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March 26 2018

Commentary by Eoin Treacy

Fear of trade war between US and China

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

Eoin Treacy's view -

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

ETF Holdings of gold has been remarkably steady since the initial surge in 2016 suggesting investors were willing to continue to hold gold despite a lengthy period of consolidation. Holdings are now hitting new recovery highs and a clear move below 70 million ounces would be required to question the return to demand dominance.



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March 26 2018

Commentary by Eoin Treacy

As Trump Takes On China, Another Trade Challenge Looms in Asia

This article by Connor Cislo and Jiyeun Lee for Bloomberg may be of interest to subscribers. Here is a section:

But at the same time, there’s been a spike in sales to China of precision metal working machines and equipment for making chips from firms like Japan’s Yaskawa Electric Corp. With a Chinese state-backed fund gearing up to pour as much as $31.5 billion into homegrown semiconductor manufacturing, there’s potential for trade flows to start to shift.

China’s ambitions, set out in its sweeping Made in China 2025 plan, go much further than semiconductors and would see its technical prowess advance in a host of areas, ranging from bio- medicine and artificial intelligence to new-energy vehicles and aircraft. The challenge to Japan, Korea and Taiwan also applies to European exporters like Germany, and comes on top of the risks to global trade from the Trump administration’s embrace of tariffs.

"The bits of the global supply chain that are currently the preserve of Korea, Japan, Taiwan, the U.S., and Germany, are the bits of the supply chain that China has a decade-long industrial strategy to move into," said Tom Orlik, Bloomberg’s chief Asia economist. He said it’s only a matter of time before many components for electronic products are made domestically and the country is on track to become a car exporter. Eventually, it will be selling airplanes, said Orlik.

Eoin Treacy's view -

China is moving up the value chain in just about all industries. It’s policies in achieving that goal are openly mercantilist. It has unabashedly supported domestic industry by whatever means necessary, closed off the mainland market to global competitors, engaged in industrial espionage on a grand scale and none of these actions are without precedent.



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March 23 2018

Commentary by Eoin Treacy

March 22 2018

Commentary by Eoin Treacy

March 22 2018

Commentary by Eoin Treacy

Protectionism Risks? What's Next?

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

Eoin Treacy's view -

A link to the full report and section from it are posted in the Subscriber's Area.

This is a very measured report which I think is underplaying the short-term volatility tariffs are likely to provoke. Bilateral trade between the USA and China is substantial and US companies have invested considerable resources in developing customer bases in China. They are far from immune from Chinese retaliatory measures which over the course of the medium-term will likely be ironed out but probably not before there is some pain felt on both sides.



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March 22 2018

Commentary by Eoin Treacy

Tencent Drops After Warning Spending to Weigh on Profit Margins

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

Tencent’s business revolves largely around its vast social networks WeChat and QQ, the twin platforms through which more than a billion people consume games, news and online entertainment while paying for a plethora of real-world services. Chief Executive Officer Ma Huateng is now angling to grab a larger slice of an advertising pie dominated by Alibaba Group Holding Ltd., while investing in new areas such as financial, retail and computing services.

“Tencent needs to invest in new business, it would help the company build a better ecosystem infrastructure to support growth, but it will hurt margins in the short term,” said Benjamin Wu, an analyst at Shanghai-based consultancy Pacific Epoch.

Analysts at Credit Suisse Group AG and Citigroup Inc. lowered their earnings estimates for Tencent after the results.

Tencent’s quarterly profit included gains in the quarter of 7.9 billion-yuan thanks mainly to the initial public offerings of Sea Ltd., Sogou Inc. and Yixin Group Ltd. Those are just three of the 600 companies the company has invested in.

Eoin Treacy's view -

I don’t know a Chinese person, either by birth or heritage, that does not use WeChat. That fact alone means it is going to be more expensive to gain new customers.



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March 22 2018

Commentary by Eoin Treacy

A Dangerous Cyberattack On A Petrochemical Plant Could Be The First Of Many

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

You probably didn’t hear about it at the time, but in August 2017, there was an attack on a petrochemical plant in Saudi Arabia. It was meant to cause a cascading explosion, experts determined. The only reason it didn’t (and that you didn’t already hear about it) is because there was a mistake in the assailant’s code.

This may feel far away, but such an attack could have easily happened more locally. Russians are hacking the U.S. electric grid. The greatest fear is that they are able to access American nuclear plants, which could wreak devastation rarely seen on some of the country’s most populated areas.

A new kind of attack has made its way into the world. And, frankly, it’s terrifying.

Experts are learning a lot from this foiled attack in Saudi Arabia. The New York Times reports that the attack required a level of sophistication that shows the attackers had government backing, though the individual hackers and the country backing them are still unknown.

Eoin Treacy's view -

This attack failed because of a typo. That’s not a comforting thought. The introduction of cyberattacks into the arsenal of sovereign states represents a major issue from the perspective of investors. That is particularly true because they are close to the perfect weapon. They have the ability to strike at the heart of an enemy’s domestic architecture, require no loss of munitions or personnel, are comparatively cheap to deploy and for the most part are anonymous.



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March 22 2018

Commentary by Eoin Treacy

Eoin's personal portfolio update March 21st 2018

March 22 2018

Commentary by Eoin Treacy

Long-term themes review March 7th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a brief summary of my view at present.



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March 21 2018

Commentary by Eoin Treacy

March 21 2018

Commentary by Eoin Treacy

Fed Lifts Rates, Steepens Path Through 2020 For More Hikes

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

In another change to the statement, the Fed said inflation on an annual basis is “expected to move up in coming months,” after saying “move up this year” in the January statement. Price gains are still expected to stabilize around the Fed’s 2 percent target over the medium term, the FOMC said.

The central bank’s preferred price gauge rose 1.7 percent in the 12 months through January and officials projected it to rise to 2 percent in 2019 and hit 2.1 percent the following year, the latest estimates showed. The estimates for inflation excluding food and energy, which officials see as a better way to gauge underlying price trends, rose to 2.1 percent in 2019 and 2020 from 2 percent seen in December.

“Job gains have been strong in recent months, and the unemployment rate has stayed low,” the FOMC said. The statement said that household spending and business investment “have moderated” from strong fourth-quarter readings.

Eoin Treacy's view -

A dovish rate hike is what the market was hoping for and that’s what it got which eases concerns that the new Fed chair is anything other than market friendly. There had been some concern that the Fed might raise rates four times this year but that is now looking less likely. However, the upshot of the statement is that four rates hikes in 2019 is a realistic possibility and a significant negative impact would be required to stop the run-off of the balance sheet. Therefore, the outlook is not quite as liquidity friendly as might have appeared on first blush.



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March 21 2018

Commentary by Eoin Treacy

BOE's May Rate Increase Seen Locked In as Wage Growth Picks Up

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

Prime Minister Theresa May’s government lifted the cap on pay for more than a million National Health Service workers on Thursday. They will get a 6.5 percent pay rise over the next three years -- spelling an end of the longstanding limit on public-sector raises -- while a 4.4 percent increase in the minimum wage is also due to come into effect in April.

BOE officials, who raised rates for the first time in more than a decade in November, are preparing to unveil their latest policy decision in London on Thursday. Markets had started to price in further tightening at the next meeting in May even before the positive upturn in wage growth, while a second hike this year is also seen as probable.

“In BOE speak, higher wages point to upside risks to domestically generated inflation and improving jobs numbers point to further erosion of slack,” said Scotiabank economist Alan Clarke. “In other words, this supports the case for a May rate hike.”

Eoin Treacy's view -

The collapse of the Pound in the aftermath of the Brexit vote in 2016 shielded the UK economy from what might otherwise have been a rather difficult period. However, the currency’s weakness made just about all imports more expensive. While the high street is just getting around to passing on higher import costs, the price of oil is 50% higher today than it was in July 2016. That might not be taken into account by official figures but it’s something all consumers have to deal with on a daily basis. With the NHS scoring a substantial pay increase, we can expect teachers, police and regular civil servants to make similar claims and that is before the private sector starts demand pay rises. That all points towards inflation.



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March 21 2018

Commentary by Eoin Treacy

Features of a Bitcoin Bear Market

Thanks to a subscriber for this report from Morgan Stanley 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 argument proposed by hard cryptocurrency advocates is that profits accumulated in the cryptocurrency world should be simply left in the system and only reinvested in other tokens or altcoins. The basis for eschewing fiat currency entirely is that the cryptocurrency market is evolving so quickly that it is only a matter of time before digital assets have widespread real-world utility and at that point the declining value of fiat currencies can be foregone completely in favour of accumulating real assets.



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March 21 2018

Commentary by Eoin Treacy

Policy focus shifted to sustainability from stability

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

March 20 2018

Commentary by Eoin Treacy

March 20 2018

Commentary by Eoin Treacy

Musings From the Oil Patch March 20th 2018

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

Eoin Treacy's view -

Both a section from the report and a link to a pdf are posted in the Subscriber's Area.

Shale oil is typically of the light variety which is used for gasoline production rather than diesel. Europe has favoured diesel for a long time and the aftermath of the Volkswagen cheating scandal suggests it will be using less in future. A lot of the new supply that has become economic over the course of the last 15 years has been of the heavy variety but that is now changing with the evolution of US domestic onshore tight resources. That represents a significant retooling risk for European refineries while the US sector will also need to evolve to cater to the prolific supply coming on line domestically.



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March 20 2018

Commentary by Eoin Treacy

Labor 2030: The Collision of Demographics, Automation and Inequality

This report from Bain & Co. by Karen Harris, Austin Kimson and Andrew Schwedel may be of interest to subscribers. Here is a section:

We expect the magnitude of workforce change in the 2020s to match that of the automation of agriculture from 1900 to 1940. However, the transition of farm workers into the industrial sector was spread out over four decades. In the case of the automation of manufacturing, the impact was over a shorter time period (roughly 20 years), but the share of labor force in manufacturing jobs was relatively small in the US. Investment in automation is likely to proceed moderately faster than agricultural automation or manufacturing automation unless other forces act to impede its progress, and it will affect a larger percentage of the total workforce.

The tension between the push to offset slowing labor force growth with automation and the pull to slow automation's rollout to prevent massive disruption will play out over the next 10 to 20 years. But once the first companies begin deploying new forms of automation, others are likely to follow suit rapidly to stay competitive.

The base-case scenario
Based on the magnitude and speed of change, our base-case scenario could result in about 2.5 million jobs per year lost or not created because of automation. Previous transformations provide an interesting comparison. The automation of agriculture transformed national economies and disrupted labor markets, culminating in the Great Depression. But if that event occurred today, scaled to the current population and labor force, it would displace 1.2 million workers per year. The rate of reabsorption from the automation of agriculture was about 700,000 workers a year.

Eoin Treacy's view -

Technology is disruptive and inherently deflationary. The rise of the robot represents a significant secular theme and for the millions of workers who are going to be affected their only resource is likely to be at the ballot box.



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March 20 2018

Commentary by Eoin Treacy

China Pledges Action on Tech Transfer as Trump Plans Tariffs

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

“Businesses are very much in a position that they want to see China take action, and talking about it isn’t sufficient any more,” John Frisbie, president of the U.S.-China Business Council, said of Li’s speech. “And it has to be tangible actions that matter.”

