, exposure to assets that thrive outside turbulent economic times.

“We had difficulty, up until now, meeting the strict terms of some of those mandates,” Brookfield Chief Executive Officer Bruce Flatt said in a phone interview. “Very few firms in the world are able to do that.”

Oaktree co-Chairman Howard Marks said in the interview that the two firms mesh “culturally and in terms of product lines without competing and overlapping.”

Eoin Treacy's view -

Warren Buffett has been preaching for years about the merits of owning a piece of a business and private equity investors have been listening. Private equity has taken private exactly the same kinds of companies Buffett favours, which are generally those with niche businesses, strong cashflows and low leverage.



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March 13 2019

Commentary by Eoin Treacy

Investors Are Still Waiting for a Gold-Mining Merger Wave

This article by Alistair MacDonald and Ben Dummett for the Wall Street Journal may be of interest to subscribers. Here is a section:

Miners and bankers give a variety of reasons for why the gold mining merger wave hasn’t come. The poor performance of gold miners’ shares means that sellers want to hold out for better valuations and buyers are reluctant to use shares they believe are undervalued for acquisitions.

The S&P TSX Global Gold Index is down 51% since its 2011. The S&P 500 has doubled in value in that time.

The industry as whole has a poor record in M&A. Miners overspent during the decadelong bubble that ended in 2011. That put off investors and made some executives wary of doing deals.

In 2016, PwC calculated that big miners had written off $200 billion of the value in acquisitions and projects over the previous five years.

Executives may be reluctant for another reason, investors say. They don’t want to put themselves out of a well-paid job by merging or selling their mines.

Eoin Treacy's view -

Ore grades at gold mines have been contracting for years but the massive investment in additional new greenfield sites during the bull market did not result in massive new sources of supply. Nevertheless, mining productivity remains high because production is more efficient today because of technological improvements.



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March 12 2019

Commentary by Eoin Treacy

Video Commentary for March 12th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Stock markets steady, Pound extremely volatile as Theresa May's deal is voted down again, China pauses, US inflation below forecasts compresses yields and supports gold, oil pauses, wheat rebounds, lumber weak as trading margins increase.



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March 12 2019

Commentary by Eoin Treacy

The Sharing Economy Was Always a Scam

This article by Susie Cagle for Medium.com may be of interest to subscribers. Here is a section:

In some instances, the sharing economy appeared to inflame the very problems it purported to solve. The supposed activation of underutilized resources actually led to more, if slightly different, patterns of resource consumption. A number of studies have shown that the ease and subsidized low cost of Uber and Lyft rides are increasing traffic in cities and apparently pulls passengers away from an actual form of sharing: public transportation. Students at UCLA are reportedly taking roughly 11,000 rides each week that never even leave campus. In putting more cars on the road, ride-hail companies have encouraged would-be drivers to consume more by buying cars with subprime loans or renting directly from the platforms themselves.

Alongside making it easy to rent out spare rooms, vacation rental platforms encouraged speculative real estate investment. Whole homes and apartment buildings are taken off the rental market to act as hotels, further squeezing housing markets in already unaffordable cities.

Early sharing champions were ultimately correct about technology enabling a shift away from an ownership society, but what came next wasn’t sharing. The rise of streaming services, subscription systems, and short-term rentals eclipsed the promise of nonmonetary resource sharing. The power and control wasn’t decentralized; it was even more concentrated in the hands of large and valuable platforms.

Why go through the trouble of swapping your own DVDs for a copy of Friends With Benefits, after all, when you can stream it through Amazon Prime Video for $2.99? The idea of paying for temporary access to albums rather than outright owning them may have been galling at first, but we’re increasingly comfortable with renting all our music, along with our software, and our books. Downloading and sharing the materials that live on these streamed resources is impossible, illegal, or both.

Eoin Treacy's view -

The evolution of the subscription business model has helped to streamline balance sheets and has essentially turned the lumpy cashflows of technology companies into the equivalent of consumer staples. That is one of the primary reasons they have continued to be able to command such high valuations.



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March 12 2019

Commentary by Eoin Treacy

Oil 2019: Analysis and forecast to 2024

This summary report from IEA may be of interest to subscribers. Here is a section:

The United States leads global supply growth The United States continues to dominate supply growth in the medium term. Following the unprecedented expansion seen in 2018, when total liquids production increased by a record 2.2 million barrels per day (mb/d), the United States will account for 70% of the increase in global production capacity until 2024, adding a total of 4 mb/d.