The administration is said to be considering wide-ranging tariffs on everything from consumer electronics to shoes and clothing made in China, as well as restrictions on Chinese investments in the U.S., according to people briefed on the matter.

That’s one of the administration’s lines of attack to deal with the lopsided bilateral trade account, which according to U.S. data, the trade deficit with China reached a record $375 billion last year, with China’s accounting considerably lower.

“A large deficit is not something we want to see,” Li said. “We want to see balanced trade. Otherwise this kind of trade would not be sustainable.”

Eoin Treacy's view -

The last thing China wants is a trade war particularly since its domestic companies are primed to take a more dominant position on the international stage selling everything from smartphones to cars. However one of the reasons they are now able to compete internationally is because of the technology sharing China insisted on over the course of the last twenty years. If China is now willing to give up on that demand we can conclude the administration believes the economy has progressed to a stage where it is no longer essential to development. The pace of R&D spending and patent lodging would support that view. 



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March 19 2018

Commentary by Eoin Treacy

March 19 2018

Commentary by Eoin Treacy

Facebook Plunges as Pressure Mounts on Zuckerberg Over Data

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

Politicians on both sides of the Atlantic are calling on Chief Executive Officer Mark Zuckerberg to appear before lawmakers to explain how U.K.-based Cambridge Analytica, the data-analysis firm that helped Donald Trump win the U.S. presidency, was able to harvest the personal information.

Facebook has already testified about how its platform was used by Russian propagandists ahead of the 2016 election, but the company never put Zuckerberg himself in the spotlight with government leaders. The pressure may also foreshadow tougher regulation for the social network.

U.S. Senators Amy Klobuchar, a Democrat from Minnesota and John Kennedy, a Republican from Louisiana, have called on the chairman of the Judiciary Committee to bring in technology company CEOs, including from Twitter Inc. and Alphabet Inc.’s Google, for public questioning.

Eoin Treacy's view -

The status quo was shaken by the election of Donald Trump and the rise of populist causes right across Europe and parts of Asia. Whether this is as a result of Russian propaganda or demographic/personality profiling is missing the point. A deep vein of discontent has been tapped by emotional rhetoric which is a symptom of political change regardless of the avenue through which it is delivered. That is contributing to polarity in political views which is likely to intensify until a new reform agenda has been implemented and it could take a decade of political disfunction to achieve it.



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March 19 2018

Commentary by Eoin Treacy

Understanding China's Rise Under Xi Jinping

This speech delivered by Kevin Rudd at West Point earlier this month represents an excellent summary of the machinations of political power in China which I found very interesting. Here is a section:

However, militating against any of the above, and the “tipping points” which each could represent, is Xi Jinping’s seemingly absolute command of the security and intelligence apparatus of the Chinese Communist Party and the state. Xi Jinping loyalists have been placed in command of all sensitive positions across the security establishment. The People’s Armed Police have now been placed firmly under party control rather than under the control of the state. And then there is the new technological sophistication of the domestic security apparatus right across the country—an apparatus which now employs more people than the PLA.

We should never forget that the Chinese Communist Party is a revolutionary party which makes no bones about the fact that it obtained power through the barrel of a gun and will sustain power through the barrel of a gun if necessary. We should not have any dewy-eyed sentimentality about any of this. It’s a simple fact that this is what the Chinese system is like.

And

Many scholars failed to pay attention to the internal debates within the Party in the late 1990s, where internal consideration was indeed given to the long-term transformation of the Communist Party into a Western-style social democratic party as part of a more pluralist political system. The Chinese were mindful of what happened with the collapse of the Soviet Union. They also saw the political transformations that unfolded across Eastern and Central Europe. Study groups were commissioned. Intense discussions held. They even included certain trusted foreigners at the time. I remember participating in some of them myself. Just as I remember my Chinese colleagues telling me in 2001-2 that China had concluded this debate, there would be no systemic change, and China would continue to be a one-party state. It would certainly be a less authoritarian state than the sort of totalitarianism we had seen during the rule of Mao Zedong. But the revolutionary party would remain. 

Eoin Treacy's view -

China is going to stay authoritarian and is in the process of implementing an internal security apparatus that is more sophisticated than anything the world has seen before. The nexus of artificial intelligence, cameras, local monitoring, real name social media enforcement, social scorecards are all designed to ensure the long-term sustainability of single party rule.



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March 19 2018

Commentary by Eoin Treacy

Businesses Respond Positively to Transition Deal

This article by Ian Wishart and Tim Ross for Bloomberg may be of interest to subscribers. Here is a section:

“Business leaders will welcome the announcement of a provisional agreement on an implementation period and congratulate the U.K. government for heeding the call of business and making it a priority early on,” Allie Renison, head of Europe and trade policy at the Institute of Directors, says in statement. “We are, however, concerned that not enough attention is being given now to the finer details and practical implications of transition.”

But the British Chambers of Commerce was more positive. “While some companies would have liked to see copper-bottomed legal guarantees around the transition, the political agreement reached in Brussels is sufficient for most businesses to plan ahead with a greater degree of confidence,” BCC director general Adam Marshall says in a statement.

It’s also noticeable that the pound has risen significantly against the dollar.

Eoin Treacy's view -

The GBP/EUR exchange rate is the clearest barometer for the market’s perception of whether the Brexit negotiations will be advantageous or not for the UK in the short term. Every time the tide of opinion turns bullish on a negotiated settlement the Pound rallies and vice versa.



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March 16 2018

Commentary by Eoin Treacy

March 16 2018

Commentary by Eoin Treacy

Precious Metals Review

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

Capital allocation: We are nearing 5 years since the significant gold price (~$1,600/oz down to $1,360/oz) correction in early April 2013. The period since has largely been characterized by cost cutting, capex reduction and de-leveraging of Balance Sheets. With an average ND/2018E EBITDA ratio of 0.5x for Precious stocks under coverage, companies are largely finished with debt reduction and must now decide on the right mix of project capex (brownfield and greenfield) /exploration /dividends/buybacks/further debt reduction/M&A opportunities. Management decisions to define companies will likely diverge over the coming years and we believe this is a key consideration for investors, particularly for a sector that does not have a good record of deploying capital. In terms of dividends, companies will need to define policies that are both sustainable but also representative of variation in cash flow through the cycle, e.g., a base dividend with a supplementary dividend is most likely.

Cost pressure starting to come back: A number of companies on recent conference calls mentioned cost pressure that is entering the industry either through macro factors or through mining sector specific areas.

Examples include the increase in energy costs (mainly due to higher diesel/gas prices), some currency moves, consumables, equipment and contracting. It does not appear to be significant at this stage but the opportunities for cost-cutting initiatives seem to have largely ended (with the potential exception of technology impacts, e.g., Barrick's initiatives medium- to long-term). As an example of cost pressure, Barrick's nearterm All-In Sustaining Costs (AISC) are expected to be ~$765-815/oz for 2018, ~$50/oz higher than previous guidance of $740-760/oz. Longer term, Barrick has alluded to the fact that its target of $700/oz is going to be more difficult to achieve.

Eoin Treacy's view -

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

The Gold/NYSE Arca Gold BUGS Index ratio hit an important peak near 10 in late 2015 which presaged the recovery rally in the metal price which broke the five-year downtrend. That undervaluation of the miners relative to the gold price represented a period of deep stress for the sector as companies scrambled to pay down debt and to keep their operations afloat. However, as the gold price rallied the miners exhibited high beta characteristics which saw them double relative to the gold price.



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March 16 2018

Commentary by Eoin Treacy

Email of the day on the MidPoint Danger Line

Trust you and your tribe are well.

Just a quick question. I don’t seem to have heard the phrase ‘mid-point danger line’ (MDL)for quite a while. Is the MDL irrelevant these days?

Eoin Treacy's view -

Thank you for your kind words and yes, the whole tribe are thriving. Thanks also for this question which remains a topic of conversation at The Chart Seminar. Incidentally, it has been a bit of a challenge to secure a venue for next month’s Chart Seminar in Melbourne, but we finally signed a contract with the Mercure in Treasury Gardens today. I’m really looking forward to revisiting my old stomping ground, having a coffee on a Lygon Street and, most of all, spending some quality time with subscribers.



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March 16 2018

Commentary by Eoin Treacy

New study rips into cobalt, lithium price bulls

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

Prominent commodities research house Wood Mackenzie this week released a report on battery materials that forecasts a decline in the price of cobalt and lithium this year which would turn into a rout from 2019 onwards.

Woodmac is not lowballing demand growth for lithium and the authors expect demand to grow from 233 kilotonnes (kt) in 2017 to 330kt of lithium carbonate equivalent in 2020 and 405kt in 2022, but:

… the supply response is under way. Yet it will take some time for this new capacity to materialise as battery-grade chemicals. As such, we expect relatively high price levels to be maintained over 2018. However, for 2019 and beyond, supply will start to outpace demand more aggressively and price levels will decline in turn.

According to Woodmac data, spot lithium carbonate prices on the domestic market in China are already down 6% from December levels to around $24,500 a tonne while international market prices have remained robust rising to $16,000 at the end of February.

Eoin Treacy's view -

Lithium and cobalt represent the freshest iterations of the supply inelasticity meets rising demand condition that contributes to the cyclicality of mining ventures. Batteries are now big business and with Volkswagen saying this week that it is willing to outspend Tesla on batteries by the early 2020s the demand portion of the market is well affirmed.



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March 15 2018

Commentary by Eoin Treacy

Video commentary for March 15th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: Japan and Europe steady, Australian banks under pressure, China steady, Nasdaq quiet but continues to hold the move above 7000, gold eases, dollar firms, oil inert for the moment. Bond yields close above 2.8%.



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March 15 2018

Commentary by Eoin Treacy

Deep Thaw Below Arctic Circle Risks $30 Billion Nordic Industry

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

The forest floors below the Arctic Circle are usually frozen solid this time of year, hard enough to support the giant timber machines needed to harvest their wood.

But that’s changing, according to the foresters who work the land in Finland and Sweden. Unusually mild winters are turning once icy grounds into thick layers of mud capable of swallowing up the 25-ton vehicles used to gather the materials that go into pulp, paper and packaging.

“We will see more and more of these difficult conditions,”

Uno Brinnen, head of forestry at Sweden’s BillerudKorsnas AB, said in an interview. “It will always shift between warm and cold winters, but the long-term trend seems clear.”

Temperatures across large swathes of Sweden were as much as 3 degrees Celsius (5.4 degrees Fahrenheit) higher than normal in December and January, according to the Swedish Meteorological and Hydrological Institute. That warming forms part of a trend that’s likely to persist, according to SMHI, whose scientists expect temperatures to continue rising over the next six decades because of climate change.

The travails increasingly experienced by Nordic foresters underscore the economic impacts of climate change. Even as warming temperatures in and around the Arctic Circle frees waterways and reveals new paths to exploit natural resources, countries and companies in the region are being forced to adopt new ways of conducting traditional business.

Eoin Treacy's view -

Lumber prices have pulled back over the course of the last month but are still holding the breakout from a 25-year range. The renegotiation of NAFTA rules on trading lumber across the US/Canadian border, the long-term impact of mountain pine beetle infestations, which are themselves a result of milder winters, coupled with warmer weather in Scandinavia and stronger economic growth are driving a supply inelasticity bull market in lumber.



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March 15 2018

Commentary by Eoin Treacy

Pipeline Stocks Sink as FERC Kills Key Income-Tax Allowance

This article by Stephen Cunningham, Tim Loh and Jim Polson for Bloomberg may be of interest to subscribers. Here is a section:

Wells Fargo & Co. analyst Michael Blum said the broad selling was an overreaction, because the effects would be felt only on partnerships with a large amount of interstate pipelines.

"It’s definitely a negative, but it’s not Armageddon for MLPs," Jay Hatfield, a New York-based portfolio manager at the InfraCap MLP exchange-traded fund, said by telephone. "And it’s not as if it affects every asset in every single MLP."

Even among interstate pipelines, it’s unclear how much the ruling will impact different assets, Selman Akyol, an analyst at Stifel Nicolaus & Co. wrote in a note Thursday. That’s because these pipelines can charge rates based on a different agreements -- there are "cost of service" rates, which will be affected, as well as market-based rates or negotiated ones, which won’t be impacted. What’s more, "cost of service" rates are partly built on aspects that have nothing to do with taxes -- including maintenance and depreciation costs for the pipeline.

"This adds a layer of uncertainty to the group, and we do not expect it to be cleared soon," Akyol said in the note. “We anticipate companies will provide disclosures around cost of service exposure and potential impact to cash flow.”

The decision could further the trend of MLPs converting into corporations -- or simply selling interstate pipelines affected by this change in policy to existing corporations such as Kinder Morgan Inc., Hatfield said.

Eoin Treacy's view -

Master Limited Partnerships are generally highly leveraged because taking out debt to fund the construction of pipelines is feasible considering the reliability of the cashflows that arise from it once it moves into service. However as with any leveraged balance sheet how it is treated for tax is a thorny issue which has resulted in a sharp sell-off today as the investors concluded it was better to sell first and ask questions later.



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March 15 2018

Commentary by Eoin Treacy

Pimco Sells Australia Banks, Property Bonds as Risks Climb

This article by Ruth Carson and Andreea Papuc for Bloomberg market be of interest to subscribers. Here is a section:

Risk assets are vulnerable to a correction as valuations approach fair value, Thakur and John Dwyer, vice president and credit research analyst, wrote in a report.

“This risk becomes more important as we transition to a period of gradual tightening of monetary policy by global central banks,” according to the report. Asset prices offer little buffer to the risk of possible shocks resulting from negative growth surprises or higher-than-expected inflation, they said.

Eoin Treacy's view -

Australian government yields share a high degree of commonality with those of other developed market nations. The 10-year has been ranging below 3% since 2015 and over the course of the last month has pulled back to test the region of the trend mean. With inflationary pressures being more of a fear than a reality at present there is scope for some further steadying in the market.



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March 14 2018

Commentary by Eoin Treacy

Video commentary for March 14th 2018

Eoin Treacy's view -

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

Some of the topics discussed include: FANG continued outperformance but looking overstretched, Dow Jones Industrials underperforming, gold and oil steady, Japan steady, Australian shares underperforming with Aussie Dollar bouncing.

 
FANG continued outperformance but looking overstretched, Dow Jones Industrials underperforming, gold and oil steady, Japan steady, Australian shares underperforming with Aussie Dollar bouncing,
 
FANG continued outperformance but looking overstretched, Dow Jones Industrials underperforming, gold and oil steady, Japan steady, Australian shares underperforming with Aussie Dollar bouncing,
 
FANG continued outperformance but looking overstretched, Dow Jones Industrials underperforming, gold and oil steady, Japan steady, Australian shares underperforming with Aussie Dollar bouncing,


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March 14 2018

Commentary by Eoin Treacy

Gundlach Disagrees with Mnuchin and Powell

Thanks to a subscriber for this article by Robert Huebsche for Advisor Perspectives summarizing Jeff Gundlach’s talk for DoubleLine clients yesterday. Here is a section:

He said that deficits have historically shrunk in non-recessionary periods and risen during recessions. “We are late in the economic cycle,” he said, “and it is unusual that the deficit is expanding.” He said that this is driven by political reasons, and noted that the fact that we are adding stimulus “has never happened before.”

Deficit problems will move to the forefront by the end of this year, he said. The deficit is getting a lot worse and there will be “a lot of bonds supplied to the market,” he said. The supply of bonds was about $650 to $700 billion in 2017, he said. It will be $1.2 to $1.3 trillion in 2018, in addition to quantitative tightening (QT) as the Fed contracts its balance sheet, according to Gundlach. There could be another $600 billion in tightening, he added.

If there is a recession the deficit will get worse, he said, but QT will stop. Either way, investors should expect $2 trillion in supply.

”If quantitative easing (QE) was a tailwind for financial assets, then QT must necessarily be a headwind,” he said.

The unique conditions that prevailed in 2017 are over, Gundlach said. The VIX is above 17, he said, which is higher than at any time in 2017. “We have lived the entire last month and a half at VIX levels higher than in 2017,” Gundlach said. As a result, the markets turned in the greatest Sharpe ratio ever in 2017, but he said that has flipped in 2018.

“We’ve gone from an easy to a very tough investing environment,” Gundlach said.

Gundlach predicted that the S&P 500 will have a negative rate-of-return this year. “My conviction is high,” he said, “higher than that the 10-year yield will break to the upside.

Eoin Treacy's view -

A link to the full deck of Gundlach’s slides is posted in the Subscriber's Area.

The S&P500 is currently up 2.88% this year but it hit at least a near-term and potentially medium-term peak in January following a brief acceleration of the two-year uptrend.



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March 14 2018

Commentary by Eoin Treacy

Crypto Research Report

Thanks to a subscriber for this report on cryptocurrencies from the team Incrementum which may be of interest. Here is a section:

Do you see any common misconceptions about cryptocurrencies and blockchains?  

Yes, actually. There is the misconception that intangible assets do not have value. However, this is not true: some cryptocurrencies are backed by tangible assets, some provide access to potential earnings, and some provide access to a network. 

We can look at this argument the other way around as well. If I am wrong, and it is the case that intangible assets have no value, then this would apply to a lot of other asset classes as well. For example, fiat currencies are mostly intangible. Although fiat currencies are backed by a government that can tax income, that does not make fiat currencies tangible in my opinion. 

However, I think we are the very beginning of the blockchain revolution. At Incrementum, we believe that a lot of the cryptocurrencies that we see today are going to disappear in the short to mid-term. There is potential for some to stay, and for some to stay for a long time. If cryptocurrencies stay around, I am convinced that regulators will regulate cryptocurrencies like every other investment, which they should do in order to level the playing field for all financial assets.

Eoin Treacy's view -

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

Bitcoin was the genesis token and is still by far the largest. It is also used as a vehicle to purchase a considerable number of other cryptocurrencies, so that creates a daisy chain effect which ensures a high degree of commonality between the various tokens.



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March 14 2018

Commentary by Eoin Treacy

Commodities Daily

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

The cocoa price has soared by 33% in New York and by 28% in London since the beginning of the year. Thus cocoa has achieved the best price performance of all the commodities we track this year – with the exception of carbon. The Coffee and Cocoa Council (CCC) of Ivory Coast, the world’s largest cocoa producer, apparently wishes to curtail its cocoa production. The first step is to count the plantations. Depending on the result, the distribution of higher-quality seeds and plants for the 2018/19 season is then to be temporarily suspended. The aim is to combat the overproduction that saw cocoa prices forced to multi-year lows at the end of last year. According to the International Cocoa Organization, global supply exceeded demand by 300,000 tons in the 2016/17 crop year. The surplus is set to decline to a good 100,000 tons in the current crop year 2017/18. Deficits are needed to reduce the cumulative surplus, as was the case on the oil market a good year ago. OPEC brought this about by cutting production, and Ivory Coast appears to want to follow a similar strategy for cocoa. If the CCC has its way, Ivorian cocoa production will be lowered from 2 million tons now to 1.7-1.8 million tons within two years. Ivory Coast has a good 40% share of the cocoa market, which is even somewhat higher than OPEC’s share of the oil market.

Eoin Treacy's view -

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

I was trading cocoa back in August for rather modest profits because I was hoping it would complete its base formation. I grew impatient with the ranging, and probably would not have held in any case during the steep decline posted in December, but there was certainly a case for buying it back at the January lows. The price has now surged higher to emphatically complete its base formation and while increasingly overbought in the short term, a clear downward dynamic would be required to check momentum.



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March 13 2018

Commentary by Eoin Treacy

March 13 2018

Commentary by Eoin Treacy

March 13 2018

Commentary by Eoin Treacy

Email of the day on the differences between China's authoritarianism and India's chaotic democracy:

I have just returned from a visit to India and I visited China last autumn. I was struck by the difference between the two societies. In China I found an almost total absence of religious belief while in India I discovered an almost nationwide attachment to different religions and traditional mysticism. While I saw "tomorrow" all over China in the form of futuristic cities like Shanghai and Hong Kong, I only saw "yesterday 's poverty and superstition" in India. David and you harp on the importance of governance. I heard many Chinese persons state that as long as their material well-being improves, they are prepared to accept the absence of democracy because this enables the government to take action without vested interests standing in its way. In India democratic discussion was said by the persons I met to be an obstacle to rapid and firm decision-taking. What is your opinion on this?

Eoin Treacy's view -

Thank you for sharing your impressions from China and India following your travels. You are not the first subscriber to have asked this question. There have been a number of people over the years who, having visited China and India, said that on coming home they sold their India positions and transferred the balance to China.



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March 13 2018

Commentary by Eoin Treacy

Volkswagen Steps Up Tesla Rivalry in $25 Billion Battery Buy

This article by Chris Reiter and Christoph Rauwald for Bloomberg may be of interest to subscribers. Here is a section:

 

Volkswagen AG secured 20 billion euros ($25 billion) in battery supplies to underpin an aggressive push into electric cars in the coming years, ramping up pressure on Tesla Inc. as it struggles with production issues for the mainstream Model 3.

The world’s largest carmaker will equip 16 factories to produce electric vehicles by the end of 2022, compared with three currently, Volkswagen said Tuesday in Berlin. The German manufacturer’s plans to build as many as 3 million of the cars a year by 2025 is backstopped by deals with suppliers including Samsung SDI Co., LG Chem Ltd. and Contemporary Amperex Technology Ltd. for batteries in Europe and China.

With the powerpack deliveries secured for its two biggest markets, a deal for North America will follow shortly, Volkswagen said. In total, the Wolfsburg-based automaker has said it plans to purchase about 50 billion euros in batteries as part of its electric-car push, which includes three new models in 2018 with dozens more following. 