 

Important contributions will also come from other non-OPEC countries, including Brazil, Canada, a resurgent Norway, and newcomer Guyana, which together add another 2.6 mb/d in the next five years. In total, non-OPEC production is set to increase by 6.1 mb/d through to 2024.

 

Among OPEC countries, only Iraq and the United Arab Emirates have significant plans to increase capacity. These gains have to offset steep losses from Iran and Venezuela, which are subject to sanctions and political or economic turmoil. As a result, OPEC’s effective production capacity falls by 0.4 mb/d by 2024.

The United States is also turning into a major player in the global oil trade
As a result of its strong oil production growth, the United States will become a net oil exporter in 2021, as its crude and products exports exceed its imports. Towards the end of forecast, US gross exports will reach 9 mb/d, overtaking Russia and catching up on Saudi Arabia. The transformation of the United States into a major exporter is another consequence of its shale revolution.

Greater US exports to global markets strengthen oil security around the world. Buyers of crude oil, particularly in Asia, where demand is growing fastest, have a wider choice of suppliers. This gives them more operational and trading flexibility, reducing their reliance on traditional, long term supply contracts.

Global trade is not simply a story for the United States. The second-largest increase in crude exports comes from Brazil, which ships an extra 0.8 mb/d of oil by 2024. Following Brazil, Norway is enjoying a renaissance and will overtake Kazakhstan and Kuwait in the next five years a remarkable achievement.

Eoin Treacy's view -

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

“Unconventional oil and gas are gamechangers for the energy sector” has been a refrain at this service for more than a decade and the full extent of that change is now becoming clear. When we first talked about the USA becoming energy independent it sounded to many like a fanciful view but the country is already an exporter and will reverse decades of imports in the coming couple of years.



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March 12 2019

Commentary by Eoin Treacy

Wheat Futures Climb Most Since August as Texas Ratings Decline

This note by Michael Hirtzer for Bloomberg may be of interest to subscribers.

May wheat futures up as much as 4.4% to $4.47 1/2 a bushel in Chicago.
Intraday advance is biggest since Aug. 2
Prices are rebounding from May contract record low reached Monday
NOTE: Winter-wheat conditions in Texas drop, USDA data showed Monday
Texas good/excellent rating lowered to 28% from 36%
Futures also climb amid short covering, Terry Reilly, senior commodity analyst for grain and oilseeds for Futures International in Chicago, says by telephone

Eoin Treacy's view -

There was also news today that Ukraine’s wheat crop is coming in ahead of expectations so there is no global shortage of the commodity. Nevertheless, there is clear evidence of a short-term oversold condition and today’s upward dynamic is the first positive news for wheat in months. Potential for some additional short covering has certainly improved.



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March 11 2019

Commentary by Eoin Treacy

Video commentary for March 11th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Technology share lead rebound, India firms as Modi strengthens in polls. Indonesia unwinding overbought condition, South African rand at potenital support, Brazil continues to extend rebound, Pound rallies, oil firm, gold eases, silver holds gain, bonds steady



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March 11 2019

Commentary by Eoin Treacy

Apple Upgraded at BofAML as Pullback Presents Opportunity

This article by Ryan Vlastelica for Bloomberg may be of interest to subscribers. Here ii is in full:

Apple Inc. was upgraded to buy from neutral at BofAML, which wrote that it saw “ten reasons to be bullish” on the iPhone maker. It also raised its price target to $210 from $180.

Shares rose 2.1 percent, taking the stock to its highest level since December.

The firm’s 10 reasons touched on a number of factors, including valuation, an “overshoot in negative estimate revisions,” a reacceleration in the company’s services division and a growing base of users. The company has a “highly loyal user base,” with “low churn where demographic changes are in Apple’s favor,” analyst Wamsi Mohan wrote.

The firm was also positive on the company’s critical iPhone line, which has been the subject of investor anxiety given demand issues, particularly in China. BofAML now forecasts “stability of supply chain order cuts,” as well as a “large reversal of inventory overhang in iPhones.”

The lower inventory is “a net positive, which after [the first quarter of 2019] could start to drive some stability in supply chain orders with new builds picking up after the next few months.”

Shares of Apple have gained more than 20 percent from a January low, though they remain more than 25 percent below a record hit in October, a pullback that BofAML wrote “presents opportunity.”

According to Bloomberg data, BofAML’s call marks the first Apple upgrade since New Street Research raised its view on the stock in early January.

Eoin Treacy's view -

Few companies are as exposed to China’s economy as Apple. It both depends on China for manufacturing and as a major demand growth market for its products. Therefore, it was only a matter of time before the share declined in line with pessimism about a trade accord. As perceptions have improved the outlook for the status quo persisting has lifted the share.