Eoin Treacy's view -

Volkswagen needs a new strategy if it is going to get past the diesel scandal, so embracing batteries whether for all-electric or hybrid vehicles is a solution. By committing to such a large purchase of batteries it will overtake Tesla as the largest consumer and this announcement helps to backstop demand for the world’s largest battery producers as well as the miners that produce the requisite metals.



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March 13 2018

Commentary by Eoin Treacy

Persimmon chief's 75m pound bonus 'almost unfathomable'

This article by Rob Davies for The Guardian may be of interest to subscribers. Here is a section:

In an evidence session held by the housing committee on Monday, the Labour MP Helen Hayes asked Raab if he was comfortable with the “positive effect” that help to buy had had on housebuilders’ profits and executive bonuses. “It’s almost unfathomable,” said Raab. “No I’m not comfortable with it.

“That’s why the government has introduced measures on corporate governance and is encouraging shareholders to take a greater grip on it. We want to see shareholders take a stronger grip on it and we’re starting to see more shareholder activism.”

Hayes asked if the government was monitoring the effect that help to buy was having on corporate profits. “I’m not sure how we would measure a hydraulic relationship between those three points,” Raab said. He added that “other parts of government” were looking at corporate pay.

Help to buy is designed to spur the construction of new homes by giving aspiring homeowners an interest-free government loan worth up to 20% of a property’s value – if the buyer opts for new build. According to several reports, housebuilders have simply increased the price of homes in response, driving up prices and boosting their own profits.

Eoin Treacy's view -

UK homebuilders initially collapsed following the Brexit vote but were among the first to rally as the full ramifications of the collapse of the Pound filtered through into nominal asset prices. Help-to-buy programs also represented significant tailwinds for the sector, however increases to stamp duty have had negative effects and not least in London where prices are now falling against a background where the Pound has strengthened considerably from its 2016 lows.



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March 12 2018

Commentary by Eoin Treacy

March 12 2018

Commentary by Eoin Treacy

China's investments in research and innovation

This is a hot topic with two subscribers sending through articles from different authors covering the same topic for newspaper columns.

Eoin Treacy's view -

Links to both articles are posted in the Subscriber's Area.

China was making headlines today because Xi Jinping’s bid to remain in power following the end of his official term was rubber stamped by the People’s Congress today. It has been a key object of Xi’s to do everything possible to ensure China sits on a level playing field with the USA on the international stage. Modernisation of the military, greater surveillance of the domestic population, strengthening the nation’s censorship of the internet, the Belt and Road infrastructure program, dominating international engagement with African countries, spending on research and development and infiltration of university campuses in the OECD are all part of that plan.



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March 12 2018

Commentary by Eoin Treacy

How Blackstone Turned India Into Its Most Profitable Market

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

 

Blackstone’s private equity funds have now invested a total of $3.5 billion in India. The firm is planning to add another $2 billion of such investments in the country over the next five years, Dixit said.

Its Tactical Opportunities fund acquired a stake last year in an Indian asset reconstruction company that buys bad loans. Blackstone is also looking at insolvent firms put up for sale under the new bankruptcy law that took effect in December 2016, he said.

At the turn of the century, many Indian industries weren’t fully open to foreign investment, and family-run businesses were wary of ceding control. Private equity has now become a “very important” source of funding for Indian companies’ growth, according to Sunil Sanghai, founder of NovaDhruva Capital Pvt. Blackstone has been successful in aligning its interests with portfolio company executives as well as finding the right time to sell, he said.

“In the past few years, the investment climate has certainly undergone a positive change,” Sanghai said. “The private equity firms have also matured: they have seen a couple of investing cycles, and they now have experience with Indian companies and Indian management.”

Eoin Treacy's view -

With a well-developed domestic consumer market and the pace of digitization increasing India’s financial, consumer and health care sectors remains on secular uptrend trends of expansion.



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March 12 2018

Commentary by Eoin Treacy

Security analysis of the most popular cryptocurrency exchanges

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

This table shows that out of the 140 exchanges we analyzed less than 40% of them are using headers like the Strict-Transport-Security header or the X-XSS-Protection header. 20% expose server information which isn’t a security vulnerability in itself but that clearly shows the low level of security best practices implemented. And 26% of them use frontend libraries with known vulnerabilities. Only 2% implemented a Content-Security-Policy that, if done well, can offer powerful protection against clickjacking or XSS….

We can do better.

Our analysis isn’t saying that these exchanges have blatant vulnerabilities. But I’m questioning whether they implemented deeper security controls and protections if they didn’t implement basic security best practices that only take a few minutes (or seconds with Sqreen) to implement.

After taking the volume that these platforms handled in the last 24h, I wanted to see if there was a correlation between volume traded and security.

The answer is clearly no. There’s no correlation between transaction volume and security maturity.

The 10 biggest crypto exchanges have an average grade of 3.8 out of a maximum of 10 and a median of 4.5.

Eoin Treacy's view -

Cryptocurrencies are completely unregulated. For many libertarians that were early backers of the theme that is considered good news. However, the downside is that a substantial number of exchanges have collapsed following hacking incidents and large numbers of investors have been robbed.



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March 12 2018

Commentary by Eoin Treacy

Japan Scandal Gives Fresh Boost to Yen Bulls Eyeing 100 Mark

This article by Masaki Kondo and David Finnerty for Bloomberg may be of interest to subscribers. Here is a section:

Governor Haruhiko Kuroda made it clear last week the current stimulus program will remain in place for a while. There’s concern that any move past 100 could prompt a policy response if it’s deemed to hurt attempts to reflate the economy. However, his remarks on March 2 that the bank will start thinking about a stimulus exit in fiscal 2019 have at least increased market speculation over the timing of a possible normalization.

Kuroda’s mention of an exit was meant to prime markets for an eventual withdrawal, says Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp. in Tokyo. “Given the reduction in bond purchases, the BOJ is already laying ground for an exit. It just isn’t saying so.”

 

Eoin Treacy's view -

The Bank of Japan will likely be the last of the major central banks to exit its quantitative easing program. With the ECB due to complete tapering by September that suggests Japan’s program will end sometime in 2019. That is of course under the assumption exogenous factors do not required it to be extended even further.



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March 09 2018

Commentary by Eoin Treacy

March 09 2018

Commentary by Eoin Treacy

Bigger U.S. Auctions in Shorter Time Seen Boosting Yields

This note by Brian Chappatta for Bloomberg may be of interest to subscribers. Here is a section:

Bond traders have to contend with both larger auction sizes and a condensed schedule when the U.S. Treasury sells $28 billion of three-year notes and $21 billion of 10-year notes on March 12. To JPMorgan Chase & Co. strategists, that combination signals a weak reception. Last month’s offerings, the first since 2009 to increase in size, priced at yields higher than the market was indicating heading into the sales. The 3- and 10-year auctions are usually spaced out over two days, but when they came on the same day in December, yields also missed higher.

Eoin Treacy's view -

Bull markets don’t often end because demand evaporates. They usually end because the surge in prices encourages supply into the market and that eventually overwhelms demand. There is no shortage of new supply, in fact the USA’s decision to double its deficit is the latest in a long line of issuers who have been locking in low rates. The fact that one of the biggest buyers, the Fed, is now a net seller, should be giving investors pause when thinking about the value represented by bonds at close to 3%.



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March 09 2018

Commentary by Eoin Treacy

There's No Accounting for Tesla Bondholders' Tolerance

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

There's more to be found off the balance sheet, too. According to Tesla's annual filing, which dropped a couple of weeks ago, it's potentially on the hook for an estimated $8.5 billion of contracted purchases over the next three years alone. Most of this relates to batteries coming from Panasonic Corp. and emphasizes the importance of Model 3 production catching up with the vast ambitions set ahead of it.

That fixed-income investors are fine with this is, of course, a function of their primary defense; namely, Tesla's gravity-defying stock price. The potential for an eighth equity sale to refill company coffers serves to salve any wounds inflicted by slipping Model 3 targets or senior managers sipping away. In early trading on Friday morning, the shares were down less than 1 percent.

What might cause the market's confidence to crack? It's impossible to say, though the Model 3's woes represent the most acute threat. We are now just over three weeks away from the March 31 deadline to get weekly production up to 2,500; a target that's been reset several times already. Bloomberg's own tracker estimates the current rate at less than 700.

Eoin Treacy's view -

Tesla is a B- rated credit so it sits squarely in the riskiest portion of the junk bond universe. The fact that it’s attempts to build a large-scale manufacturing venture from zero have been met with equanimity by the investing public is a testament to the boldness of their design, Elon Musk’s ability to inspire just about everyone he meets and the abundance of credit on offer since 2008.



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March 09 2018

Commentary by Eoin Treacy

How a Donald Trump-Kim Jong Un Summit Scrambles the Calculus for Key Players

This article by Jonathan Cheng in Seoul and Alastair Gale for the Wall Street Journal may be of interest to subscribers. Here is a section:

President Donald Trump’s decision to accept a meeting with North Korean leader Kim Jong Un caught the world off guard.

In agreeing to sit down with North Korea’s third-generation leader, Mr. Trump has boosted the stature of Mr. Kim—a man he has ridiculed as “Little Rocket Man” and threatened with “fire and fury”—with a surprise diplomatic opening that left some allies wrong-footed.

For Mr. Kim, who is half the age of Mr. Trump, just getting a summit meeting with the U.S. president is a big win. Neither his father nor his grandfather succeeded in getting a face-to-face meeting with a sitting U.S. president.

Mr. Trump’s move represents a victory for South Korea’s president, Moon Jae-in, who has pleaded with the U.S. to tone down its rhetoric and worked assiduously to get negotiations off the ground, and others who have pushed for engagement and diplomacy.

Other U.S. allies and some veteran negotiators, however, expressed concern that while a summit meeting could lead to a breakthrough in what has been a protracted standoff, it is a risky move that could lead to ill-considered concessions to Pyongyang.

Eoin Treacy's view -

Agreeing to a meeting with Kim is a big risk because of the polarity of the potential outcomes. These kinds of win/lose scenarios are not attractive from the perspective of any diplomatic corp but are not at all unusual in business where the first lesson is you have to be willing to walk away with nothing if you do not get the price you want.



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March 08 2018

Commentary by Eoin Treacy

March 08 2018

Commentary by Eoin Treacy

Saudi Oil Minister Says Aramco IPO Could Be Delayed to 2019

This article by Annmarie Hordern, Glen Carey and Grant Smith for Bloomberg may be of interest to subscribers. Here is a section:

Saudi Arabia’s energy minister hinted the initial public offering of the state oil company Aramco could be delayed until 2019, pushing back a central plank of Crown Prince Mohammed bin Salman’s plan to modernize the economy.

Khalid Al-Falih also said the IPO, potentially the largest ever, would be “anchored” by a listing on Saudi Arabia’s local exchange and any international listing would be announced in due course, if at all.

“Between December 31st and January 1st there is no value lost for the kingdom,” Al-Falih said in an interview in London.

“So, I don’t see this artificial deadline that you refer to as being significant.”

Until recently, Saudi officials insisted the IPO was “on track, on time” for 2018, but two months into the year that deadline is looking harder to meet. Still, Al-Falih, who also serves as Aramco’s chairman, insisted the company had made all the necessary preparations for a share sale of the world’s largest oil producer.