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March 11 2019

Commentary by Eoin Treacy

Indonesia's imminent presidential election

This article by Lex Rieffel and Alexander R. Arifianto for the Brookings Institute may be of interest to subscribers. Here is a section:

Another vulnerability for Jokowi is the nation’s economic performance during his first term. Indonesia’s exceptional track record of sound macroeconomic policies since the transition in 1998 has been maintained. However, as The Jakarta Post noted in a 2016 article, he has been unable to lift the growth rate from the lackluster pace under his predecessors. His promised surge in infrastructure investment has not materialized, the state enterprise sector is largely unreformed, and a host of environmental challenges are not being addressed adequately.

The possibility that disenchanted voters will abstain from the election and that enthusiasm among potential voters backing Subianto will produce a surge of votes in his favor has led independent observers (including one of us—Alexander) to conclude that electoral support for both candidates is actually in a statistical dead heat.

The one point of consensus among most analysts is that neither of these two candidates is a committed democrat, implying that Indonesia is likely to continue drifting away from democratic rule in the near term.

A Jokowi-led government will clearly be more aligned with American values than a Subianto-led government because it will be more respectful of human rights and the rule of law. By contrast, a Subianto-led government might be more favored by the Trump administration due to its tough-guy, authoritarian approach to domestic governance and its hardline foreign policies.

The best outcome for long-term U.S.-Indonesia relations would arguably be a landslide victory for Jokowi that makes it easier for him to fix some of the weaknesses of Indonesia’s democratic political system, especially the role of the parliament. His policy leverage during a second five-year term may be enhanced significantly. According to a January 23 piece in Republika, Jokowi’s party, the Indonesian Democratic Party Struggle (PDIP), and its coalition allies are expected to control approximately 56 percent of seats in the new parliament that will also be elected on April 17.

Eoin Treacy's view -

A third of the world population is voting this year and with populist rhetoric already on par with what was witnessed in the 1930s there is ample scope for continued populist uprising. After all, we are now talking about a global phenomenon whereas the pre-War era was really just Europe.



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March 11 2019

Commentary by Eoin Treacy

Modi Hopes $27 Billion Bet on Women Will Swing Election His Way

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

A record 65.3 percent of India’s 260 million women voters cast a ballot in the 2014 polls that swept Modi to the biggest parliamentary majority in three decades. In most states, female turnout has surpassed males in recent ballots. And that is now starting to produce real change: Modi’s government has raised expenditure on sanitation and education for girls, provided safer cooking fuels and instituted the death penalty for rapists.

“In 2019, Modi sees women as an important demographic that can help power the party’s reelection,” said Milan Vaishnav, South Asia director at the Carnegie Endowment for International Peace. “The BJP believes that women will reward the party for their welfare delivery schemes.”

The loan program is called Aajeevika (it translates to livelihood), and it was started in the 1990s as a local poverty alleviation program for women’s groups in the southern state of Andhra Pradesh. It was adopted country-wide in 2011 under the Congress-led government that Modi ousted three years later.

Once in power, Modi expanded Aajeevika to 622 of India’s 640 districts and increased annual outlays by about three times. The federal government makes funds available and local governments oversee implementation—a task made relatively easier with Modi’s Bharatiya Janata Party and allies ruling 16 of India’s 28 states.

Eoin Treacy's view -

Narendra Modi was the first of the world’s populist upstarts to gain power. His appeal to Hindu nationalism in the election campaign is a testament to his continued support for populist causes but also to the electoral math that helped him get elected in the first place. The one thing we can say with certainty is Modi has an understanding that access to credit forms the bedrock of economic development, most particularly in emerging markets. Together with his support for markets and economic development, that makes him the darling of investors.



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March 11 2019

Commentary by Eoin Treacy

Rand Bears in Ascendance as Risks Rise From Moody's to Poll

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

Short Positions
Investors in the futures market are becoming more pessimistic, with non-commercial short-rand contracts outweighing longs, CFTC data show. That’s a turnaround from February, when traders were net long-rand for a brief period.

Selling Out
Foreign investors are getting out of South African bonds and stocks. Non-residents have been net sellers of government bonds at an average rate of 115 million rand ($8 million) a day over the past month -- not a huge number, but a turnaround from mid-February, when inflows averaged 434 million rand a day. And offshore investors have been net sellers of South African equities for the past 14 days, the longest streak since October 2017.