"The only certain thing about the Saudi Aramco IPO is that a) it will happen, b) the anchor market will be the Tadawul exchange in Saudi Arabia,” Al-Falih said. “We have created the framework -- fiscal and otherwise regulatory -- for Saudi Aramco to be listed this year. The actual timing will be announced when we feel that the conditions for the success of that listing are in place.”

Eoin Treacy's view -

Managing even a partial sale of one of the world’s most significant assets is not an undertaking that can be completed in a short period of time and there is an obvious incentive to get the best possible price. One of the primary supporting arguments for the oil price over the last year has been that Saudi motivation to get the best possible price for its asset.



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March 08 2018

Commentary by Eoin Treacy

Draghi Says Euro-Area Turnaround Warrants Policy Dial-Back

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

The European Central Bank unexpectedly dropped a pledge to ramp up bond buying if the economy deteriorates, saying the turnaround in the outlook has given it to confidence to change a key part of its monetary-policy guidance.

In what the ECB President Mario Draghi said was a unanimous decision, policy makers in Frankfurt surprised investors by ending an easing bias on quantitative easing, effectively a conditional promise to increase debt purchases in “size and/or duration” if needed. But he said downside risks remain, and added rising trade protectionism to the list of threats.

“These are unlikely contingencies now, the ones that would suggest that we would activate this easing bias,” Draghi said Thursday. The language “was introduced in 2016 -- think about how different the situation was at that time.”

The revision coincided with an upgrade to the ECB’s outlook for 2018. At the same time, Draghi emphasized that, currently scheduled to run at a monthly pace of 30 billion euros ($37

billion) until at least the end of September, will continue until inflation is solidly back on track toward its goal.

Eoin Treacy's view -

The ECB is edging towards the exit of quantitative easing. First, they put an end date on purchases, now they are removing the proviso that purchases will be increased and in September they will cease to add €30 billion to their balance sheet. This timetable is subject to the belief that the economy will continue to improve.



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March 08 2018

Commentary by Eoin Treacy

Autodesk's results

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

Autodesk continues to show steady progress in shifting to a subscription model, which has boosted its recurring sales. Subscriber additions continued to be aided by its discounting and other promotions for converting legacy license users to subscription offerings. The company has bundled its products to boost annual recurring revenue (ARR) and average revenue per subscriber (ARPS). While upsell of subscription products to its maintenance subscribers is aiding sales momentum, new cloud products are unlikely to be a growth driver in the near term.

Eoin Treacy's view -

Subscription business models have been growing in popularity among technology companies since Adobe first explored the concept about five years ago. Historically technology has been a highly cyclical business with each new iteration of the product or software resulting in a surge in sales which subsequently led to declines as sales growth tapered off while support costs rose. The cycle would be repeated with each new product offering and this also put a lot of pressure on companies to come up with a new iteration that was measurably better than the last to justify the additional outlay.



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March 07 2018

Commentary by Eoin Treacy

Video Commentary for March 7th 2018

Eoin Treacy's view -

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

Some of the topics covered include: Trade wars troubling for India, base formations in bonds and commodities, bitcoin decline may be positive for gold, subscription businesses continue to do well, consumer staples underperform, stock markets generally steady



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March 07 2018

Commentary by Eoin Treacy

Email of the day on long-term themes:

I was at the last Seminar in London.

I hope you are enjoying the weather in Dubai. Here in Dublin it is snowed in with temperatures -2C, real feel -11C and the city has ground to a halt!!

Anyway, I wanted to let you know that I think your note on Long Term Themes is an excellent addition to the Comment of the day. A very good succinct summary of your current view. I had been keeping my own notes from your videos. I think that you could also consider adding comments on the disenfranchisement of people in the developing countries contributing to the change in the established order, the rise of the global consumer, forecast population growth being greatest in Africa and gold….

Thanks for a great service.

Eoin Treacy's view -

Thank you for these suggestions and I’m delighted you are enjoying the service. I love to travel because I believe it helps to broaden one’s perspective, but it is also nice to be back in the routine of home life. Thank you for these suggestions which I will incorporate into today’s and future long-term updates.



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March 07 2018

Commentary by Eoin Treacy

Trade Frictions: Broadening Out

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

Eoin Treacy's view -

A link to the full report as well as a section from it are posted in the Subscriber's Area.

Trade wars are only manageable if both parties decline the temptation to escalate. This is still very early and some still doubt whether the Trump administration will go ahead with tariffs even after Steve Cohn’s resignation. However, Trump also started his re-election campaign last week and this move is aimed squarely at his voter base in the exactly the same way as the tax cuts were.



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March 06 2018

Commentary by Eoin Treacy

Video commentary for March 6th 2018

Eoin Treacy's view -

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

Some of the topics covered include: gold prices continue to firm from the $1350 area while gold shares still look neglected, commonality in bond yields, TIPS and commodities, Wall Street steady, China bounces but governance is deteriorating, India weak, Eurozone barely steady but Italy bouncing, 



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March 06 2018

Commentary by Eoin Treacy

Gold helped by USD pullback and safe haven flows

This report by Joni Teves for UBS may be of interest to subscribers. Here is a section:

March 06 2018

Commentary by Eoin Treacy

Stock Bulls in Trump Country Are Freaking Out Their Brokers

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

The glittering rise has been irresistible to Americans of all political stripes, of course. Consumers’ confidence in the stock market soared to a record high in January before fading in February after the market slumped 8.6 percent over a span of eight days. (And markets have begun gyrating again, triggered in part by Trump’s plan to impose steel and aluminum tariffs.)

Among Trump’s fans, though, trust in the firebrand politician as a stock-market bulwark easily endured the selloff, at least in San Angelo. During other routs, Edward Jones’s Freeman said, “I had people wanting to jump out of windows. Not this time.” This time, they kept buying. “I have to temper people,” he said, without much success.

Neff, for one, is unyielding. So strong is his faith, in fact, that he can even get odd looks in the heart of Trump country when he starts talking about how much money he’s investing in stocks -- including an additional $30,000 amid the February selloff.

“People look at me like a cow looking at a new gate.” But to Neff, it’s not complicated. “The economy’s doing too good, and all the companies are making money.”

Eoin Treacy's view -

One headline I saw this morning was something akin to the cry “Why do we need a Powell put when we have a Trump put?” That’s a simple emotive rallying cry for retail investors who have seen the stock market do nothing but go up since the Presidential election. Quite whether it will continue to work following the shock and awe of the early February meltdown is another question entirely.



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March 06 2018

Commentary by Eoin Treacy

Musings from the Oil Patch March 6th 2018

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

Eoin Treacy's view -

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

Unconventional oil and gas have been game changers for the US energy sector and with increasing export capacity that moniker will increasingly be true for the global market.

Together with the fact that US tight oil supply is also of the sweet light variety makes it an attractive option for refiners, particularly since a great deal of the additional supply coming from Saudi Arabia is of the heavier variety.



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March 05 2018

Commentary by Eoin Treacy

March 05 2018

Commentary by Eoin Treacy

China Turns Fiscal Screws While Targeting GDP Growth Around 6.5%

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

Xi has ratcheted up his drive to curb debt risk, pollution and poverty at a time when the world’s second-largest economy is on a long-term growth slowdown. His efforts to rein in spending contrast with an historic expansion of U.S. borrowing under Donald Trump during a period of economic expansion.

The 2018 targets “suggest slower growth and a fiscal drag,” said Callum Henderson, a managing director for Asia-Pacific at Eurasia Group in Singapore. “This makes sense for China in the context of the new focus on financial de-risking, poverty alleviation and environmental clean-up, but is less good news at the margin for those economies that have high export exposure to China.”

Growth handily surpassed 2017’s target with a 6.9 percent expansion that was the first acceleration since 2010. Economists forecast a moderation to 6.5 percent this year amid the ongoing deleveraging drive and trade tensions with the Trump administration and a further deceleration to 6.2 percent in 2019.

Eoin Treacy's view -

China has significant challenges ahead as it engages with deleveraging, particularly among the regional lenders. However, it is also worth considering that fiscal discipline at this stage in the cycle is admirable since it will leave the government with some firepower when the economy next slows. That is the exact opposite of what the US government is doing at present which is of course why interest rates are set to continue to rise.



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March 05 2018

Commentary by Eoin Treacy

Bitcoin's Plunge in Volume Stirs Questions About Its Usage

This article by Eddie Van Der Walt for Bloomberg may be of interest to subscribers. Here is a section:

Earlier this year, when Bitcoin’s price fell by more than 60 percent from its record close, a less-noticed Bitcoin figure also plunged: the number of daily transactions.

There are many explanations for the fall-off in trading, from software- to news-related. What’s less understood is why the level hasn’t recovered as Bitcoin’s price made a 50 percent comeback since Feb. 5. That’s left some investors wondering whether the cryptocurrency is waning in popularity.

The average number of trades recorded daily has roughly dropped in half from the December highs and touched its lowest in two years last month, even as Bitcoin became a household name and roared back to near $11,000.

The transaction data may be bad news for Bitcoin bulls, according to Charles Morris, chief investment officer of Newscape Capital Group in London, who invests in cryptocurrencies. Trading and purchases on the Bitcoin network, which can be measured by metrics like transaction volume, is indicative of price direction, he said.

Eoin Treacy's view -

Following a crash of bitcoin’s magnitude it is only reasonable that some people are shy about now continuing to invest at such a feverous pace. The 69.65% peak to trough decline will have resulted in a large number of people coming under severe hardship but the fall was also enough to encourage bargain hunters at least in the short term. The decline in trading volume is also not so surprising for exactly the same reason.
 



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March 05 2018

Commentary by Eoin Treacy

OPEC Must Rethink Plans as $60 Oil Brings New Glut, IEA Says

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

"Established producers need to reconsider their production plans quickly and substantially in light of the huge production increase from U.S. shale," the agency’s Executive Director Fatih Birol said Monday on the sidelines of the CERAWeek by IHS Markit conference in Houston. Asked whether he was referring to OPEC nations, Birol said: "All OPEC producers are established producers."

The Organization of Petroleum Exporting Countries and allies including Russia, Mexico and Kazakhstan agreed to cut production in late 2016 in an effort to clear a glut in crude inventories. They defied the skeptics by going deeper than their pledged curbs and maintaining them for long enough to deplete the bloated stockpiles.

Yet the strategy has also backfired by unleashing “a new wave of growth from the U.S.” that leaves little space for OPEC to increase output once the cuts expire at the end of the year, according to the agency’s report.

The U.S. will dominate global oil markets for years to come, satisfying 80 percent of global demand growth to 2020, the IEA said. Supplies from other non-OPEC nations will make up the rest.

Eoin Treacy's view -

US unconventional supply is elastic since the pace of production can only be sustained by continued drilling. When prices are high production can be hedged out as far as two years which ensures profitability. At the same time, drilling multiple horizontal wells is a capital-intensive exercise and the sector has been issuing a great deal of debt to fund production in the hope prices will stay higher for longer.