Eoin Treacy's view -

What I find particularly interesting about this article is it provides a very good example of a reporter providing details of what people have already done with their money.



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March 08 2019

Commentary by Eoin Treacy

March 08 2019

Commentary by Eoin Treacy

Email of the day on differences between the performance of the FTSE A50 Index and the Shanghai A-Shares Index.

Would you care to comment on the different behaviour of the China A-50 future and the A-Share indices themselves?  It has been ironic, and frustrating, that while you and all the media talk of surging A-Share prices, the A-50 future, which is the one one can actually trade, has come down very sharply in the last few days.

Eoin Treacy's view -

Thank you for this email which highlights an interesting development. The FTSE-50 is much more concentrated that the Shanghai A-Shares Index which has 1453 members. In fact, its largest constituent, Ping An Insurance, occupies 12.31% of the Index. That is the largest weighting for an insurer in any of the China focused indices and ensures the Index does not track the performance of the mainland market as closely as one might like.



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March 08 2019

Commentary by Eoin Treacy

An 80 Billion-Share Mystery Surrounds Buybacks

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

Yardeni says the companies in the S&P 500 have spent roughly $4.5 trillion on buybacks over the past 10 years, yet by his calculation, which include some adjustments, the shares outstanding of those companies has dropped by just 2 percent during that time. What accounts for the difference? Employee stock compensation.

Buybacks haven’t returned cash to shareholders, or boosted share prices, Yardeni says. All they have done is bought back the shares that have been issued to employees, essentially enabling higher executive compensation by picking up the tab of stock options. Based on data from S&P Dow Jones Indices, the current members of the S&P 500 had 284 billion shares outstanding in early 2009, and have bought back bought 81.5 billion shares through the end of 2018. That means shares outstanding should have dropped by nearly 29 percent, instead of falling 2 percent, by Yardeni’s calculations – or rising
slightly, as data from S&P show.

Even after accounting for equity issuance and share-count changes due to acquisitions, I calculate that roughly two-thirds of what companies spent on buybacks appears to have gone toward offsetting executive compensation. And there’s more to the story.

The tale usually told about buybacks is that companies have this pot of profits and they are choosing to use it to prop up their stock with buybacks. But back in 2005, the Financial Standards Accounting Board began forcing companies to expense the cost of option grants, even though they aren’t a cash
outlay. That means buybacks aren’t really funding stock grants. Corporate bottom lines already include the cost of stock options. By the time you get to the bottom line, that money has effectively already been “spent.”

Repurchases are just a way of squaring that accounting. Without buybacks, shareholders would effectively be paying for stock compensation twice – once when they are expensed and a second time from the dilution of additional shares. Executives get the options either way. And indeed, the growth of buybacks in the past decade-and-a-half correlates pretty closely with the 2005 accounting change for options. There is even some research to suggest causation.

Eoin Treacy's view -

We are about 18 months out from the next US Presidential Election and positions are being staked out. So far, we have seen some quarters on the progressive left support modern monetary theory and many from the financial community decrying the suite of policies as sacrilegious. We have heard calls for free healthcare for all and simple questions about how it is going to be paid for. We have seen calls for big companies like Amazon and Facebook to be broken up. Where there has been clear evidence of cross-party support has been to either tax or reduce buybacks. That suggests it is going to be an election issue which has potential to be enacted.



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March 08 2019

Commentary by Eoin Treacy

China Stashes Away Tons and Tons of Gold as Tensions Pick Up

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

“China will keep buying on a regular basis, but we would not be surprised if there were months when they don’t,” said Ross Strachan at Capital Economics Ltd. “Overall, we would expect them to be the second-largest purchaser this year. The motivation will be to diversify their foreign-exchange reserves, and increase gold from its current very low percentage of these reserves.”

While China’s gold holdings are the sixth-largest by country, they account for only 2.4 percent of its reserves, compared with more than 70 percent in Germany and the U.S., WGC data show.

Central bank purchases are likely to be sustained in 2019 at the same level as last year amid elevated geopolitical tensions and less pressure on emerging-market currencies, Goldman Sachs Group Inc. said in a March 4 report. Kazakhstan added about 50 tons last year, and was joined by other countries including Poland, India and Hungary, which picked up smaller amounts.

Eoin Treacy's view -

The reason China has such a low proportion of its total reserves in gold is because it has been holding Treasuries in an effort to recycle Dollars and keep the value of the Renminbi down. Unless China is going to allow the Renminbi to float freely, which appears unlikely in the near-term, there is little chance of the country’s gold holdings approximating those of the USA or Germany.  



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