 



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March 05 2018

Commentary by Eoin Treacy

Email of the day on the yield curve spread and medium-term outlook for bonds

I just have a couple of queries for you:

Where can I find the US yield curve spread chart (10yY-2yY) in your chart library?

Based on expected MT to LT yield rising environment, should I keep my PIMCO income Fund (Global Investor Series Plc), or dispose of it? 

Thank you and best regards 

Eoin Treacy's view -

Thank you for these questions which may be of interest to other subscribers. I created this video to discuss both how to create the chart and save it as a preset template for when you want to find it later which I hope will be of use to you. 



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March 02 2018

Commentary by Eoin Treacy

March 02 2018

Commentary by Eoin Treacy

Paul Tudor Jones on Jerome Powell

Thanks to a subscriber for this note which may be of interest.

Eoin Treacy's view -

A link to Tudor-Jones comments are posted in the Subscriber's Area.

The market has long relied on the assumption that in a crisis the Federal Reserve will wade in to the rescue by boosting money supply and helping to reflate asset prices. However, it is not until a crisis occurs that investors truly knew whether Greenspan, Bernanke or Yellen had their backs. Jerome Powell is a lawyer, rather than an economist by training, and has yet to be tested. Therefore, investors do not know how he will react in a time of market stress. That remains an uncertainty that is being priced into this market.



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March 02 2018

Commentary by Eoin Treacy

Welcome to Dubai 2.0

This article by Donna Abu-Nasr may be of interest to subscribers. Here is a section:

It tackled oppressive summer heat and sandstorms, the population more than doubling in a decade to approach 3 million. Foreigners, who make up the vast majority of Dubai’s residents, flocked for work, banking and fun.

Now it’s about how to keep the party going, even one in a country where unmarried couples can’t legally live together and where free voice calls over the Internet and Apple’s FaceTime are blocked.

Few places reflect the challenge more than the site of the expo, without which the emirate could face a sharp economic slowdown. Dozens of cranes are busy working on the 438-hectare (1,080-acre) site south of Dubai’s center. The city is the first in the Middle East to be awarded the event in its 167-year history. The pressure is on to make it work beyond the short-term influx of visitors.

“The impact that it has in terms of generating opportunities for the economy is definitely big,” said Marjan Faraidooni, who’s in charge of the legacy impact and development for the expo. “If we don’t showcase things that are cool, then we’re not living up to our reputation.”

Eoin Treacy's view -

Here was the view from my balcony this morning which highlights how much building is still going on in Dubai, with the horizon peppered with cranes.



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March 02 2018

Commentary by Eoin Treacy

Diesel ban approved for German cities to cut pollution

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

The likelihood now is that the German government will rush to introduce some sort of national policy, to ensure at least some level of consistency across the country.

It's not just about Germany either - cities across Europe are struggling to meet EU air quality standards, and may well see the German ruling as setting a precedent.

New diesel cars won't be affected, but that's not really the point. Consumers are already moving away from the technology - and the prospect of city bans will only accelerate that process.

So diesel's decline is likely to gather momentum.

That's a problem for the industry, because while diesels produce high levels of nitrogen oxide - a major urban pollutant - they emit relatively low levels of carbon dioxide, a greenhouse gas.

So moves to control one environmental problem may end up undermining efforts to combat another - unless we all start driving electric cars very soon.

Eoin Treacy's view -

Platinum has been struggling to rally since the Volkswagen scandal broke in 2015 and this ban of diesel vehicles from city centres represents an additional headwind.



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March 01 2018

Commentary by Eoin Treacy

March 01 2018

Commentary by Eoin Treacy

"Fickle February"

Thanks to a subscriber for this report by Jeffrey Saut for Raymond James. Here is a section:

One of them, and arguably the smartest strategist on “The Street,” is my friend Tony Dwyer, who writes:

Why bother worrying about a retest? Given our positive fundamental core thesis and 3100 target, many wonder why we bother calling for a retest of the “shock drop” ending the week of 02/09.  The answer is simple – when a retest happens, fear it is something more significant causes many to reduce risk, just at the very time history suggests increasing it.  In all prior occurrences of such a historic spike in the 10-week rate-of change in volatility as measured by the CBOE Volatility Index (VIX), there was an average bounce of 5.62% (ex-2008 instance) prior to the retesting of the low 30 trading days later.  With a gain of 4.89% from our signal highlighted in “Shock drops, pops and flops,” the market is following the script, which means the comfort of the rebound should soon fade, either from fear of Fed, disappointing data, or some combination of the two.

Obviously, opinions vary on the “Street of Dreams,” but that’s what makes a market.  We happen to think a full retest of the “selling climax lows” is not going to happen, but then anything can happen in the equity markets.  So, what caused yesterday’s Dow Dump (-380 points).  Well, we think it was cognitive dissonance, which would be the ability to hold two disparate thoughts at the same time.  In the current case it is whether to believe the softening headline economic reports (durable goods, housing, etc.), or the details within those reports that show final sales up 3.3%, domestic final sales better by 4.3%, and private domestic final purchases improving by 4.6%, which suggest the economy is really strong.  We continue to think the economy is stronger than a “garlic milkshake!”  This morning the S&P 500 futures are off about 7-points as we write at 5:12 a.m. as the Street awaits Fed head Powell’s part 2 testimony to lawmakers.  Clearly, Wall Street is currently of the belief that Jay Powell is more hawkish than his predecessors.  Surely time will tell; but, until he demonstrates a more dovish disposition, the perception will be the new Fed Chair is a hawk.

Eoin Treacy's view -

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

Ranging appears to be the most amenable course of action for the market following the sharp drawdown in February that resulted in a 10% pullback. February was the first month in 15 where the S&P500 recorded a negative return. Since that was the longest run of consecutive positive monthly returns in decades it is reasonable that this inconsistency represents at least a pause for markets.



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March 01 2018

Commentary by Eoin Treacy

Dogmas of the Quiet Past, Why Higher Rates are on the Horizon

Thanks to a subscriber for this article by Pamela Rosenau which appeared in Forbes. Here is a section:

For starters, history tells us that the dynamics of the supply and demand for money are relevant for determining an appropriate level for interest rates. The Federal Reserve is decreasing the supply of money by tapering their balance sheet, while the demand for money will increase with the latest bout of expansionary fiscal policy (i.e. tax reform). Professor Lars Oxelheim of the Financial Times, recently wrote how historical precedence has shown how this supply/demand shift can lead to significantly higher interest rates over a short period of time. Of course, this would impact the valuation of all asset classes as discount rates head higher. Market strategist Dave Rosenberg recently added that “we have a government policy that is aimed at pushing fiscal deficits higher and pulling trade deficits lower. Say this over and over again – these two goals can only co-exist with rising interest rates.”

Also, who is going to stroll in on their white horse and be the new big US treasury bond buyer? We know that the Fed is pruning their bond portfolio. After all, newly installed Fed Chairman Powell showed his true colors six years ago when he warned of the “Greenspan put” and its implicit encouragement of risk taking. Considering his concerns back then, I cannot imagine him being overly dovish given the valuation excesses in our environment today. Furthermore, the Chinese could play monetary hardball as a response to any hostile U.S. trade actions and choose to mitigate their participation in our auctions, thus causing a sudden spike or pernicious reset in interest rates. Frankly, Xi Jinping has a license to do whatever he wants at this point.

Eoin Treacy's view -

Let’s lay aside for a moment the arguments about whether inflation is in fact rising or not, or whether we can expect all of the deflationary forces that have contributed to the decades long decline of yields to continue. Let’s just devolve to the first principles of markets. There are more sellers than buyers.



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March 01 2018

Commentary by Eoin Treacy

Why Italian Elections Matter: A New Type of Populism Is Rising

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

The election is likely to prompt a question that could force 5 Star to define its future—and potentially that of Italy, too. Is it a governing force or simply a protest movement?

On one side are members, including Luigi Di Maio, the party’s 31-year-old candidate for premier, who are pushing it to join an alliance with mainstream parties. According to polls, 5 Star would receive about 27% of votes—not enough to govern alone, but potentially enough to play a major part in a coalition government.

Mr. Grillo has roundly rejected that scenario, saying that unless 5 Star wins an outright majority, it should remain an opposition party. Joining a coalition government is “like saying that a panda can eat raw meat,” he said in January. “We only eat bamboo.”

If no single party or coalition emerges with a parliamentary majority, Italy’s president could ask parties to attempt to form a grand, cross-party coalition that could have a limited lifespan.

Eoin Treacy's view -

This history of protest parties that enter government as part of a coalition is not favourable so Grillo is exhibiting political savvy in eschewing the temptation to enter power without a majority. However, Italy’s political system is so fractured that receiving a majority is a tall order which suggests the most likely scenario is another coalition that supports the status quo or limited reform at best. Nevertheless, until the event has passed it will continue to represent an uncertainty.



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February 28 2018

Commentary by Eoin Treacy

Video commentary for February 28th 2018

Eoin Treacy's view -

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

Some of the topics covered include: small key reversals on Wall Street yesterday suggest the impetus of the short covering rally is fading, stocks generally fall in sympathy. Eurozone banks testing the region of the trend mean and Italian yields inert ahead of the election, discussion of the impact of Chinese dictatorship on headline grabbing shares. 



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February 28 2018

Commentary by Eoin Treacy

More Trouble for the Equity Markets Ahead

Thanks to a subscriber for this article by Byron Wein for Blackstone which may be of interest to subscribers. Here is a section:

Some skeptics believe all this good news about the prospects for the economy supports the bearish, not the bullish, case for the equity market. They argue that the economy was already doing well before the fiscal stimulus provided by the tax cut. With unemployment at 4.1% and headed to 3.5%, the economy did not need any stimulus. It was already at full employment and the additional federal spending would cause the economy to overheat, resulting in higher inflation to and rising bond yields. They argue that those who are bullish on the market should hope for slower growth. My view is that this is an earnings-driven market and the improving profit forecasts will offset rising inflation and interest rates.

Some observers believe a 10% correction is enough, at least for a while. Valuations have come down to reasonable levels, the market is no longer excessively overbought and intermediate-term interest rates are showing signs of stabilizing. The Crowd Sentiment indicator has moved from close to 80 down to 61, putting it in “neutral” territory where we could see a short term rally. It would be nice if investors had to endure only two weeks of pain before the market headed higher again.

I believe the positive sentiment that provided the background for the decline has only partially been corrected. Consumer confidence is high, reaching levels not seen since the late 1990s, but the savings rate has dropped to 3.4% as consumer net worth has increased. The last time the savings rate was this low was two years before the 2008-9 recession. We know that the Federal Reserve is moving toward a more restrictive monetary policy and the European Central Bank is talking about tapering. Less accommodative monetary policies are generally not good for the equity markets. Consumer debt has risen sharply since 2009 as confidence has increased, but federal debt may be the real problem. According to Doug Kass and Larry McDonald, that debt was $9 trillion in 2007 and carried a cost of servicing of 4.75% or about $425 billion a year. (In 2000 it was only $6 trillion with a cost of servicing of 6% or $360 billion, but with a tax cut and two wars to finance, debt soared in the new millennium.) Today it is $20.5 trillion with a debt service cost of 2.25% or $460 billion, slightly more than in 2007. Think of what interest rates going above 3% would do to the budget deficit.

None of these issues make me bearish but they do make me think the correction is not over. I am bothered by the role that quantitative algorithmic trading and leveraged Exchange Traded Funds played in accentuating the rise in the market and its decline. These are basically trading tools, not investment strategies, and while it can be argued that traders contribute to market liquidity, I fear that these mechanical techniques have produced a certain level of instability in frenetic periods such as the one we just experienced.

Eoin Treacy's view -

I am on the record as saying I think the market is more likely to range than trend so I see more in Byron Wein’s views to agree with than disagree with.



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February 28 2018

Commentary by Eoin Treacy

February 28 2018

Commentary by Eoin Treacy

Email of the day on how to invest in Africa

Thank you very much for another nice long term video. I think your idea the potential of Africa is very interesting. Would you have any suggestions how to invest to benefit from the growth of Africa? Thanks in advance

Eoin Treacy's view -

Thank you for this email which others may have an interest in. One of the primary challenges in investing in Africa is that there are only about 1700 companies listed on the entire continent. Additionally the shares of most of the listed companies are illiquid.  To compound the challenge, many of the companies are linked to the resources sector which means they tend to be cyclical.



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February 27 2018

Commentary by Eoin Treacy

February 27 2018

Commentary by Eoin Treacy

Will Modi lose the next Lok Sabha election in 2019?

Thanks to a subscriber for this article by Arvind Kala for which may be of interest to subscribers. Here is a section: 

Earlier the poor Indian farmer could sell his cow for Rs 25000 when it stopped giving milk. No longer. Now cattle buyers don't step forward lest Hindu goons lynch them.

So the farmer with an unproductive cow leaves it in some open area, and this cow becomes yet another addition to the tens of thousands of emaciated cows standing around in the countryside.

Worse, they eat up the farmer's crop. Losing him the little he has.

India has 120 million cows, according to the last agriculture census. Why would those cow-owners vote for a Modi who impoverishes them?

When Nanded voted against the BJP and Modi this week, it was speaking for all of rural India. Village voters will pulverize Modi in 2019.

About urban distress, facts speak. Mahesh Vyas is India's most respected statistician and founder of CMIE, our most credible source on the Indian economy.

Citing figures, he wrote that demonetization triggered huge job losses. Seven million of them in one year between Jan 2016 and Jan 2017. He was talking of formal jobs in the private sector.

Those seven milllost jobs means at least 28 million people pauperized, at four people per family, people who depended on those salaries to eat and live.

Today a failing GST has paralyzed commerce all over India. Small traders and manufacturers just can't cope with the paperwork.

And they can't afford the services of trained accountants.

Eoin Treacy's view -

Could Modi lose the 2019 election in India? It’s a question the majority of investors haven’t even to contemplate but it behoves us to at least consider the possibilities.

Modi is an economic reformer and his success in Gujarat was one of his most alluring attributes in delivering what was a stunning electoral victory at the last election. However, Modi is also a populist, in fact he was the first of what is now an increasingly long line of successful populist politicians. Granting single party rule to the BJP also promoted Hindu nationalism to the national stage where it has become more assertive. 



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February 27 2018

Commentary by Eoin Treacy

Macro Morsels February 27th 2018

Thanks to a subscriber for this report from D. Harding at Maybank dated the 17th, which may be of interest. Here is a section on commodity led inflation or vice versa:

February 27 2018

Commentary by Eoin Treacy

What Does Population Aging Mean for Growth and Investments?

Thanks to a subscriber for highlighting this article by Henry McVey at KKR which appeared in the Macro Morsels report on the 23rd. Here is a section on China: 

Eoin Treacy's view -

Both a section from the report and the report are posted in the Subscriber's Area.

China has successfully developed a domestic demand driven digital economy out of nothing less than a decade ago. The introduction of social media, ecommerce, online banking, payments and saving are all contributing to the upskilling of the population.



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February 26 2018

Commentary by Eoin Treacy

February 26 2018

Commentary by Eoin Treacy

Berkshire Hathaway Shareholder Letter

Thanks to a subscriber for this year’s letter by Warren Buffett. Here is a section: 

The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you. That requirement will produce some truly wild and capricious swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period. Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our operating performance. For analytical purposes, Berkshire’s “bottom-line” will be useless.

The new rule compounds the communication problems we have long had in dealing with the realized gains (or losses) that accounting rules compel us to include in our net income. In past quarterly and annual press releases, we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains – fluctuate randomly.

That’s largely because we sell securities when that seems the intelligent thing to do, not because we are trying to influence earnings in any way. As a result, we sometimes have reported substantial realized gains for a period when our portfolio, overall, performed poorly (or the converse).

Eoin Treacy's view -

This mark to market rule which Buffett is speaking about will have a large impact not only on Berkshire Hathaway but potentially also on banks that conduct trading and investment banking activities. That will likely contribute to them representing high beta plays on stock market performance.

 



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February 26 2018

Commentary by Eoin Treacy

The Poison We Pick

This article by Andrew Sullivan for the New Yorker offers a particularly lucid account of the opioid epidemic in the USA. Here is a section: 

One of the more vivid images that Americans have of drug abuse is of a rat in a cage, tapping a cocaine-infused water bottle again and again until the rodent expires. Years later, as recounted in Johann Hari’s epic history of the drug war, Chasing the Scream, a curious scientist replicated the experiment. But this time he added a control group. In one cage sat a rat and a water dispenser serving diluted morphine. In another cage, with another rat and an identical dispenser, he added something else: wheels to run in, colored balls to play with, lots of food to eat, and other rats for the junkie rodent to play or have sex with. Call it rat park. And the rats in rat park consumed just one-fifth of the morphine water of the rat in the cage. One reason for pathological addiction, it turns out, is the environment. If you were trapped in solitary confinement, with only morphine to pass the time, you’d die of your addiction pretty swiftly too. Take away the stimulus of community and all the oxytocin it naturally generates, and an artificial variety of the substance becomes much more compelling.

One way of thinking of postindustrial America is to imagine it as a former rat park, slowly converting into a rat cage. Market capitalism and revolutionary technology in the past couple of decades have transformed our economic and cultural reality, most intensely for those without college degrees. The dignity that many working-class men retained by providing for their families through physical labor has been greatly reduced by automation. Stable family life has collapsed, and the number of children without two parents in the home has risen among the white working and middle classes. The internet has ravaged local retail stores, flattening the uniqueness of many communities. Smartphones have eviscerated those moments of oxytocin-friendly actual human interaction. Meaning — once effortlessly provided by a more unified and often religious culture shared, at least nominally, by others — is harder to find, and the proportion of Americans who identify as “nones,” with no religious affiliation, has risen to record levels. Even as we near peak employment and record-high median household income, a sense of permanent economic insecurity and spiritual emptiness has become widespread. Some of that emptiness was once assuaged by a constantly rising standard of living, generation to generation. But that has now evaporated for most Americans.

Eoin Treacy's view -

The hollowing out of the middle class might be a handy soundbite but what if it can be taken literally? Escapism is part of the human condition and the spectrum of distractions we pursue is indeed influenced by the health of our individual social settings. 



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February 26 2018

Commentary by Eoin Treacy

China will scrap limit on presidential terms, meaning Xi Jinping can stay on

Thanks to a subscriber this article from the South China Morning Post which may be of interest. Here is a section:  

The party has in recent decades largely observed an unwritten retirement age of 68 for its top leaders, but its charter does not have any limit on terms. That means there are no restrictions on the general secretary position, but the Chinese constitution does limit presidents to a maximum of two five-year terms. 

Analysts said ending the two-term limit gives the strongest indication yet that Xi will stay in power longer than his recent predecessors at a time when the leadership was “fixated on stability”.

There was intense speculation in the lead-up to the party’s five-yearly congress in October over whether Xi would continue to lead the party beyond two terms, with some questioning whether his ambitious plans to “rejuvenate” China could be achieved within 10 years.

Eoin Treacy's view -

Governance is Everything. Does the removal of term limits represent a retrograde step? If we look at the anything beyond the short term then the answer had to be in the affirmative. Absolute power corrupts and the removal of term limits means any semblance of checks and balances will be removed. Xi has been clear that no one is above the law but China does not have an independent judiciary so that statement means nothing. 



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February 23 2018

Commentary by Eoin Treacy

February 23 2018

Commentary by Eoin Treacy

Email of the day on gold and interest rates

Can gold really breakout when real interest rates are rising?

Eoin Treacy's view -

Thank you for this question which I have been pondering for a while. Gold does not have a yield so the only way it can outperform on a total return basis is for the price to rise. The reason it can do that is because the supply of gold is not easily or quickly increased. That’s it’s primary advantage relative to electronic money which is wished into existence by a simple keystroke. 



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February 23 2018

Commentary by Eoin Treacy

Email of the day on China's desire to settle in Renminbi

Thanks, Eoin for all your recent helpful comments. could you please comment now on the new oil market, I believe run by China, due to start on 01 March 2018 which is backed by gold and how this might affect world markets in so many different ways.

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. I last commented on this subject in Comment of the Day on October 2nd



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February 23 2018

Commentary by Eoin Treacy

Naspers CEO Exploring Amsterdam IPO for Some Units, FD Says

This article by Wout Vergauwen and Loni Prinsloo for Bloomberg may be of interest to subscribers. Here is a section: 

Van Dijk sees investment in e-commerce businesses as helping to reduce a valuation gap with Naspers’s stake in Chinese Internet giant Tencent Holdings Ltd., which is worth more than the company as a whole. E-commerce units, which include online food delivery in India and educational software in the U.S., have the highest potential for an initial public offering, Het Financieele Dagblad cited the CEO as saying. He didn’t set a timeline.

Eoin Treacy's view -

If Naspers decides to list its ecommerce ventures in Amsterdam the question of whether that will include its 30% stake in Tencent is going to have a major influence on the market since it almost certainly represent a powerful new high growth addition to the Euro STOXX 50. 



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February 23 2018

Commentary by Eoin Treacy

Will Quantitative Tightening (QT), which is deflationary in theory, be inflationary in practice?

Thanks to a subscriber for this article by Viril's Sokolof for 13d.com which may be of interest. Here is a section: 

It is equally noteworthy that most of the peaks in M2 velocity shown in the prior chart, with a couple of exceptions, occurred when the U.S. dollar was in protracted bear markets from 1972 to 1980, 1985 to 1995 and 2002 to 2008. Moreover, the first and third of those down-cycles was marked by generally-rising yields on 10-year U.S. Treasuries. In other words, one could argue that rising UST yields were a symptom of capital flowing out of the dollar, which contributed to a higher cost-of-money and higher inflation.

These relationships shed some insight into the idea that tighter monetary policy — reflected in the slowing growth rate of M2 and the onset of the Fed’s balance-sheet reduction — is likely to be inflationary in practice. When money supply growth slows and the demand for funds increases — such as with the $1 trillion-plus fiscal deficits we wrote about last week — the conditions are ripe for an inflationary surge and a falling dollar. One could also argue that this will be good for real assets (which were hurt by QE during 2010 to 2016) but bad for financial assets (which benefited from QE).

Eoin Treacy's view -

The Velocity of Money is reported quarter in arrears so it tends to be a lagging indicator but it did turn upwards at the last reading in December. It stands to reason that if the economy has less slack and the government is about to blow out its deficits then inflationary pressures rise. 



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February 22 2018

Commentary by Eoin Treacy

Video commentary for February 22nd 2018

Eoin Treacy's view -

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

Some of the topics discussed include: commodity driven markets outperforming, VIX pausing above 15, Wall Street has not held intraday highs for the last four sessions, FTSE rallies off its lows, oil firm, gold steady, China rebounding after the New Year Break.



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February 22 2018

Commentary by Eoin Treacy

The lithium ion battery and the eV Market

Thanks to a subscriber for this report from BMO 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.

Battery chemistry is complicated and the rate at which energy density doubles is about every five years. That’s quite a bit slower than the 18-month pace of doubling of efficiency seen in the semiconductors sector on which Moore’s Law is based. 



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February 22 2018

Commentary by Eoin Treacy

ECB to Blame for Surge in U.S. Yields? Timing Is Suggestive

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

One school of thought says that shifting perceptions about the European Central Bank’s policy outlook had a significant role to play in the surge in U.S. Treasury yields that began in September and picked up speed last month, roiling global stocks.

Behind the argument is the observation that ECB policy has had much more impact on markets than the Federal Reserve’s. That’s because ECB bond purchases were so large that they exceeded the net issuance of respective government bonds -- unlike the Fed. That pushed European investors into other markets, such as Treasuries. One estimate has them buying more than a trillion euros ($1.2 trillion) of foreign bonds since ECB QE began.

ECB’s importance popped up on Treasuries traders’ radar screens last June, when President Mario Draghi gave what were perceived to be hawkish remarks at the Sintra confab, sending yields climbing round the world. In the fall, expectations grew that the ECB would announce a taper of its purchases. Yields started jumping in mid-October, when Bloomberg reported the ECB was thinking of halving its QE program.

And traders may want to set a reminder for the minutes of the ECB’s January meeting. Last month’s release said policy makers were open to tweaking their policy guidance given a strengthening economy. Later in January, news came that ECB policy makers were favoring a short taper to bring an end to QE.

Those January indications coincided with a surge in yields that’s continuing to affect markets, with 10-year U.S. touching their highest since 2014.

Eoin Treacy's view -

The ECB’s balance sheet has risen from €2 to €4.5 trillion since late 2014 and it remains on an upward trajectory. The rise of populist parties as well as the surprise success of Macron in France can all be levelled at the shifting of private sector debts onto sovereigns and the fiscal austerity demanded by creditors to pay those debts down. The deflationary effects that set off resulted in the ECB feeling they had little choice but to pursue extraordinary monetary accommodation. 



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February 22 2018

Commentary by Eoin Treacy

Brazil Seen as More Corrupt Than Argentina in Global Ranking

This article by David Biller and Charlie Devereux for Bloomberg may be of interest to subscribers. Here is a section: 

Brazil is now seen as more corrupt than Argentina for the first time in over two decades after suffering last year one of the biggest plunges among the nations tracked by a global transparency ranking.

Latin America’s largest economy fell 17 positions in the2017 index released by graft watchdog Transparency International on Thursday. It now ranks 96th among 180 nations, tied in the region with Colombia and Peru. Only two other countries in the whole index -- Bahrain and Liberia -- slid more than Brazil last year. Argentina meantime rose 10 spots, to 85th place and now ranks better than Brazil for the first time since 1996.

A series of corruption scandals have rocked Brazil over the past few years as the so-called Carwash probe uncovered a massive kickback scheme involving the country’s political and business elite. Former President Luiz Inacio Lula da Silva was convicted for graft last year while allegations against President Michel Temer are still being investigated. In Argentina, meanwhile, President Mauricio Macri has worked to make public tenders more transparent and successfully pushed for a law allowing plea bargain testimonies to resolve corruption cases.

Among key Latin American countries, the least transparent are still Venezuela (169th position) and Mexico (135th spot).

Transparency International’s ranking is based on surveys and assessments from 12 institutions and has become a benchmark gauge of corruption perception used by analysts and investors.

Eoin Treacy's view -

There is no Brazilian politician that has not been embroiled in the carwash probe. That’s bad news. However, the fact the scandal has broken, is being addressed by the judiciary and is making headlines both domestically and internationally speaks to the fact that Brazil does have institutions that can tackle corruption if the will to do is present. 



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February 21 2018

Commentary by Eoin Treacy

Video commentary for February 21st 2018

February 21 2018

Commentary by Eoin Treacy

Email of the day on the potential for downtrends

Your recent assessments of the markets appear to be that a period of ranging is likely to be followed by markets going up again. Of course, whilst no one knows what the future will be, I wonder why you don't see the greater likelihood of markets turning down after some consolidation. With the amount of US debt increasing, interest rates increasing, and stock market levels already high by historical standards, are you not more concerned that markets, being forwards looking, might be more likely to head down than up? Esp. since markets struggle when interest rates go above 3%? I appreciate your talk of share rotation, but a rising tide lifts all boats and surely the opposite is true when markets tank?

Eoin Treacy's view -

Thank you for these questions which I think everyone asks from time to time. For someone in our position of attempting to forecast the outlook for markets the most important thing we have to remember is that markets rise for longer than they fall but when they fall they often do so quite quickly. However, they do not fall without first exhibiting topping characteristics. 



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February 21 2018

Commentary by Eoin Treacy

Email of the day on the Dow/Gold miners ratio

You have cited the Gold/Dow relationship and how if this ratio was to do what it has in the past, Dow has lots of upside versus gold. However, Jesse Felder sees it just the opposite. Not sure why your tow ratio charts would be opposite. Here is a link to the public post

Eoin Treacy's view -

Thank you for this email which may be of interest to other subscribers. In the Big Picture Long-Term audios and videos, I tend to use the Dow/Gold ratio over the course of the last century because it gives us a graphic illustration of how stocks outperform gold in secular trends but gold outperforms stocks following stock market peaks. 



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February 21 2018

Commentary by Eoin Treacy

Musings from the Oil Patch February 20th 2018

Thanks to a subscriber for this edition of Allen Brooks’ ever informative report for PPHB. Here is a section on methane hydrates:

The attacks on the oil and gas industry in the U.S. for its methane emissions have been based on reports and estimates of the volume of leaks from its drilling and transportation activities.  Fighting these leaks is in the companies’ best interests because it will help the bottom lines as less natural gas will be lost to the atmosphere and income will be enhanced.  Fixing the leaks on their own is also a way the oil and gas industry can hope to stave off further debilitating regulations.  Now, however, the industry is hopeful of an easing of the methane containment rules for companies drilling and producing natural gas from federal lands by the Trump administration.  

 

While the discussion about methane leak control for the oil and gas industry is dominating the headlines, there remains a huge untapped source of natural gas in the form of methane hydrates under the ocean that some governments are working to exploit.  These hydrates are where molecules of methane gas are entrapped within an ice lattice.  They form under very low temperatures or high pressures, or a combination of the two.  They are usually found on the outer continental shelves around the world.  (They have been found in the pink areas of the global map in Exhibit 18.)  The challenge is that they have been difficult (risky) to mine, as well as costly.  They have the potential to blow up any vessel attempting to extract the hydrates from the sea floor.  The U.S. Bureau of Ocean Energy Management (BOEM) estimates that the U.S. has 51,338 trillion cubic feet of methane hydrate gas resources.  If only half of BOEM’s estimate is realized, there are 1,000 years of supply based on the current consumption rate of natural gas in the United States.

 

Last year, China, a country with significant needs for more natural gas but lacking success in finding and developing meaningful reserves, has been experimenting with tapping methane hydrates.  The country’s focus is on hydrates situated in the South China Sea, which helps explain China’s attempt to claim territorial rights to that area of the Pacific Ocean.  At the same time, Japan, another nation lacking adequate energy resources, has successfully extracted methane hydrates from an area offshore the Shima Peninsula.  The implications of successful development of methane hydrate mining by either or both countries would be significant for the future of the global liquefied natural gas (LNG) business.

Eoin Treacy's view -

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

If one were looking for a single reason China is so interested in claiming the South China Sea, then methane hydrates are probably the answer. The existence of such vast resources is no secret. Just like shale oil and gas, geologists have known about methane hydrates for years. However, they have been largely irrelevant to the energy sector because of the cost of production. 



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February 21 2018

Commentary by Eoin Treacy

Brexiteer Tory MPs back European Research Group demands in letter to Theresa May

This article by Aubrey Allegretti for Sky.com may be of interest to subscribers. Here is a section: 

In it, the MPs say Mrs May "must" ensure Britain can change its laws without authorisation from Brussels from the moment it leaves the bloc in March 2019.

And they demand the UK be "free to start its own trade negotiations" from day one of the transition period.

Ministers have also been urged to fight back harder against the EU setting a timetable for negotiations and to "take control" of tariff schedules - in other words the customs union.

The letter was signed off by MP John Penrose "on behalf of ERG officers" and sent to Mrs May on Friday, with a copy leaked to Sky News on Tuesday.

The requests do not necessarily defy Government policy on Brexit but come at a crucial time in negotiations within the Conservative Party about what type of divorce to pursue.

Eoin Treacy's view -

Here is a link to the full letter which is now on Twitter.

Theresa May is sandwiched between those who are willing to renounce negotiations and revert to WTO rules of trade with the EU, and the rest of the party who want to see as little disruption to the economy as possible. However, as she attempts to tread a path between these opposing groups, she also has to keep Northern Ireland’s Democratic Unionist Party on side.  



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February 20 2018

Commentary by Eoin Treacy

Video commentary for February 20th 2018

Eoin Treacy's view -

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

Some of the topics covered include: bond yields and the outlook for inflation, gold pauses at the upper side of its base, Wall eases but Europe steady on weaker Euro, Yen eases and stocks in the region of the MA, bitcoin continues to rebound and the VIX is holding above 20. 



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February 20 2018

Commentary by Eoin Treacy

Email of the day on stagflation

I have been a long-time subscriber and attended the Chart Seminar around ten years ago. Back then you were a young kid and David led the show. Showing no disrespect for David who admire greatly, you have become at least an equal when it comes to your daily audios. I found this weekend's long-term picture very interesting and well done. I think you have properly described where we are at presently and the likely outcomes in the medium and longer terms. I do get the sense over here in the US that we may be facing an environment of Stagflation. With rising inflation and what now looks like slower growth in the near term, combined with a shrinking Fed balance sheet and rising rates, we could be facing some real headwinds for equities. Can you share your insights on an environment of stagflation and what asset classes would generally over-perform and underperform if the past is a guide? Thank you and keep up the great work!

Eoin Treacy's view -

Thank you for your kind words. David is a visionary I can only hope to emulate. Luckily, the reason we have always gotten along so well is because we share a very similar world view.

Tax cuts funded with debt, a potential infrastructure bill funded with debt and the prospect of tariffs on steel and other basic commodities all represent inflationary pressures. 



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